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Emerging Markets: A Tenuous And Varied Recovery Path

Emerging market economies are recovering from a sharp drop in economic activity, as governments ease social distancing measures, global demand picks up, and financial conditions remain supportive. The speed of the recovery varies across EMs, shaped by pandemic-related developments, along with other factors such as the pace of the rebound in major trading partners and the effectiveness of policy support.

S&P Global Ratings forecasts the average EM GDP (excluding China) to decline 6.4% in 2020 and grow 6.2% in 2021 (see Table 1 at the end of the document). Our 2020 GDP forecast for EMs excluding China is 1.7 percentage points (ppts) lower compared to our previous macroeconomic update; however, this masks significant divergences between economies. The largest negative contribution (-1.2 ppt) comes from our sharply lower growth forecast for India (-9%, down from -5%). We also downwardly revised GDP growth forecasts for several other economies, including Mexico and South Africa. At the same time, for the first time this year, we have revised upwards our 2020 growth expectations for some EMs, namely Brazil, China, Poland, Russia, and Turkey.

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The current consensus among health experts is that COVID-19 will remain a threat until a vaccine or effective treatment becomes widely available, which could be around mid-2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: As the situation evolves, we will update our assumptions and estimates accordingly.

Mixed Progress In Containing The Pandemic

The evolution of the pandemic in EMs remains mixed. COVID-19 appears to be receding in many key EMs, but is yet to be contained in others. Overall, it has proven to be highly difficult to sustainably bring the pandemic under control. Some EMs still face increasing COVID-19 cases (such as Argentina, India, Indonesia, and the Philippines), while others have had setbacks after initially controlling contagion (e.g., Poland and Turkey, and more recently Russia). The pandemic picture improved in several EMs over the last couple of months, most notably in South Africa (see Chart 1).

Chart 1


Uneven Hits, Uneven Recoveries

Lockdowns at home and in key trading partners took a large toll on second-quarter activity in EMs. Second-quarter GDP figures confirmed the depth of the downturn across key EMs. Output fell between roughly 30% and 70%, with a median decline in GDP in key EMs excluding China of about 45% (seasonally adjusted annualized rate). The drop in output in the second quarter was less severe in Emerging Europe, Indonesia, and Brazil, while India was the hardest hit (Chart 2).

Chart 2


Although we saw a clear correlation between the stringency of lockdowns and the magnitude of the fall in GDP, other factors also played a role. Structural factors such as the share of services in output and employment, different exposures to trade and tourism, and the effectiveness of policy support are among the key factors that made the hit to output from COVID-19 vary between EMs in the second quarter.

Chart 3 illustrates these differences by looking at the contribution of domestic demand and foreign trade to GDP for four EM economies.

In Turkey, the drop in domestic demand in the second quarter was the least severe, at about 6% (non-annualized), but net exports have become a major drag on growth. A large credit stimulus put a floor on the contraction in domestic demand and imports in Turkey. However, goods exports plunged by more than 30% and tourism collapsed. In Brazil, the surprise upside to growth rose from three factors: large government transfers to informal and low-income workers; less stringent lockdown measures than many other countries in the region; and strong exports to China, especially of soybeans. Brazil's exports rose in the second quarter, in sharp contrast to other EMs. In Mexico, although it had a lockdown that was on par with Brazil's in terms of stringency and length, domestic demand fell more given the lack of government stimulus to cushion the blow on activity. Trade also dragged down the Mexican economy in the second quarter, as manufacturers shut down temporarily. Stringent lockdowns in domestic and export sectors resulted in a steep GDP decline in South Africa.

Chart 3


Uneven drops in economic activity in EMs are being followed by uneven recoveries. Data on mobility shows continuing normalization in activity across EMs, although it still varies widely, with Emerging Europe leading the pack in terms of returning to pre-COVID-19 mobility levels (chart 4).

Chart 4


More conventional economic indicators such as industrial production and retail sales also confirm an ongoing recovery across EMs, although these also vary widely by country. April was the trough for most EMs outside of China, but the magnitude of the declines and the subsequent recoveries have been very uneven. Russia and Chile stand out as having relatively shallow drops in industrial output over March-April, but their outputs failed to recover over May-July. Conversely, many EMs suffered a severe decline in industrial production in March-April, but have since bounced back. In annual terms, in July industrial output exceeded last year's levels in Turkey, Malaysia, and Poland, but it was still 11%-12% below 2019 levels in India, Mexico, and South Africa.

