Emerging markets performed strongly in 2000, could face bumpy though rewarding ride in 2001 El-Erian discusses prospects for emerging markets

• Author: Joshua Greene
• Position: IMF Institute
• Pages: 37-41

Page 37

In an IMF Institute seminar for staff on January 19, Mohamed A. El-Erian, a managing director at the Pacific International Management Company (PIMCO) and former IMF staff member, offered his view on trends in capital markets for emerging economies. His presentation highlighted the markets' solid performance in 2000, notwithstanding a fluid international environment. For 2001, he singled out the U.S. economy and emerging economies' internal fundamentals as two key determinants of performance.

In his opening remarks, El-Erian noted that the average spread between emerging market bonds and U.S. treasury securities was about 750 basis points at both the beginning and end of 2000. This contrasted greatly with the experience of 1998, when spreads were highly volatile, and 1999, when spreads tightened significantly, raising returns to investors in emerging market securities. Indeed, during 1999-2000, he said, emerging market debt outperformed all other fixedincome asset classes.

Interestingly, the asset class shared the top-ranking performance with other "risk assets" in 1999, while in 2000, it was in the company of bonds (such as U.S. treasury bonds) at the other end of the risk spectrum.

El-Erian also observed that the emerging marketPage 40 rally in 2000 was broadly based, with only the Philippines and Turkey registering negative returns for the year.

Emerging markets in 2000

No single theme dominated market developments for the emerging economy asset class in 2000, according to El-Erian. The good performance of emerging market securities, he argued, reflected improved economic policies in many countries, supported by the countries' enhanced liability management, a generally benign external environment, and the IMF's rapid and massive emergency support for Argentina and Turkey (see IMF Survey, November 20, page 372, and December 11, 2000, page 385).

El-Erian noted that a growing number of countries, led by Brazil and Mexico, conducted appropriate liability management operations in 2000. These operations resulted in net present value gains, improved maturity profiles, and a de facto stabilization of their yield curves.Most notable was Mexico's success in buying back Brady bonds. This reduced Mexico's cost of borrowing and generated large fiscal savings. El- Erian predicted that liability management of this sort would become an increasingly important policy...