Two Emerging Markets Are Ready for the Next Global Recession
Port of Murmansk, in Murmansk, Russia. Photographer: Andrey Rudakov/Bloomberg

Two Emerging Markets Are Ready for the Next Global Recession

(Bloomberg) -- If the global trade spat ends up tipping the world into recession, Russia and South Korea could be the best places to hide in emerging markets, according to Saxo Bank.

Both countries have high real interest rates and are running budget surpluses, giving policy makers ample room to adjust in a downturn, said Christopher Dembik, the bank’s Paris-based global head of macroeconomic research. Both the ruble and won could outperform, he said.

“All emerging countries have room to make a monetary or fiscal push, but only Russia and South Korea can do both,” Dembik said Wednesday, during a visit to Moscow. “This will help them to stay afloat.”

Two Emerging Markets Are Ready for the Next Global Recession

Although global recession isn’t Saxo bank’s base case, Dembik says the trade standoff between the U.S. and China makes it a possibility worth assessing. Germany may tip into recession this quarter and early indicators show there’s a rising risk growth in China will drop below 6% next year.

Incoming European Central Bank President Christine Lagarde sees the global economy avoiding an outright contraction, but says trade tensions remain a major concern for growth. The International Monetary Fund cut its estimate for the pace of expansion globally to 3.2% in July, the lowest since the financial crisis.

Policy makers in Moscow have been building up reserves to reduce the nation’s vulnerability to swings in global oil prices and the threat of new U.S. sanctions. Inflation has plunged this year, giving the central bank ample room to slowly reduce rates.

Inflation in South Korea hit a record low of zero in August, putting the real rate at the highest since 2014. A tax increase has helped boost the country’s coffers in recent years, according to the International Monetary Fund.

Both countries have seen big inflows to their local-currency bond markets this year, with South Korea poised to record its biggest purchases since 2007. Ruble debt has handed investors returns of 23%, the most in emerging markets after Thailand.

Read More: Investors Scouring the World for Yield Turn to South Korea

To be sure, both South Korea and Russia are heavily dependent on exports and the trade war is further dampening already sluggish growth.

But at the other end of the spectrum in emerging markets are countries like South Africa and Turkey, where policymakers don’t have much wiggle room if the global economy sours, according to Dembik.

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