Chart 5


Manufacturing Purchasing Managers' Indexes (PMIs) also show divergent trends across EMs. Brazil posted a strong performance, reporting the strongest pace of expansion globally (across developed and emerging markets) in both July and August. On the other end of the spectrum, Mexico's PMIs remain at depressed levels: 41.3 in August. The rest of EMs are in between but are mostly expanding. In Turkey, the pace of improvement from April lows has slowed, while it improved slightly in Russia, moving above the 50 threshold that indicates expansionary conditions.

Chart 6


Financial Conditions Remain Favorable For Most EMs

Financial conditions remained broadly favorable for EM assets over the last quarter, despite short episodes of sudden volatility. In the last couple of weeks, a resurgence in COVID-19 cases in major economies, as well as uncertainty over additional U.S. stimulus measures, arguably drove the recent generalized sell-off in risk assets. However, in our view it's too early to say whether this is a temporary adjustment of market expectations following significant gains on risk assets, or a sign of more volatility to come. In most cases, despite the recent bout of volatility, EM bond spreads in secondary markets remain near their post-pandemic lows (Chart 7), among relatively healthy appetite for EM assets amid near zero or even negative real yields on a large portion of outstanding development market bonds. Consequently, EM issuers--both investment grade and below--have been able to issue debt at relatively low yields, considering the still high level of uncertainty about the pace of economic recovery from the pandemic-related downturn.

Most EM currencies appreciated in the third quarter, with the notable exception of the Russian ruble and Turkish lira. Both currencies lost 10%-12% of their values against the US$ in the context of rising risk of sanctions (Russia) and the widening current account deficit and negative real policy rates (Turkey).

Chart 7


The new monetary policy framework by the U.S. Federal Reserve announced at the end of August has helped lower borrowing costs by anchoring expectations that U.S. interest rates will remain low for several years. Under its revised framework, the Fed has more flexibility to overshoot its 2% inflation target temporarily and increases its emphasis on employment objectives for monetary policy with a more accommodative tilt. Furthermore, the Fed in its September meeting committed to keeping rates at its current 0% to 0.25% level through at least 2023 (S&P Global U.S. economists expect the Fed to hold off on raising rates until mid-2024 when inflation moderately holds above 2%. See "The U.S. Economy Reboots, With Obstacles Ahead," published Sept. 24, 2020). These conditions could continue to fuel "search for yield" periods and benefit EM assets.

"Lower For Longer" Stance In Developed Markets Reduces Pressure To Normalize Rates In EMs

We expect monetary policy to remain loose in key EMs this year and next. The EM central banks have cut interest rates by a median of roughly 150 basis points (bps) this year, and in many cases, they are the lowest on record. The median of real interest rates in EM is just 10 bps, according to observed overnight policy rates, and in many cases the rates are negative, down from an already low 80 bps at the end of 2019 (Chart 8). The commitment by the Fed to keep rates unchanged for several years has encouraged several central banks in EM to follow suit with guidance of continued low interest rates, which lowers some of the depreciatory pressure on currencies versus the U.S. dollar. Core inflation, both observed and expected, has remained relatively low and below central bank targets in most EMs, also reducing pressure for rates to increase. A notable exception from this narrative is Turkey, where exchange rate and inflationary pressures have prompted the central bank to tighten monetary policy.

We expect that some EM central banks will start gradually increasing interest rates at some point next year, as the expected recovery in demand pushes inflation expectations higher. Nonetheless, in real terms, rates are likely to remain very low throughout 2021.

Chart 8


Our Base-Case Forecast

We maintain our assumption that a vaccine or an effective treatment for COVID-19 will not be widely available until sometime near the middle of next year. We think that the recovery in EMs will continue even in the absence of the vaccine, as people are adapting to a reality of living with the virus. Still, until the arrival of an effective vaccine, the recovery will be limited and prone to setbacks. This is because social distancing measures will remain in place, even if they are likely to be localized and more targeted compared with those deployed earlier in the pandemic. The uncertainty about the trajectory of the pandemic and future containment measures will weigh on confidence and investment decisions. In addition, international travel will likely remain depressed, with negative implications for growth and foreign currency revenues in several EMs (for example, Thailand and Turkey).

Our adjustments to our 2020 GDP projections incorporate the differences from our expected versus the actual performance in the second quarter, as well as the pace of the recovery from second quarter lows as seen in high-frequency data, such as industrial production and mobility data published by Google. In most cases, our downward revisions for 2020 GDP growth forecast were related to the pandemic. Upward adjustments incorporate a shallower than expected decline in the second quarter or a stronger recovery from lows that quarter, driven in most cases by policy. For example, our large downward revisions in GDP forecasts for India and the Philippines reflect the difficulties in containing the virus, despite very stringent lockdown restrictions that are limiting economic recovery. On the other side, strong fiscal stimulus (Brazil and Poland) or credit stimulus (Turkey) are key factors behind the relatively better performance of these economies.

