Growing concerns of EM ‘ripple effects’

Relatively low vaccination rates amid fresh COVID-19 outbreaks, slowing Chinese growth and peaked terms of trade with the prospects of tighter US monetary policy have produced several headwinds for emerging markets in 2022, according to analysts from Aviva Investors.

With different rates of rebounding economic growth in developing countries amid concerns over the impact of new outbreaks of COVID-19, Nafez Zouk and Carmen Altenkirch have argued that this will result in varying degrees of resilience and vulnerability across emerging markets. Lagging vaccination rates have also put emerging markets at risk of economic consequences and scarring in the medium-term.

Zouk and Altenkirch also highlighted the growing concerns about the cooling Chinese economy, which is also projected to produce varying impact on the emerging markets.

“Countries such as Peru, Chile and Brazil are heavily dependent on Chinese demand for commodity exports, Thailand relies on Chinese tourists, and supply chains in the Philippines and Malaysia are deeply intertwined with the Chinese economy,” Zouk and Altenkirch in their analysis.

“Other countries are in a better position to weather a slowdown in China. Mexico and Eastern European countries stand out, given their respective proximity to large manufacturing centres in the US and Europe.”

Zouk and Altenkirch also identified the imminent tapering of the Federal Reserve’s (Fed) asset-purchase programme and a likely increase in policy rates next year as further headwinds for emerging markets in 2022. This projection is based on the historical financial consequences for emerging markets after financial conditions in the US were tightened, due to the impact on capital accounts.

“Meanwhile, the recent (and wholesale) improvements in current account balances may wane in 2022 as commodity prices come off their highs and import demand picks up,” the analysis said.

“Taken together, it will prove more challenging for more vulnerable EM countries to meet their financing needs.”

The analysis also highlighted several countries Zouk and Altenkirch believe will experience real economic growth that is likely to exceed real effective interest rates, like Malaysia and Indonesia, and those that remain vulnerable to large primary deficits putting pressure on debt-to-GDP ratios, like South Africa and Brazil.

“The likes of Peru, Colombia, Ukraine, and Ghana are all vulnerable to disappointing growth; as such, investors will need to watch fiscal metrics closely to better assess their future debt trajectory.

“Some nations are in an even worse position… Although it would take a big negative economic shock to cause serious concerns for Romania and the Czech Republic, the same cannot be said for Bahrain, whose fiscal position merits closer monitoring.”