Emerging Markets Weekly

The last week offered an interesting test of the resilience of the current rebound in capital market prices— especially for emerging markets in light of the default by Dubai on debt issued through its wholly owned corporate entity, Dubai World. The announcement last Wednesday sent shudders through capital markets, leading to one well known portfolio managers to predict a 20% correction in emerging markets. The result, heretofore, has been a muted cementing of the general impression put forward in this column that emerging markets are less risky entities and less exposed to external shocks in global capital markets than before.

It is highly noteworthy that emerging market bonds in the likes of India and China have experienced capital inflows over the past week. These markets are understood to be less risky than many bond markets in the developed world where heavily indebted countries experienced selloffs— most notably Greece and Italy.

The Dubai World incident raises the issue of how tighter liquidity will affect different borrowers with high debt loads. While it is still early to contemplate, the events of the past week provide a nice test for emerging markets in the event of these external shocks and the grade is a resounding pass.