Oil shock: six months on, EM debt remains strong

EM fixed income has remained resilient through an oil shock and worsening geopolitical conditions, supported by stronger emerging-market fundamentals, policy reforms and attractive carry.

• The Strait of Hormuz carried only 4.9 million barrels per day on average after the mid-July US blockade according to TankerTrackers, while Kpler estimated up to 6.5 million barrels per day in the first three weeks of September; Brent stabilized around USD 100 per barrel and diesel prices reached records after disruptions to Russian refineries.
• Turkey, Egypt, Kenya, Pakistan and Sri Lanka were identified as fragile oil importers, yet none has underperformed year to date; Sri Lanka and Pakistan were among the 15 best-performing sovereign issuers.
• Egypt, Pakistan and Sri Lanka implemented reforms under IMF programs, while Turkey pursued reforms outside an IMF program; all five countries strengthened their external positions, and Kenya’s reserves reached more than six months of imports.
• Remittances and tourism helped offset wider trade deficits, while sovereign upgrades continued, including Fitch’s upgrade of Sri Lanka to B- from CCC+ and S&P’s upgrade of Kazakhstan to BBB in August.
• EM fixed-income inflows continued despite a 1.7% month-to-date rise in the DXY as of 25 September and market expectations for three additional US rate hikes by April 2027; EM local yields rose less rapidly than US Treasury yields.

Takeaway: The authors remain constructive on EM fixed income because contained inflation, improved external balances, independent EM policy cycles, diversification benefits and favorable carry can offset weaker global conditions, although geopolitical risks and higher hydrocarbon prices remain significant constraints.