Emerging markets strain under pressure; can crypto adoption pare the losses?

emerging market, Emerging markets strain under pressure; can crypto adoption pare the losses?
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YEREVAN (CoinChapter.com) – The recent debt default in Sri Lanka, the continuous growth of inflation, and rising interest rates have reignited fears that other emerging markets (EMs) could head into similar turmoil.

Moreover, according to Bloomberg and Financial Times data, more than a dozen developing economies are caught in a crossfire from multiple macro factors.

Financial giant JPMorgan analyzed the EM situation in its Q1 report after the Russia-Ukraine war broke out on Feb. 24. The report claimed that “EM currencies and EM spreads stabilized somewhat
to provide some respite as differentiation in EM regions became more pronounced.”

In EMFX, against the backdrop of surging commodity prices, commodity exporters rallied, and the sell-off was concentrated among countries that were more closely linked by proximity and other ties to
the Russia-Ukraine War.

stated JPMorgan.
Emerging Markets (EM) Q1 report by JPMorgan
Emerging Markets (EM) Q1 report by JPMorgan

Also read: Inflation at 9.1% deflates Bitcoin’s recovery hopes – what to expect?

Moreover, JPMorgan asserted that investors pulled a whopping $52 billion from emerging market bonds this year. Charlie Robertson, the chief global economist at Renaissance Capital, called the scale of the bond collapse in EMs “shocking.”

Emerging markets do not like the Fed hiking rates and do not like it when the dollar’s strengthening. It’s just bad news for countries that need capital when that happens, and we haven’t seen rate hikes like this in nearly 30 years.

said the expert.

Can crypto adoption help?

With the war in Ukraine raging on, some markets suffered more than others. Thus, a case-by-case approach should be used to assess each emerging market. Moreover, can crypto adoption help the situation, or will it drag EMs into a deeper pit?

emerging market, Emerging markets strain under pressure; can crypto adoption pare the losses?

El Salvador is one of the EMs affected by the global turmoil. President Nayib Bukele’s multimillion-dollar bet on Bitcoin has backfired, as the alpha crypto more than halved its value year-to-date, worsening the economic situation in Latin America.

Also read: What is margin call and how does it crash crypto markets.

In detail, as investors dump the debt, El Salvador’s 10-year bond yield has surged by more than 18 percentage points so far in 2022. Moreover, the country has an $800 million debt due in January 2023, but the ability to repay is up for debate.

What about Ukraine?

Ukraine was hit the hardest among EMs this year, as Russia’s invasion has sent Kyiv’s bond yields soaring. However, the International Monetary Fund (IMF) expected Ukraine to continue servicing its debts. The IMF also noted that extra funding would help the country function without issuing more bonds.

In March 2022, Ukraine legalized the crytpo sector, as digital currency donations poured in from all over the world. In detail, President Volodymyr Zelenskyy signed a bill that allowed foreign and Ukrainian cryptocurrency exchanges to conduct their affairs without fear of prosecution. Thus, the crypto exchanges operated according to the country’s Ministry of Digital Transformation.

Also read: Stock markets have more room to crash – researchers say

Ukraine’s budget deficit runs at $9 billion a month, up from $5 billion in the early stages of the war. Thus, with the war far from over, it is hard to make any sort of predictions about the EM.

Can crytpo help Argentina?

Analysts suggest that Argentina’s default risks intensify as well. The yield on its 10-year bond is up by more than ten percentage points so far in 2022. Meanwhile, the bond price has plunged to below 20 cents on the dollar.

Meanwhile, according to crypto data provider Chainalysis, Argentina is one of the nine countries with the highest adoption of cryptocurrencies. In a country with recurring currency crises and inflation running around 60% annually, two-thirds of Argentines who invest in crypto say they do so to protect their savings.

Also read: Crypto is no different than traditional finance, in the end.

However, the crypto market did not offer returns on digital asset investments this year, given Bitcoin’s high correlation with equities. Thus, for the time being, Emerging Markets shouldn’t look for a hedge against global economic turmoil among cryptocurrencies.

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