10 Jan 2024 3 min read

Emerging market debt: Time to shine?

By Uday Patnaik , Raza Agha

Given a resilient macroeconomic picture and supportive technicals, we believe the outlook for emerging market debt (EMD) is positive.


The following is an extract from our latest CIO outlook.

It has been a challenging two years in emerging market (EM) credit, during which sharp increases in developed market yields have led to outflows from EM bond funds – and nearly three years of negative or low returns.

Falling bond prices, though, have meant the higher EM yields on offer have found few precedents in recent history. The hard-currency, sovereign benchmark index[1] yields 8.5%, implying 70 basis points (bps) of monthly carry, while outflows have also meant investor positioning is cleaner.

Higher borrowing costs have resulted in many emerging markets shifting their focus to multilateral agencies, meaning new issuance from sovereigns over 2021, 2022 and 2023 year-to-date has remained lower – even compared to 2020 levels. Looking ahead, 2024 cashflows returned to investors, in the form of amortisation and coupon payments, are forecast to see a 30% plus increase.[2]

Support from yields, technicals and macro

According to the International Monetary Fund (IMF), and despite sharp monetary tightening over the last two years, headline EM real GDP growth is forecast to come in at 4% this year and expected to stay at this level for 2024. This implies that growth differentials, relative to their developed market peers, will rise to 2.5% – increasing for the third consecutive year to the highest level since 2016.


Meanwhile, government debt in EM is forecast rise to 69% of GDP – about 2% higher than last year – but significantly lower than the 113% of GDP pencilled in for advanced economies.[3] This increase is, in fact, driven by just a few large economies, making the country-bycountry picture considerably better than suggested by headline data.

The strength of emerging markets is also apparent in external sector dynamics. Trade surpluses are running at about $550 billion, some $100 billion lower than the peak, but still close to their highest levels. This, coupled with the rebound in tourism, implies that EM current account surpluses will persist this year and next at about 0.5% of GDP, according to the IMF. That’s better than pre-COVID levels, which typically saw modest deficits.

In addition, emerging markets have enjoyed strong support from multilateral institutions, such as the IMF and the World Bank. This not only provides cheap financing, making up for closed capital markets, but also acts as an anchor for policy reforms.

Importantly, these dynamics have also meant that EM FX reserves remain healthy at $10.3 trillion, almost $500 billion higher than pre Covid (end 2019) levels, and equal to nearly 3x the level of external debt amortization due in 2024.[4]

India – a key driver of emerging market growth

A key driver of the growth resilience in emerging markets has been India, where real GDP has expanded in recent years at the fastest pace among large economies. These growth dynamics are underpinned by a vibrant economy, driven by a resilient private sector and a government focused on reforms and addressing the infrastructure deficit.

India heads to elections next year, where the incumbent Bharatiya Janata Party is likely to secure another term. The question is the extent of the majority the party will likely win in parliament – as that will determine the pace and scale of reforms.

The government’s track record on the latter has not only aided growth but has also led to India’s forthcoming inclusion in the JPM GBI-EM Global Diversified Index, and potentially other indices. When this happens, we expect capital inflows to rise, helping to lower domestic borrowing costs for the government and private sector, further boosting growth dynamics.


The above is an extract from our latest CIO outlook.


[1] Source: JP Morgan EMBI GD Index, October 2023.

[2] Source: JP Morgan, October 2023.

[3] Source: IMF, World Economic Outlook databases, October 2023

[4] Source: Bloomberg, as at 13 November, 2023

Uday Patnaik

Head of Emerging Markets Debt

Uday is responsible for developing LGIM’s emerging market capabilities within the Active Fixed Income team. Uday joined LGIM in April 2014 from Gulf International Bank (UK) Ltd where he held the title of Chief Investment Officer with primary responsibility for managing the flagship EMD hedge fund and other fixed income portfolios. Prior to that, Uday set up the Bear Stearns’ Eastern European sovereign trading desk in London, and at Merrill Lynch in New York helped manage the firm’s Latin America exposure and build the institutional customer base. Uday has an MBA in finance from the University of Chicago and a BSc degree in industrial management from Carnegie Mellon University.

Uday Patnaik

Raza Agha

Head of Emerging Markets Credit Strategy

Raza Agha joined LGIM as Head of Emerging Markets Credit Strategy in February 2019. He has over 23 years of experience in EM sovereign credit/macro research and strategy at commercial, investment, multilateral and central banks. Raza was most recently at VTB Capital in London where he was Chief Economist, Middle East and Africa, while also servicing internal clients on global emerging markets. He has previously worked with the Royal Bank of Scotland, Samba Financial Group, Bear Stearns, Central Bank of Pakistan, Abn Amro, and has been a consultant to the World Bank and Asian Development Bank. Raza graduated from Cornell University with two Master’s degrees in public administration and development policy. His undergraduate degree is in Economics from University College London.

Raza Agha