Withdrawal of monetary stimulus benefits debt of emerging countries

The withdrawal of stimuli announced by the main central banks is easing interest rates on the sovereign debt of developing countries. The most significant decreases are in South Africa, China, Indonesia, India and Croatia, and may lead to a reduction in the financing costs of these countries in the market.
It is a scenario that contrasts with that experienced in developed countries. In the United States, the announcement that the US Federal Reserve will accelerate the pace of withdrawal of monetary stimulus to the economy and increase interest rates in 2022 was received with a strong deterioration in the bond market: the 10-year interest rate recorded the largest increase since 2013.

The same happened in Europe, with the decision of the European Central Bank (ECB) to increase the purchase of debt created by Mario Draghi to compensate for the end of the program created especially to respond to the pandemic (which ends in March) and the surprising announcement of the Bank of England to raise benchmark interest rates.
Meanwhile, interest rates in several developing countries are falling, which may represent a decrease in the burden of issuing new debt. According to data compiled by Bloomberg, emerging market sovereign bonds have fallen a total of 1.3% this year.
Read Also Bond investors have worst year in two decades with central bank pressure Shafali Sachdev, bond specialist at BNP Paribas Wealth Management in Singapore explains that “investing in emerging market bonds” could be a good decision in the event of a “tightening” in 2022, “rather than extending duration or shortening the credit curve”, given the return received through interest payments (coupon) and the return of face value outstanding at maturity.
South African bonds have led the way in steady returns for investors. Bloomberg data indicates that the bonds have given a total return of 8.7% this year, despite the country being the first to detect the omicron variant. The coupon gain was 9.02% and offset the 0.79% loss caused by the fall in bond prices.
China’s bond debt, meanwhile, gave a 5.6% return in 2021, Indonesia’s 5.2%, India’s 2.7% and Croatia’s 1%. In counter-cyclical, the largest losses were recorded in Hungary, Peru and China, three countries that increased interest rates this year.
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