How vaccines will affect our EM forecasts - Capital Economics
Emerging Markets Economics

How vaccines will affect our EM forecasts

Emerging Markets Economics Focus
Written by William Jackson
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This Focus sets out a framework for thinking about how the distribution of COVID-19 vaccines will affect the outlook for EMs. For much of Emerging Europe and Chile, these developments may allow economies to return to normal more quickly than we had expected. But it will take still take a long time for GDP to recover to its pre-crisis trend in much of the rest of Latin America, as well as South Asia and Africa.

  • This Focus sets out a framework for thinking about how the distribution of COVID-19 vaccines will affect the outlook for EMs. For much of Emerging Europe and Chile, these developments may allow economies to return to normal more quickly than we had expected. But it will take still take a long time for GDP to recover to its pre-crisis trend in much of the rest of Latin America, as well as South Asia and Africa.
  • At this stage, the scale and timing of vaccine distribution across the emerging world is still marked by a high degree of uncertainty. A few EMs – including Chile and those that are EU member states – have large pre-orders with pharmaceutical firms. Russia and China may be able to rely on ‘national champion’ vaccines. But for many other EMs, vaccine coverage over the coming years will be much lower.
  • From an economic perspective, the widespread roll-out of effective vaccines would have a larger impact in those countries where the virus is imposing a heavier economic burden. These differences in the speed of roll-out and the economic impact allow us to split EMs into four groups.
  • The first group contains EMs that have suppressed the virus and whose economies have already largely returned to normal (China, Taiwan and Korea). A widespread vaccine won’t really change the outlook.
  • The second contains EMs that haven’t suppressed the virus and where vaccine rollout will be slow (due to limited pre-orders, a reliance on the multilateral COVAX facility and distributional challenges). This includes much of Latin America, Africa and South Asia. Restrictions may be lifted in most sectors, but this will come late (perhaps late 2021/early 2022) and some sectors might still be subject to such measures.
  • The third contains those EMs which have a reasonable likelihood of widespread vaccine distribution next year, and that haven’t suppressed the virus (Chile, the EMs that are EU members and Russia). These EMs will benefit from a faster return to normality, with most restrictions likely to be relaxed around mid-2021.
  • The final group, which overlaps with all of the above, is tourism-dependent economies. Tourism sectors are likely to re-open, although this process is likely to be slower in countries such as Thailand that have suppressed the virus and will remain more cautious about opening up.
  • Overall, the likelihood of widespread vaccines should help the countries in the third group return towards their pre-crisis path of GDP more quickly than we had expected. Those countries in the second group will take longer to do so. GDP in this second group of countries is likely to remain some way below its pre-crisis path by the end of our near-term forecast horizon (at the end of 2022).
  • There will also be indirect economic effects on EMs from vaccine distribution elsewhere (particularly in DMs). It could push commodity prices up further. And it seems likely that the recovery in global risk appetite has further to run, which should support capital flows to EMs. In principle, stronger global demand is positive for EM exports. But the recent tailwind to some exporters – mainly those in East Asia – from a shift by global consumers towards goods and away from services may reverse.
  • While the distribution of vaccines offers hopes for an end to the crisis, some EMs will suffer from the economic legacy which will delay the return to their pre-crisis path of GDP. Limited fiscal support in some countries (e.g. India and Mexico) may have already caused long-term damage via higher unemployment and company liquidations that will have a lasting economic impact.
  • The crisis will also leave EMs with much higher public debt-to-GDP ratios. Most will grow their way out of this. But a few – like Brazil and South Africa – which came into this crisis with fragile fiscal positions, are likely to turn to fiscal austerity from next year, which will hold back economic recoveries.

How vaccines will affect our EM forecasts

It now looks like COVID-19 vaccines will be more effective and come sooner than had initially seemed likely. We are factoring these developments into our macroeconomic forecasts. (See our Global Economics Update.) This Focus sets out a framework for considering how vaccine developments will affect emerging markets.

Thinking through vaccine supply

The starting point is to consider how emerging markets will access vaccines.

