Systemic EM crises still only a tail event – Goldman Sachs

By FXStreet 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 …read more

Source:: FX Street