Outlook of EMD diverges

Many emerging markets have learned lessons from the past and therefore have paid down external debt and accumulated massive foreign-exchange reserves. But what does this mean for emerging market debt investors?

The last decade of strong global growth and booming commodity prices led the majority of emerging market countries to generate a large balance of payments surpluses that allowed them to accumulate a massive stockpile of foreign-exchange reserves and pay down their sovereign external debt. As an example, in 1998 Brazil had just $50bn of foreign-exchange reserves with $115bn of outstanding sovereign external debt. FX reserves are now close to $200bn and sovereign external debt stands at just $60bn. To varying degrees, this trend is similar across the vast majority of countries within the so...