EM exports may be peaking

EM goods exports have surged in Q2. There are some early indications that EM exports will now come off their record highs, but they are still likely to stay at elevated levels throughout the rest of the year.
Shilan Shah Senior India Economist
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Lat Am leads the EM tightening cycle

Several EM central banks have raised interest rates in the past couple of months on the back of growing inflation concerns (including many in Latin America) and/or strong economic recoveries (parts of Central Europe, Korea). Hiking cycles look set to continue for a while longer, with Latin America likely to tighten most aggressively. Bucking the trend is much of Asia, where – with the exception of Korea – policy tightening still looks some way off.

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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.

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India’s ferocious second virus wave is subsiding as quickly as it emerged, enabling the recovery to get back on track. However, the rapid scaling back of containment measures that is underway increases the threat of further outbreaks. And beyond the initial reopening bounce, the weakness of the banking sector will also weigh on the recovery. Under these circumstances, the RBI is likely to tolerate a bout of higher inflation and keep policy loose over the next year.

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How much further will inflation rise?

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EM policy tightening will proceed only gradually

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