What investors watch out for in emerging markets in 2023

It has been a rough 12 months for emerging markets that have seen more governments stumble into default, currencies suffer and double-digit losses in stocks and bonds alike – though many investors are optimistic that 2023 could bring some relief.

Developing economies are expected to cling to their growth differential over developed peers, but recession fears in the United States as well as Europe are casting a pall over global markets generally – especially in the first half of the year. Analysts also expect a sharp pick-up in consumption and investment in China’s economy from mid-2023 onwards.

Globally, the war has transformed energy markets and inflation pressures, food security and geopolitical risk perception – factors that are often more keenly felt in emerging economies. Emerging Europe has also felt the immediate humanitarian impact – from refugee movements to Russia’s brain drain.

A growing list of countries, however, is in debt distress in the wake of Covid-19 and the war in Ukraine: Zambia and Ethiopia are trying to overhaul debt burdens under the Group of 20 Common Framework. Sri Lanka and Ghana defaulted in 2022.

But a more complex mix of creditors – including the emergence of China as the world’s top bilateral lender – compared to previous episodes of debt distress have made proceedings slow and complex.

The number of countries locked out of capital markets among smaller, riskier economies is at historic highs – though there might be a saving grace.

“There’s not actually a lot of debt maturing next year,” said Carmen Altenkirch, Emerging Markets Sovereign Analyst at Aviva Investors. “The country that’s probably most at risk is Pakistan.”