Valuation Metrics in Emerging Debt: 1Q25

Tariff tantrum takeaways:

• State of valuations going into “Liberation day”:
  • Hard currency: Spreads and U.S. rates were at neutral+ levels
  • Local currency: Both FX and local rates were very attractive
• Post announcement – as we did with the COVID shock, we performed some top-down scenario analysis around the metrics we use in this report:
  • Hard currency: Our sovereign team stress-tested our 90-country opportunity set for two downside scenarios – a "moderate” downside and a "severe” downside. We considered two channels of impact from the trade war: (1) a U.S. recession, particularly affecting those countries with high economic integration (and trade) with the U.S.; and (2) a global risk channel that chokes funding to EM countries, exposing the most vulnerable to rollover risks.
    • In the moderate case, 27 such countries (39% of EMBIG-D) are downgraded, while the severe case doubles down on these downgrades and adds 5 countries (an additional 12% of EMBIG-D) to the vulnerable list.
    • The output is a change in the expected credit loss from default, which rises from 119 bps at 3/31 (as noted on page 5) to 149 bps (moderate) or 177 bps (severe). The actual duration-adjusted EMBIG-D market spread rose from 288 bps at 3/31 to 308 bps at 4/10/25.
• Local currency: Unlike hard currency credit, where it’s reasonable to expect weak countries to get weaker, local debt deals predominantly with relatively strong countries with already undervalued currencies (so far, few EM currencies have recovered spot FX losses from Q4 last year). Moreover, the impact on growth, inflation, and financial flows is complex. We are therefore still debating whether we can meaningfully stress test the variables of our FX and rates valuation metrics.

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Disclaimer: The views expressed are the views and understanding of the Emerging Country Debt team through the period ending April 2025 and are subject to change at any time based on market and other conditions. While all reasonable effort has been taken to ensure accuracy, no representation or warranty for accuracy is provided nor should be assumed. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.

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