Emerging Market Fiscal Gaps No Longer Bogeyman, HSBC Says

ACCRA (Capital Markets in Africa) – Fiscal deficits are no longer such a worry for emerging-market investors, according to HSBC Holdings Plc.

In a world of low-interest rates and quantitative easing, governments aren’t being punished for running bigger budget deficits and pushing up debt, said David Bloom, HSBC’s London-based global head of foreign-exchange strategy. Instead, investors are continuing to snap up emerging-market bonds as they search for higher yields.

A case in point is South Africa, where the budget deficit is set to widen to 6.5% of the gross domestic product in 2020, the biggest in more than a decade, yet 10-year local bond yields fell to 8.98%. India, too, has been a beneficiary, with the 10-year bond yield at 6.6%.

“The bond market was the disciplinarian telling you: don’t do this,” Bloom said in a briefing in Singapore. “The bond market doesn’t intimidate anyone anymore. That’s part of the issue of QE: who’s there to tell you no?”

Investors should be careful as yields in the developing world may come to a point where they don’t offer any buffer when things go wrong, he said.

“It’s a liquidity-driven situation. Don’t get sucked into this,” Bloom said.

Faster inflation is also not a problem for emerging markets, said Frederic Neumann, HSBC’s Hong Kong-based co-head of Asian economic research, in the same briefing. The recent sharp pickup in prices in places like China and India is mainly driven by rising food costs amid supply problems. Core inflation will continue to remain subdued, giving central banks room to ease monetary policy further.

In Southeast Asia, Neumann forecasts 50 basis points of rate cuts each in Indonesia and the Philippines this year, Malaysia reducing by 25 basis points, and even Singapore possibly easing.

Source: Bloomberg Business News