The Fed Rate Cut and Emerging Markets: How Can Geopolitics Help Price Sovereign Spreads?

As the Fed rate cut bet continues, it’s no surprise the EM class is becoming more attractive. Many of the 140+ countries we cover have relatively low levels of public debt, and most are seeing inflationary pressures continue to ease.

So how does geopolitics affect the pricing of EM assets? Is it measurable and can it be used as a predictive tool?

Yes. In fact, the impact political risk is economically large and statistically significant, with a recent study showing that a ten-point deterioration in a country’s ICRG rating (i.e., an increase in political risk) is associated with an average annual increase in sovereign spreads of 106 basis points, with more marked impacts for high-debt and high-risk countries. The average reduction in GDP growth with such an increase in political risk is two percentage points.

Have a look: (https://www.bruegel.org/analysis/incorporating-political-risk-analysis-sovereign-debt-sustainability)

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The PRS Group

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