Not only have developing-country stock markets underperformed high-income stock markets, developing country sovereign credit default swap (CDS) rates and yields (figure 3) have been rising, despite the improved ratings of developing countries, and strong investor appetite for developing-country bonds.FN2
Developing country borrowing costs have risen but remain below historical averages
Source: World Bank, JP Morgan
Rising spreads, even as demand is strong and growing, may reflect a welcome and ultimately healthy improvement in market perceptions of the riskiness of investing in high-income countries. Part of the decline in developing-country risk premiums over the past five years was due to the increased riskiness of high-income country debt.FN3 Now that those risks have receded, investors may be shifting their portfolios back into high-income country assets, resulting in an increase in developing-country yields and spreads and better stock-market performance in high-income countries.
These developments may also reflect concern on the part of investors about inflation of asset prices in some developing countries (such as Brazil, Indonesia, Lao PDR, Philippines, Thailand, and Turkey) and the recent easing of commodity prices. Risk premia could have risen because high asset prices have been interpreted as a harbinger of sharp future correction; or if an expectation of lower commodity prices had raise concerns about future government revenues and governments’ capacity to repay existing debt and spending programs.