Emerging markets face more downgrades than upgrades this year as foreign debt levels leave them vulnerable to rising U.S. interest rates and the strength of the dollar, according to Fitch Ratings. Latin America, the Middle East and Africa will be impacted more by lower credit scores because of the high share of their foreign-currency debt, said James McCormack, Hong Kong-based global head of the sovereign and supranational group at Fitch.
Brazilian stocks index, Bovespa, rose nearly 2% on Friday ahead of this weekend's presidential election, whole Brazil's Real further consolidated. The MSCI's index of emerging market stocks in the region gained 1.24%. Although, the region's markets fared better than emerging markets elsewhere, they were on track to end a five-week winning streak.
Argentina’s Peso fell on Thursday, pressured by the recession-hit country’s dismal inflation outlook and higher U.S. interest rates that have pushed capital away from riskier emerging markets and toward the greenback, local traders said. The peso shed 1.85% to close at 38.4 per dollar after having gained 9.58% over the previous three days under a freshly-renegotiated International Monetary Fund financing deal that calls for tougher fiscal and monetary policy measures.
The Brazilian currency Real fell to a 31-month low versus the U.S. dollar on Thursday on jitters ahead of the country’s October election. Jitters across emerging markets caused by a stronger U.S. dollar and exacerbated by the unfolding currency crisis in Turkey already took a toll on the Brazilian unit before this week.
Advanced economies, including the United States, must avoid pulling back stimulus too quickly given the weak global economic recovery and recent market volatility highlights key risks in some emerging markets, the International Monetary Fund said on Wednesday.
Monetary policy tightening in advanced economies will cause volatility in international markets this year and impact the monetary situation of some emerging economies, IMF Managing Director Christine Lagarde cautioned on Wednesday.
India and Brazil have the highest government debt ratios at almost 70% of GDP among top ten emerging market economies, according to a report by Deutsche Bank.
Jim Yong Kim, who took over as World Bank president said his first task will be to help emerging markets keep expanding at a time of stress for the world economy.
New IMF Managing Director Christine Lagarde pledged to push ahead with reforms to give fast-growing emerging markets greater sway at the global lender and said the world economy was on the rebound.
The outlook for government debts and deficits in 2011 is a mixed bag, with most advanced economies reining in fiscal deficits, but not fast enough to keep their debt from rising. Fiscal balances are improving in most emerging economies, and some could do more as they experience a windfall from high commodity prices and strong capital flows.