Increased uncertainty in financial markets, following the US Federal Reserve's decision in September to delay tightening monetary policy because of concerns about China's economy, is testing the resilience of Emerging Europe's local government bond markets. Poland and Hungary are vulnerable given the very high share of foreign holdings, but sentiment is bleakest towards Turkish assets, with the lira falling by 10% against the dollar since mid-August.
Some EM bond markets have escaped dramatic falls in equities and currencies, partly due to local institutional investors' strong support.
CE economies are better placed to cope with a China- and commodities-induced deterioration in sentiment.
This is because of Central Europe's negligible linkages with China and its status as a net oil importer.
The 22% decline in oil prices since early July is putting further downward pressure on already subdued CE inflation rates.
This will keep monetary policy loose and help underpin growth.
