CFI (*) suggests two major "Benefits of Investing in Emerging Markets":
1. Growth: fueled by constant interaction with the global market.
2. Diversification: Downturns in developed nations can cause growth in emerging markets.
The same source suggests two major "Risks of Investing in Emerging Markets":
1. Economy, Inflation, and Currencies: extremely volatile profits due to conversion rates.
2. Politics: Institutions can be unstable, causing changes and deficits to investors.
Red Santa Cruz is creating a Business Refuge in Ecuador: a Dollarized Emerging Economy, free of inflation and currency risk, with an economy that is set for growth, with local spaces open to investments of leaders interested in diversifying portfolios by working (hands-on) on the governance and dialoguing over policies that create stability and institutionality through hexagonal investment plans, investment programs, investment participation, investment processes, and investment pricing policies.
Infrastructure, Technology, Mining, Forests, Energy, Waste, Beauty, Finance, Water, Food, Tourism, Infrastructure, Science, Training, Services, Ports, Roads, Culture, Housing, Trade, Equipment, Security, Art, Fintech, Entertainment, Sports, Raw Materials, Education, Fishing, and Health, are sectors where Santa Cruz Network (of Impact Investors) is working nowadays.
Ecuador is Dollarized since January 2000. Before the last 5 years of crisis (2019, 2020, 2021, 2022, and 2023), the forecast (2017) expected the country to have the lowest inflation in Latin America in 2018 (five years ago):
Economic analysts expected Ecuador to be the only economy with less than 2% of inflation in 2018.
Statista shows the following results for 2018-2022, and expectations until 2027:
The Ecuadorean Economy was able to produce disinflation in 2018. This way, the expectation of growth is the following:
Resilience is the name of Ecuador: the crisis has only made stronger the case of impact investing in the country, which performs excellent compared to other Latin-American Economies:
Ecuador has still room to grow, but it is not a risky country in terms of inflation and devaluation risk:
If stability, growth, and development through governance is the game, would EMBI, or ESG help the liberal and dollarized Ecuador to jump higher in the rankings?
EMBI?
CFI (*) defines the Emerging Market Bond Index (EMBI) as a "benchmark index that measures the bond performance of emerging countries and their relative corporate organizations".
Emerging markets are countries still showing rates of GDP growth higher (non-convergent) compared to the USA, UK, and other developed global economies, and include Latin American countries such as Ecuador, Chile, and Mexico, but also global powers like Russia and China.
Because of those differences, J.P. Morgan operates three popular EMBI indices that we should study first, before comparing which is the one where Ecuador should be measured for analyzing its business (investment) case:
1. J.P. Morgan EMBI+ Index: The EMBI+ Index measures total returns for traded foreign debt instruments in emerging markets. The index provides investors with definitive emerging market external-currency debt information, a compilation of the instruments traded within the market, and their agreed terms. The regular EMBI index differs from EMBI+ due to USD-denominated Brady Bonds, Eurobonds, and loans. Financial instruments within EMBI+ are required to meet the strict criteria for secondary-market trading liquidity and must possess a minimum face value of $500 million.
2. J.P. Morgan EMBI Global Index: Considered the “expanded” version of EMBI+, EMBI Global also measures total returns for traded foreign debt instruments in emerging countries. It differs from EMBI+ by including USD -denominated Brady Bonds, Eurobonds, and loans. The EMBI Global Index is still required to meet the minimum face value of $500 million but does not need to follow strict criteria for secondary-market trading liquidity. It is essentially a combination of the regular EMBI index and EMBI+.
3. J.P. Morgan EMBI Global Diversified Index The EMBI Global Diversified Index limits the weights of emerging countries with larger debt stocks. It is done by only including specific portions of current face value amounts of debt outstanding.
Before analyzing the utility of EMBI family of (debt risk) indexes for investment (not credit) and in special for impact investment, we should see how some emerging countries, like Mexico, or India, rank in it:
India and Mexico are around 3.5 to 5.5 in terms of risk, over 1 in USA:
The same goes for Costa Rica, Chile, Colombia, and the other OECD countries in Latin America, but it goes to that level for the global economy, the Latino countries, Brazil, Uruguay, Peru, and other economies.
Politics and governance expectations are key for understanding risk in Argentina, Ecuador, and El Salvador (the other fully dollarized country in Latin America).
The effect of the last elections in Ecuador shows how its risk is over the one in El Salvador now.
ESG?
Working on ESG at the micro level can help, but accelerating its application is mandatory.
The ESG score measures different environmental, societal, and governance standards that companies are expected to follow when there is a lack of trust. When it comes to investing, the ESG score shows foreign investors the company’s morality.
But what about a territory?
There is where "peacing" can help differentiate provinces, cities, and parishes in countries, and that is what we need to work on as we are doing from Red Santa Cruz, and ADN@+.
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