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A closer look at the Delta variant’s threat to recoveries

The spread of the Delta variant of COVID-19 poses a much bigger risk to economic recoveries in emerging markets than in developed markets. India, South Africa, and South East Asia have suffered already or are suffering. And limited vaccine coverage in much of Latin America, other parts of Asia and Africa mean that the threat of future outbreaks will persist. That adds to reasons to expect that GDP will return to its pre-crisis path more slowly than elsewhere.
William Jackson Chief Emerging Markets Economist
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Asia joins the EM rate hike club

Upside surprises to inflation coupled with a hawkish Fed have prompted aggressive monetary policy responses by central banks across the emerging world over the past month. Policymakers in Czechia, Romania, Chile and Egypt raised interest rates by more than expected while Mexico’s central bank appears to be shifting its tightening cycle into a higher gear. Meanwhile, a handful of Asian central banks kicked off their tightening cycles, with India, Malaysia and the Philippines raising interest rates. Looking ahead, we think tightening cycles in Emerging Europe and Latin America have a bit further to run, while policy normalisation in Asia is likely to be gradual. The key exception is China where policy is likely to be loosened a bit further, although a renewed round of large-scale stimulus seems off the cards. LatAm Drop-In (26th May, 10:00 ET/15:00 BST): Join our 20-minute briefing about Colombia’s election and other regional political and fiscal risks – including Lula vs Bolsonaro in October. Register here.

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Net capital outflows from EMs appear to have picked up over the past few weeks amid the general risk-off mood in global financial markets. This is a worrying development for countries with fragile external positions, notably Turkey and some smaller frontier economies. But most major EMs are much better placed to cope with a period of capital outflows.

18 May 2022

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Inflation surge not just a food and energy story

Higher food and energy prices go some way to explaining the rise in headline inflation rates across the emerging world, but this is only part of the story. Core inflation has also jumped in many EMs, especially in Emerging Europe and Latin America. This will keep central banks in both regions in tightening mode. With inflation in Asia and South Africa more subdued, tightening cycles there will be more gradual. EM Drop-In (17th May): Do current EM debt strains point to a repeat of the kinds of crises seen in the 1980s and 1990s? Join our special briefing on EM sovereign debt risk on Tuesday. Register now.

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More from William Jackson

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Not all doom and gloom

Virus outbreaks are easing in much of Latin America which should support activity in the near term. And while vaccination coverage is still weak in most of the region, suggesting there is still a clear risk of further virus waves, economies are becoming increasingly resilient on this front. We think that the pace of the regional recovery will beat most analysts’ expectations in the coming years. Further monetary tightening lies in store but, with headline inflation rates set to drop back in 2022, interest rates probably won’t rise as far as investors are currently pricing into financial markets. Meanwhile, political risks are likely to grow over the coming year, raising debt concerns and putting local financial assets under pressure.

19 July 2021

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Brazil’s tax reform, Chilean primary elections

Proposed changes to Brazil’s income tax setup, which aim to cut corporate tax but only partly offset that with an end to exemptions and the introduction of a levy on dividends, add to the view that fiscal risks will resurface. Elsewhere, on Sunday there will be primary elections in Chile to decide the presidential nominees for the left-wing Apruebo Dignidad and centre-right Chile Vamos coalitions. While there is still a lot of uncertainty at this stage, one common theme is that there seems to be broad political support for keeping fiscal policy loose.

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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.

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