The first route is via bilateral advanced purchase agreements (APAs) with major pharmaceutical companies. Chart 1 shows emerging markets’ confirmed vaccine pre-orders, as recorded by the Duke Global Health Innovation Center (data up to 20th November). We have updated the figures where we have been able to get additional information. These are measured on a per capita basis (assuming that vaccination requires two doses). We include the EU, which has pre-ordered vaccines as a bloc and will cover those EMs which are member states.

A few countries have pre-orders for an undisclosed number of doses (Hong Kong, Taiwan, Saudi, Qatar, Morocco, Korea, Vietnam and the Philippines). Such orders are not shown in the chart.

Chart 1: Confirmed Vaccine* Pre-Orders (per Capita,
As of 20th November)

Sources: Duke Global Health Innovation Center, Capital Economics

Of course, governments may make more pre-orders in the coming months, although it seems likely that those orders would not be prioritised. There may, however, be exceptions, in particular when the vaccine is being produced in that country (such as the AstraZeneca/Oxford vaccine in India among other countries, or Johnson & Johnson’s vaccine in South Africa). Within all this, there are a few points worth highlighting:

  • The pre-orders that are in place are generally small. The UK, US and Canada’s pre-orders cover their populations many times over, on the basis that some vaccines won’t pass trials. Apart from Chile, the EU states and Mexico (just), no EMs have pre-orders for vaccines in sufficient quantity to cover their population.
  • EMs have also pre-ordered vaccines from few companies (one to three); the US, UK and Canada have pre-orders of five or more different vaccines.
  • Relatively few EMs have ordered the Pfizer and Moderna vaccines (those that ordered Pfizer’s vaccine are shown in Chart 1; Korea, the EU and Qatar have ordered an undisclosed number of doses from Moderna and aren’t shown in the chart). These two companies have provided the most positive news on efficacy. Many EMs have ordered the AstraZeneca/Oxford vaccine, whose efficacy has been questioned in recent days. Much will also depend on vaccines on which we’re awaiting results (in particular from Novavax and China’s Sinovac).

The other main route to access vaccines is via the multilateral COVAX facility. Box 1 contains details of this facility. But one general point is that immunisation is likely to be slower in those countries accessing vaccines via COVAX (compared with those with pre-orders). They will have access to fewer doses and the roll out will probably be slower. COVAX’s publications suggest that allocation decisions will be made between December and March, with the first shipments envisaged in February or later. Some countries with pre-orders may be able to start vaccination programmes in the next month or two.

Finally, a few countries, like Russia and China, do not have deals with multinational pharmaceutical companies, but are instead relying on ‘national champion’ vaccines. Both countries already have immunisation programmes underway.

Box 1: A closer look at COVAX

The COVAX facility aims to distribute vaccines on a more equitable basis and ensure distribution to lower-income countries. All the emerging markets that we cover (with the exception of Russia) are members, have shown intent to join or are otherwise eligible to receive vaccines.

Middle- and high-income countries are what are called self-financing countries – they have paid money up front to receive vaccine doses via COVAX; lower income countries are eligible for financial support to purchase vaccines.

COVAX aims to provide two billion vaccine doses by the end of next year, which would enough to vaccinate one billion people (equivalent to 13% of the global population). It is aimed primarily at vaccinating frontline workers and other vulnerable members of society.

So far, it has reportedly secured access to 700 million doses (from AstraZeneca/Oxford, Novavax and Sanofi/GSK). That said, there is still some uncertainty about whether COVAX will be able to meet its targets. In particular, funding has not met the facility’s target.

As for the allocation of vaccines from COVAX, self-financing countries are allowed to request doses to cover between 10% and 50% of their populations (but they cannot receive more than 20% unless all participating countries have reached 20% coverage). Data are patchy, but most self-financing countries on which we have information have sought to purchase doses to cover 10-20% of their populations.

Distribution challenges are high

The challenge for emerging markets is not just securing vaccine supplies; there are also obstacles to distributing vaccines domestically. Constraints include the number of professionals to administer the vaccine, transport equipment and storage facilities. And the challenge will be greater if the vaccine needs to be stored at very low temperatures (as the Pfizer one does).

