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Perú dentro de los países emergentes con mayor posibilidad de recuperación económica

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Investors should not shrink from frontier emerging markets

The Philippines, Peru and Vietnam stand out among developing nations

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In countries such as the Philippines, the recovery will be aided by the relative resilience of the banking sector and strong foreign exchange reserves

By Matthew Voggel  

The consensus among investors is that Covid-19 will overwhelm frontier emerging markets, causing immense economic fallout from a collapse in both domestic and external demand. We think another scenario is more likely: that such markets will outperform.

MSCI’s Frontier Emerging Markets index spans large companies across 34 nations — from Argentina, Bahrain and Bangladesh to Togo, Tunisia and Vietnam. Typically, such markets suffer from domestic economic weakness rather than external factors.

Clearly, a number of these countries will have local frailties exposed by the unprecedented shock to external financing from tourism and remittances. Sri Lanka, for example, will probably see a sharp drop in tourism, delivering a nasty economic shock for an economy already struggling.

It is also true that some countries in this category, notably Nigeria and Egypt, will be hardest hit by external factors such as falling exports due to lower global demand and weaker remittance inflows from nationals employed overseas.

In some cases, disruptions to the real economy from lockdowns may further accentuate vulnerabilities in financial systems. This is particularly true in Bangladesh, for example, where bad loans at state banks amount to about 30 per cent of gross domestic product and where the sector has suffered for years from poor liquidity.

However, this is not the whole picture.

Our more bullish view is based on data and intelligence gathered from an on-the-ground network spanning such markets around the world. From this we have identified several countries where strong growth and recovery is possible once the impact of Covid-19 begins to diminish.

We believe the Philippines, Peru and Vietnam are best positioned to recover. In these countries, the recovery will be aided by the relative resilience of their banking sectors and strong foreign exchange reserves.

The Philippines, for example, has huge FX buffers, a low deficit and a banking system with ample liquidity. Moreover, the country’s ratio of external debt to GDP is only 24 per cent, less than half the EM average, while FX reserves cover nearly 12 months of imports, much higher than Asean peers Thailand or Indonesia. Expansionary fiscal and monetary policies have been substantial without threatening macroeconomic stability.

Peru, like the Philippines, is enacting strong initiatives to address the Covid-19 public health challenge. In economic terms, the country also enjoys additional freedom in fiscal and monetary policy because of years of sound policy management. Both the deficit and cumulative debt are low. Even with a stimulus package of 8 per cent of GDP — at the upper end of EM spending — Peru has surplus funding from a variety of domestic and external sources, including abundant Treasury assets and an IMF contingent credit line.

Vietnam’s handling of Covid-19 has been short and sharp. Previous experience in dealing with earlier pandemics kept infections and deaths extremely low. As a result, the economy has resumed close-to-normal activity quickly. As of mid-May, country mobility reports from Google showed activity levels across all sectors to have fully recovered with the exception of retail, which is down just 15 per cent from the pre-Covid baseline.

Even Egypt and Pakistan, both highly indebted and seemingly vulnerable, may outperform. Both have reaffirmed their commitments to tax and civil service reforms and have maintained access to IMF programme funding.

Investors should not overlook the considerable post-Covid potential of frontier emerging markets. The reasons are straightforward: resilient government balance sheets, improving governance and promising growth trajectories.

The writer is head strategist and portfolio manager at FIM Partners in Dubai

(Source: Financial Times)