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Systemic EM crises still only a tail event – Goldman Sachs

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 4, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Research Team at Goldman Sachs, suggests that EM bank underperformance is likely in 2016, but the bar for sovereign crises is much higher.

    Key Quotes

    “The nature of the current EM challenge is different, and is primarily focused on navigating a poor growth outlook. Stretched leverage ratios remain a key headwind and not just in China: credit gaps are also wide in South-East Asia, Turkey and Brazil. With much of that debt denominated in local currency in this cycle, EM banks may see further underperformance and require recapitalisation as corporate and household credit deteriorates in line with weak growth and higher rates.”

    “The starting point is also stretched, as the share of EM banks in overall corporate profits has risen sharply from an average of 15% over the past 20 years to nearly 30% currently. We would also not be surprised to see pockets of corporate distress where external borrowing has been substantial, especially in the commodity investment sector.”

    “The real risk of a systemic EM crisis stems from a different source – the ability of institutions across EM to navigate a prolonged period of weak growth coinciding with adverse shocks. Venezuela may move even closer to hyperinflation and/or default in 2016 without external help, but even more ‘mainstream’ EMs such as Brazil, Malaysia and Turkey are seeing currency and sovereign CDS underperformance as markets worry about institutional fragilities and the ability to manage the cycle effectively.”

    “Bouts of volatility are possible in Asia too, with general elections in Korea and Taiwan, a political transition in Thailand and the retirement of the highly experienced BNM governor Zeti in Malaysia. It is possible that worries around some of these shifts will escalate to critical levels in the year ahead, but we do not think a broad-based EM crisis is inevitable or even likely unless some of these political/institutional risks worsen across the EM landscape, including and especially in China.”
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