Emerging Markets

Emerging Markets Economics Chart Book

Emerging Markets Economics Chart Book

Omicron sweeps across the emerging world

The Omicron variant of COVID-19 is causing new virus cases to surge in the emerging world. Many EMs are reporting record daily cases or that new infections are rising sharply. South Africa’s experience offers some hope – cases are now falling sharply there and it looks like the economic fallout was limited. Elsewhere, most EM governments are following South Africa’s playbook by imposing limited (if any) containment measures, although China is a key exception. And given weakness in testing capacity and large informal sectors in most EMs, workplace absenteeism is unlikely to be as economically disruptive as in DMs.

14 January 2022

Emerging Markets Economics Chart Book

Omicron not yet swaying EM central banks

The latest EM central bank meetings confirmed that policymakers in Emerging Europe and Latin America are still focused on high and rising inflation, rather than any downside risk to the economic outlook from the Omicron variant. Central banks in Brazil, Hungary, Poland and Peru tightened monetary policy aggressively this week, and we expect that policymakers in Russia, Chile and Colombia will follow suit next week. Lower inflation in much Asia gives policymakers there more leeway. If anything, the Omicron variant reinforces our view that interest rates in most of Asia will stay low for longer than most currently anticipate.

10 December 2021

Emerging Markets Economics Chart Book

EM tightening cycles have further to run

Inflation in the emerging world has generally surprised to the upside in recent months. But while inflation in most parts of Asia remains at levels which central banks are comfortable with, it has risen well above target in much of Emerging Europe and Latin America. Soaring energy (and in some countries food) prices explain a big chunk of the rise in headline rates, although the re-opening of economies and goods shortages have caused core price pressures to intensify too. This has prompted central banks to step on the brakes and raise interest rates, with policymakers in Brazil, Chile and Czechia in particular stepping up the pace of tightening over the past few weeks. Looking ahead, with inflation across both Latin America and Emerging Europe set to remain above central bank targets for a while yet, further rate hikes lie in store. The key exception is Turkey where, under pressure from President Erdogan, the central bank has signalled that it will ease policy again at its next meeting.

19 November 2021
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Supply shortages take their toll

The supply shortages that have affected many DMs have also intensified in emerging economies over the past couple of months. The automotive sector has been hit hard by global semiconductor shortages, weighing on recoveries in Mexico, Czechia and Hungary in particular. More broadly, EM manufacturers are struggling to meet new orders, causing backlog of works to increase. Meanwhile, recent power shortages have weighed on recoveries in China, India and Brazil. As shortages continue, they are likely to not just weigh on growth, but also add to upward pressure to core inflation. That will probably keep central banks in Latin America and Central Europe in particular in tightening mode.

Emerging Markets Economics Chart Book

Debt risks come back to the fore

Problems at Evergrande in China have dominated the headlines recently, but (sovereign) debt risks are brewing in other EMs too. Concerns about higher government spending and rising public debt levels are building in parts of Latin America. Meanwhile, sovereign dollar bond spreads have surged in a handful of frontier markets including Sri Lanka, Tunisia and Ethiopia. These economies all face the worrying combination of large external foreign-currency debt burdens, low FX reserves and weakening currencies. We are most worried about Sri Lanka. While the country will probably muddle through this year, it will face a crunch point in early 2022 when large bond repayments are due. A default is now looking the most likely option.

Emerging Markets Economics Chart Book

Asia bucks the monetary policy trend

Several EM central banks have continued to tighten monetary policy over the past month or so in response to strong reopening rebounds (Chile, Czech Republic, Hungary) and/or rising inflation concerns (Brazil, Mexico, Peru, Russia). A few others, including Colombia, are likely to follow suit relatively soon. But one EM region that is bucking the monetary policy trend is Asia. Admittedly, the Bank of Korea may be gearing up to tighten policy soon too in response to building financial risks. But the surge in virus cases and low (or easing) inflation means that most central banks in the region are in no rush to tighten. In fact, we now expect further rate cuts in both Thailand and the Philippines over the coming months, while the Reserve Bank of India is unlikely to start normalising policy until well into next year.

Emerging Markets Economics Chart Book

Shifting towards rate hikes

Falling virus cases, strong economic recoveries and/or inflation worries prompted several more EM central banks – those of Czechia, Chile, Hungary and Mexico – to tighten monetary policy in the past month, joining Russia and Brazil. And a few others, including Korea and Colombia, are likely to follow suit relatively soon. But it’s not a widespread tightening cycle. Low inflation means that many central banks in Asia in particular are still a long way from hiking. And perhaps most notably, the People’s Bank of China, having removed stimulus since late last year, has signalled with a cut to the reserve requirement ratio that it is now focused on lowering financing costs for indebted firms.

Emerging Markets Economics Chart Book

Inflation concerns build

Inflation has risen sharply across the emerging world in the last few months, prompting much more cautious words from central banks (mainly in Latin America and Emerging Europe), but we expect that EM price pressures will ease in the coming months. The recent spike in energy inflation should unwind soon, while supply constraints that are pushing up inflation for some goods won’t last indefinitely. With demand some way below most EMs’ supply potential, underlying inflation rates should fall back. We’re more concerned about inflation dynamics in Central Europe though, and central banks in Czechia and Hungary could shortly join Russia and Brazil in being among the first to hike rates.

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