The big question for dollar-denominated debt markets in emerging market countries is whether they have decoupled from their historical dependence on the US economy and financial markets, according to analysts at Bear Stearns.
While the US consumer is still a strong driver of global growth, many EM countries have considerable momentum in terms of their own rising consumption and investment, analysts Carl Ross and Alberto Bernal say in a recent report. Most EM countries also need only very limited access to international capital markets over the next year, as domestic liquidity is generally high, they say. Therefore, these countries should be able to withstand a moderate US slowdown that lasts two to three quarters, according to the Bear Stearns analysts.
Several EM sovereigns are excellent candidates for ratings upgrades to investment grade next year, especially some Latin American countries such as Brazil and Peru, the analysts say. The current US-induced credit crunch provides a test for these countries, they say.
“If the emerging market countries come through this liquidity and real-economy event with their fundamentals mostly intact, we think that the argument will be much stronger for rating upgrades,” the report says.