Emerging economies worldwide are bracing for sliding currencies and a possible deterioration of their sovereign credit after U.S. President Donald Trump's tariffs brought levies on U.S. imports to their highest levels in 100 years.
The worse-than-expected tariff blitz hits Asia -- and some of the world's poorest nations -- the hardest. It could mark a negative turning point for emerging market debt just as many nations had hoped to lure investments after years of risk aversion.
"We are immediately concerned by the potential impact of the severe tariffs imposed on a range of emerging economies — an approach which risks further damaging the development prospects of countries already facing worsening terms of trade," said John Denton, Secretary-General of the International Chamber of Commerce. He added that the shifts could cause a cascade of sovereign rating downgrades.
Trump unveiled the sweeping set of penalties as high as 50% on allies and antagonists alike, roiling financial markets and stoking fears of a global trade war.
The tariffs, which add to existing levies, will hit everything from Madagascar's vanilla, at 47%, to Sri Lanka's textiles at 44%.
"The shock to sentiment and capital flows is likely to endure and requires higher risk premia," investment bank JPMorgan said in a note, downgrading its stance on emerging market currencies to "underweight" and calling a possible turning point for emerging market debt.
Emerging markets had only last year started to reverse a decade-long deterioration in credit ratings following a wave of defaults, which was accelerated by the fallout from COVID-19 and was a key driver of rising borrowing costs.
U.S. investment bank Goldman Sachs said tariffs would add a 1 percentage point drag to GDP growth in China, the world's second-largest economy, which could have a knock-on effect on wider emerging markets.
The International Chamber of Commerce's Denton likened the impact to the devastating 1970s energy crisis, which hit the global economy and roiled a swath of emerging market assets.
Some investors said tariffs could fundamentally shift how they approach emerging market bets.
"If the tariffs remain as it is, we definitely need to think about the structural, export-oriented growth story for EM," said Gary Tan, a portfolio manager at Allspring Global Investments.
"If this model is broken, then definitely we have to reconsider how, basically, you invest in EM for growth."
DEEP IMPACT AT 'FACTORY ASIA'
Asian economies bore the brunt of the penalties; six of the nine Southeast Asian countries on Trump's list were hit by tariffs between 32% and 49%.
Citi said the tariffs hit 'Factory Asia' particularly hard, estimating the weighted average U.S. tariffs increased by 21%, but Southeast Asia and China took 34%, compared with Europe's 20% and little in Latin America beyond 10%.
Market moves mirrored those concerns.
Vietnam stocks tumbled nearly 7%, their steepest daily decline in at least four years, its dong currency sank to a record low and the Thai baht slipped to a more than three months low. Sri Lanka's sovereign dollar bonds slid more than 3 cents, to their lowest levels since last year's debt restructuring.
Fred Neumann, chief Asia economist at HSBC, said he expected central bank policy makers from China, Taiwan, Malaysia and elsewhere in Asia to step in with rate cuts.
"This is likely to amount to a significant growth shock for the region including Southeast Asia," said Neumann. "That would mean that central banks will likely prioritize growth over inflation concerns."
International Monetary Fund Managing Director Kristalina Georgieva had warned on Monday that many countries had exhausted their fiscal and monetary space during COVID, leaving them with high debt and limited ability to cushion future shocks.
International investors have less exposure to some of the poorest countries, such as Cambodia and Bangladesh, but their 49% and 37% reciprocal tariffs, respectively, will sting the countries. Cambodia sent more than 40% of its exports to the United States in 2022, according to the World Bank.
But investors cautioned that it was far from clear how lasting the measures would be - or the secondary effects of a shift in global trade that is unprecedented in the modern era.
"We haven't seen these large gravitational shifts in 80 years," said Yvette Babb, portfolio manager at William Blair.
"The question is, how structural is it? It's fairly unprecedented, what we're seeing, in terms of what the U.S. president is embarking on, but how much of it is going to stick?"