These constraints will, in general, be more severe in emerging markets than in developed markets. Analysis by DHL suggests that the feasibility of in-country vaccine distribution is generally high in East Asia, Eastern Europe, the UAE, Chile and South Africa. However, distribution challenges are severe across much of the rest of sub-Saharan Africa, and parts of South Asia and Latin America.

A framework for considering the economic effects

From an economic perspective, the roll-out of effective vaccines would have a larger positive impact in those countries where the virus is imposing a heavier economic burden. These differences in the speed of roll-out and the economic impact allow us to split EMs into four groups.

The first group contains those EMs that have suppressed the virus and whose economies have largely returned to normal. Containment measures have largely been lifted and, as a result, the distribution of a vaccine wouldn’t make a major difference to the economic outlook. GDP has almost (or in some cases already has) returned to its pre-crisis path. This includes several Asian economies: China, Korea and Taiwan.

The second group contains EMs where vaccine roll-out is likely to be relatively slow (due to limited pre-orders, a reliance on COVAX and/or distributional challenges that make it difficult to conduct mass vaccinations). This includes much of South Asia, Africa and Latin America.

There will, of course, be a wide variation in vaccine distribution among these countries. But in general, it seems likely that vaccine coverage will be between 10-20% of the population (in countries entirely reliant on COVAX) and 20-50% (in those with some pre-orders) by the end of next year.

That degree of immunisation would probably be sufficient to cover the most vulnerable, limiting the risk that health care sectors become overwhelmed and allowing governments to lift most containment measures. Note that elderly populations in lower-income EMs, in particular in Africa and South Asia, are small as share of the population. (See Chart 2.)

However, this process of lifting restrictions is likely to occur relatively late (perhaps by the end of 2021 or early 2022) and some sectors (e.g. recreation and hospitality) may still be subject to social distancing.

Chart 2: Share of Population Aged 65+ (%, 2019)

Source: World Bank

The third group contains those EMs which have a reasonable likelihood of widespread vaccination next year and that haven’t suppressed the virus. That should allow most social distancing measures to be relaxed by the middle of 2021. This group includes Chile, the emerging markets that are EU member states. (See Chart 3.) Russia probably also fits into this group.

Chart 3: Confirmed Vaccine Orders & Daily New COVID-19 Cases

Sources: Duke Global Health Innovation Center, Refinitiv

The final group, which overlaps with all of the above, is tourism-dependent countries. (See Chart 4.) Many destinations are likely to open up as demand for travel recovers. That said, those countries that have suppressed COVID-19 (and are unlikely to have a widespread vaccine), most notably Thailand and Vietnam, may be slower to re-open – perhaps at first relying on travel corridors, stringent testing or vaccine certifications. In a similar vein, tourism sectors in those countries that re-open but have yet to supress the virus may also recover slowly if tourists remain nervous about visiting.

Chart 4: Tourism (Direct Impact on GDP, %)

Source: WTTC

Overall, the likelihood of widespread vaccines should help the countries in the third group return towards their pre-crisis path of GDP more quickly than we had expected. Those countries in the second group will take longer to do so. GDP in this second group of countries is likely to remain some way below its pre-crisis path by the end of our near-term forecast horizon (end-2022).

Taking stock of the indirect effects

Emerging markets will benefit from vaccines not just by virtue of the fact that governments will be able to lift lockdowns. They will also benefit from the indirect effects – that is, the spillovers from the distribution of vaccines elsewhere (particularly in developed markets). There are several channels through which this will occur.

The first is via stronger global risk appetite, which should support capital inflows to emerging markets. Indeed, it looks like the recent positive vaccine news has led to a sharp pick-up in flows to EM equity and bond markets. (See our latest Emerging Markets Capital Flows Monitor.) That is good news for those emerging markets with large external financing requirements, most notably Turkey (but also many smaller Frontier Markets).

The second is via higher commodity prices. We have recently revised up our oil price forecasts. (See our Energy Update.) This is particularly good news for Angola and the major oil economies in the Gulf. (See Chart 5.) Admittedly, energy producers are likely to raise supply to meet higher demand, tempering the rise in oil prices. But this would boost producers’ GDP growth via a rise in real mining output.

