Can Emerging Markets Purge Corruption?

Can Emerging Markets Purge Corruption?

Can Emerging Markets Purge Corruption? by Shamaila Khan, AllianceBernstein

Emerging-market (EM) assets have had a rough ride lately, but we think the medium-term outlook is brighter. The reason: some governments are getting serious about tackling corruption.

From Asia to Latin American, governments have been trying to crack down on corruption and make politics and business more transparent. In Brazil, for example, a bribery scandal involving state-run oil company Petrobras has resulted in formal charges against some senior politicians and jail terms for some top executives.

Ironically, the attempt to root out fraud, bribery and other corrupt practices has been a big contributor to the volatility in EM corporate bond markets. That’s because jailing politicians or corporate executives usually leads to short-term political turmoil, policy paralysis, slower growth—and, for investors, sleepless nights.

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In Brazil’s case, the Petrobras scandal has complicated the government’s much-needed fiscal reform efforts and worsened the near-term economic outlook. Standard & Poor’s responded by stripping Brazil of its investment-grade-credit rating. Investors responded by punishing Brazilian assets.

Moving Toward Better Corporate Governance

Market participants are pricing in these short-term risks across the emerging world. Many local currencies have declined sharply and volatility has soared.

But so far, investors have overlooked the medium-term benefits that we expect anti-corruption campaigns to deliver. These include better corporate governance, financial disclosure for investors, independent judiciaries, and a free and vibrant local media.

Despite its struggles over the last few months, the JPMorgan EMBI Global, an index of dollar-denominate