Last week, I had the opportunity to travel to Lima, Peru to meet with policymakers and other investors around the IMF/World Bank Annual Meetings. Prior to the meetings, markets had been selling off and investors were quite bearish. Some worried that upon arriving in Lima, the swarm of policymakers and investors would overburden the transportation infrastructure and that investors would leave even more bearish after sitting through hours of traffic. Instead, Peru extended a national holiday for the weekend in Lima, clearing the streets of traffic and presenting the best of a country that has doubled the size of its economy since 2008. Several EM policymakers over the weekend commented on how they have been adjusting to shocks in commodity prices and preparing for the normalization of U.S. monetary policy. While the macro outlook for emerging economies remains challenging, the market pricing-in a late-90’s style crisis is likely overshooting and fails to acknowledge the increased resiliency of emerging markets today.
China was the focus of the weekend as investors continued to highlight a hard landing as the biggest risk to markets. Officials from various international agencies agreed that while there is ample space for fiscal stimulus, it needs to be done in a way that supports rebalancing of the economy. Throughout the weekend there was also heavy criticism of China’s policy coordination and communication – something that will need to be refined as China will likely remain under closer scrutiny. The official sector view was ultimately more optimistic in the short-term. The IMF left growth forecasts for China unchanged at 6.8% for this year and 6.25% next year. Local analysts also remarked that a retreat of the anti-corruption campaign from earlier this year should boost activity at the local government level and help achieve near term growth targets.
Brazil was also at the forefront of investor minds this weekend. An external adjustment is coming along with improving exports and a more competitive BRL. Unfortunately, fiscal adjustment will remain stalled until political problems dissipate. Options for cutting fiscal expenditures seemed pretty limited without tackling politically sensitive mandatory expenditures. Despite these headwinds, several investors thought valuations had become attractive enough for certain Brazilian credits like Petrobras.
In other emerging markets, signs of adjustment were more evident. Investors were very positive on the amount of deleveraging that has occurred in Russia and remarked that capital outflows have been lower than anticipated. In Colombia, the currency has become much more competitive and the government stressed their commitment to plans of medium term fiscal consolidation despite declining oil revenues. Even in Ecuador, a small, dollarized country left with few options to adjust to a large oil shock, showed a great ability to cut expenditures this year and is basing their budget on $40/barrel oil for next year. Unlike previous years, no policymakers suggested that commodity prices will rebound quickly in the future and instead used the airtime to highlight efforts to adjust to new realities and make headway on structural reforms. For investors, understanding how different countries have approached adjustment (or not) will be critical in identifying opportunities in emerging markets going forward.