Economics: The new geopolitics of EM debt

The pattern of global capital flows has changed

Current account surpluses are no longer inflating the FX reserves of the Gulf states or China. Instead, a portion of their surpluses has been recycled into the FX reserves of other EMs facing balance of payment shortfalls.   

China is complicating debt restructurings for other EMs

China has called for the World Bank and IMF to participate in debt restructurings for EMs in default. That’s partly because it wants to avoid realizing losses on its loans, but it’s also seeking more influence over the multilateral lenders. 

Fundamentals may matter more in the new geopolitical environment

These trends may lead to higher, structural risk premiums for countries vulnerable to balance of payments shortfalls and default. We’ve upgraded the ASR EM Default Risk Index to better systematically assess the relative risks for more than 70 countries.