Chart 5: Commodity Exports (% of GDP, 2019)

Sources: WTO, Refinitiv, Capital Economics

In principle, vaccines – and the prospect of a stronger recovery in global demand – bode well for EM exports too. That said, some countries may lose out. It’s worth noting that exporters in East Asia have benefitted from a shift in consumption patterns caused by lockdowns, as households have purchased more goods and fewer services. (See Chart 6, which shows this for the case of China.) This trend is likely to reverse as vaccine coverage widens.

Chart 6: China Exports (US$ Terms, % y/y, 3m Avg.)

Sources: Refinitiv, Capital Economics

Some will still suffer a hangover

While the distribution of vaccines offers hopes for an end to the crisis, some EMs will suffer from the economic legacy for years to come. This could delay these economies’ return to their pre-crisis path of GDP. One avenue through which this will occur is the sharp rise in public debt-to-GDP ratios this year. For most EMs, like their DM counterparts, this shouldn’t be a problem – a return to growth, combined with low borrowing costs, should help to stabilise public debt ratios.

But there are some important exceptions. (See here.) In Brazil and South Africa, the rise in debt this year has exacerbated concerns about fiscal sustainability. High long-term borrowing costs and large fiscal deficits mean that governments in both countries will need to implement austerity next year. Further out, policymakers might need to adopt financial repression policies that could also impact negatively on growth. (See here.)

Other countries may suffer long-term scarring from the crisis. This is most likely in those places where governments have provided little support (e.g. India, Mexico, Colombia) to counter the downturn. (See Chart 7.) That raises the risk of higher company liquidations and unemployment, as well as a rise in bad loans on banks’ balance sheets which will constrain credit growth (India seems particularly vulnerable to this – see here). These will weigh on aggregate demand.

Chart 7: Direct Fiscal Support During Crisis (% of GDP)

Source: IMF

Data constraints make it hard to get a firm grasp on the extent to which this has happened. But employment figures (which come with caveats about labour market data quality in EMs) suggest that the fallout has been much worse in South Africa and parts of Latin America than it has in East Asia or Eastern Europe, where income support and furlough schemes have generally been more generous.

The implications for monetary policy

In general, the positive vaccine news doesn’t change our dovish view on EM monetary policy. Major global central banks are likely to keep interest rates low (see here and here), which will help to anchor low policy rates in emerging markets.

Admittedly, a few might be more inclined to bring forward interest rate hikes. In the Central European economies of the Czech Republic, Hungary and Poland, core inflation has remained strong during this crisis. And faster vaccine distribution might mean output gaps close more quicky too, justifying earlier interest rate hikes. Meanwhile, a few EM central banks might be unnerved by the low level of policy rates (e.g. in Brazil) and might also become more inclined to tighten monetary conditions sooner than is currently in our forecasts.

That said, in most countries, we hold more dovish views than those priced into financial markets. Moreover, in a few cases, vaccine distribution could strengthen the case for interest rate cuts. Some EM central banks that tend to pay a lot of attention to the currency and/or risk premia, might be more comfortable loosening policy. This includes the central banks of Russia, Mexico and Indonesia.

Conclusions

Chart 8 tries to distil some of the key themes covered in this Focus. The horizontal axis shows our assessment of the likelihood of widespread vaccine distribution in the coming quarters. The vertical axis shows the degree to which the widespread distribution of vaccines domestically would provide economic benefits. (It doesn’t include the indirect economic benefits which depend on vaccine distribution in other countries.)

In the bottom right are those Asian economies that have already suppressed COVID-19 and would see little economic benefit from a widely distributed vaccine. A few – in the top-right quadrant – stand to see a quicker return to normal from the roll out of vaccines. And, finally, many EMs sit in the top-left quadrant – they would stand to see significant economic benefits from a widespread vaccine, but distribution is likely to be relatively slow and GDP will take longer to return to its pre-crisis path.

We will look in detail at the country-specific factors on our regional emerging markets services.

Chart 8: Likelihood of Widespread Vaccine & Potential Economic Benefit

Source: Capital Economics


William Jackson, Chief Emerging Markets Economist, william.jackson@capitaleconomics.com