For investors in emerging markets bonds, the narratives are seldom straightforward. Ahead of polls in India, Mexico and South Africa, some investors had seemed too complacent about the risks. But the negative market reaction to those elections belies much more positive developments in emerging economies — particularly in countries traditionally considered more vulnerable.
As a result of effective monetary policies, emerging markets economies have been particularly quick to control inflation and were able to initiate a rate-cutting cycle last year. This proactive approach is anticipated to provide crucial support for economic growth in 2024. A case in point is the Brazilian central bank, which raised rates at 12 consecutive policy meetings from a low of 2 per cent in March 2021 to 13.75 per cent to curtail inflation.
Against the backdrop of tighter financial conditions in developed markets, macroeconomic policies in many emerging market countries have undergone significant improvements. Such positive developments have been instrumental in reducing the risk premium associated with investing in these nations from prohibitively high levels last year. Structural reforms, fiscal discipline and adoption of flexible exchange rate regimes have helped mitigate risks and strengthen policy credibility.