This week it’s Emerging Markets sovereign CDS (Credit Default Swaps). The reason why I think this chart is really worth paying attention to is that after reaching a record low in mid-January, there has been a swift reassessment of risk in Emerging Markets. Typically when EM sovereign CDS turns up from a low point like this, it will tend to keep going, and the logical conclusion of that could even be some sort of emerging markets financial crisis.
The chart appeared in a recent report on the tactical risk outlook for emerging markets, it tracks the median 5-year sovereign credit default swap premium across 14 different emerging market countries. Basically this indicator shows the perceived risk of default, or market pricing of sovereign credit risk, across EM. The fact that it has turned up through the 200-day moving average is also a trigger point to put EM on watch.
I will note though, that it has yet to break through the long term average of 136bps (this series began in 2007), so the more benign take would be that this is just a correction in risk pricing which had originally gotten too complacent. In terms of the countries driving this upturn, Turkey has seen the largest lift (up more than 100bps), followed by Brazil and Indonesia (both up over 50bps), with South Africa, Mexico, Malaysia, Philippines, Russia, and Colombia also seeing material uplift in CDS pricing.
On the macro drivers, it’s clearly the renewed strength in the US dollar that’s putting pressure on these economies – and most of those mentioned have traditionally been ones which have been sensitive to US dollar movements and funding costs due to large USD borrowing. The progression of Fed quantitative tightening is also a factor… and in that respect we truly are in uncharted territory as the monetary policy experiment comes full circle.