Evergrande & frontier sovereign debt risks build

The combination of large foreign-currency debt burdens, low FX reserves and weakening currencies means that the risk of sovereign defaults in Sri Lanka and Tunisia is growing. Elsewhere, China’s largest property developer, Evergrande, appears to be close to collapse, which would cause large losses for banks and bondholders. Were this to cause stress in the banking sector, the government would ultimately step in to restore stability. Elsewhere, banking sectors in Turkey, India and the UAE are points of concern.
Kimberley Sperrfechter Assistant Emerging Markets Economist
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A big chunk of the recent rise in headline inflation in EMs has been driven by a jump in energy inflation which will be transitory. But core inflation has also risen in parts of Latin America and Emerging Europe and is likely to prove more persistent. With headline rates in both regions set to remain elevated for some time, central banks there will remain in tightening mode over the coming months.

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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.

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Car woes to weigh on recoveries in Mexico & CEE

The supply constraints that have hit global vehicle output have probably reduced the level of GDP by a modest 0.1-0.2% in most EM auto producers, but some countries like Czechia, Hungary and Mexico have suffered much bigger blows. And the drag from vehicle production is likely to persist for some time yet.

15 October 2021

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With external positions in decent shape in most major EMs, the macroeconomic fallout from any tightening of external financing conditions should be limited. But there are a handful of EMs which look vulnerable. Turkey remains the key one, but risks are also emerging in a few other countries, including Romania and the Andes.

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EM manufacturing recovery comes off the boil

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