In our view, policy developments are becoming increasingly important in influencing the recovery path. The stimulus in Brazil is already coming to an end, with the monthly stimulus check that has reached about 66 million informal and low-income workers cut in half starting in September and the program scheduled to end in December. This means consumption momentum for Brazil is likely to moderate in the rest of the year and into 2021. At the same time, Poland is set to be one of the main beneficiaries of the EU recovery fund, and we think that money from the fund could be flowing starting in mid-2021. The investment projects stemming from the fund will lead to a surge in investment, thus boosting economic recovery and job creation. In this context, we expect private consumption in Poland to stay strong.

Our recovery profiles have not changed materially. Under our base-case projections, most EMs in Asia, as well as Poland and Turkey, will return to their pre-pandemic (2019) GDP levels next year (Chart 9).

For most Latin American economies, we expect a return to their pre-pandemic GDP levels in 2022. We expect South Africa to reach this level in 2023. Argentina and Mexico are lagging behind and, in our view, aren't likely to return to their pre-pandemic GDP levels until 2024 (beyond our 2023 forecast horizon), assuming a consistent growth rate.

Chart 9


We maintain our view that COVID-19 pandemic has inflicted significant permanent income losses for EMs in all regions, especially in India, Latin America, and South Africa, due to higher debt levels, subdued investment, and in some cases considerable damage to labor markets (see "Emerging Markets: The Long Road To A New Normal," published July 13, 2020").

Key Risks

Risks to our forecast are still tilted to the downside, and relate mainly to pandemic and policy developments. The third quarter has also seen a rise in geopolitical risks in some EMs, notably in Russia and Turkey. Periods of social instability are another important risk, especially in Latin America.

The renewed growth in COVID-19 cases, especially if associated with a surge in adverse health outcomes, could disrupt the recovery in EMs because of renewed and stricter lockdowns, or the spike in risk aversion by consumers and businesses. We consider that room for policy support in most EMs would be more limited this time. If advanced economies reimpose lockdowns in order to try to contain a second wave of infections, it could result in another bout of significantly lower global demand, trade, and commodity prices, slowing the recovery in EMs.

On the policy side, a premature withdrawal of government support could create cliff-edge effects and derail the recovery. At the same time, some EM economies may be forced by the markets to start consolidating their fiscal positions sooner rather than later.

Earlier deployment of a vaccine is a modest upside risk to our projections. It would lift confidence globally, and benefit EMs directly as consumers and businesses start spending more and via the positive spillovers from a boost to external demand and global risk appetite.

Overview Of Our Regional Macroeconomic Assumptions


We forecast GDP growth in emerging Asian economies to fall by 1.6% in 2020, before recovering to 7.7% in 2021. For 2020, this represents a downward revision of negative 0.9 ppts, because an upward revision in China is offset by the large downward adjustment in India and moderate downward revisions elsewhere.

Economic activity likely bottomed out for emerging Asia in the second quarter and an uneven recovery is now underway. Trade activity has started recovering faster than we expected, helped by improved demand from China, and the U.S. labor markets have also started to recover. However, the scars from the sharp economic downturn will take time to heal. Some temporary job losses could become permanent as fiscal support measures expire and more businesses close. Investment spending has fallen sharply, which will constrain production capacity, and it will take time for firms to rebuild their balance sheets.

There is little additional policy support in the pipeline. Central banks are unlikely to cut nominal interest rates further following aggressive easing earlier this year. With the exception of India, core inflation is not rising, and this is keeping real credit costs high. Loan moratoriums across the region are set to expire, which will result in a drag on credit impulse and could also lead to a deterioration in credit quality. On the fiscal side, policymakers are likely to gradually unwind stimulus measures beginning next year because fiscal space is limited. Some measures, such as jobs support and cash handouts, will expire sooner.

We have revised China's GDP growth forecast up to 2.1% in 2020 (from 1.2%), and down to 6.9% in 2021 (from 7.4%). The recovery is real but remains unbalanced and is not yet self-sustaining. The pick- up in growth is driven by infrastructure, manufacturing, and property; however, consumers remain downbeat.

In other EMs in emerging Asia, economic activity contracted more sharply than we expected over the second quarter, particularly among the countries with stringent COVID-19 mitigation lockdowns (the Philippines and India). We revised growth sharply lower for these two economies to -9.0% and -9.5% from -5.0% and -3.5%, respectively. The Malaysian economy contracted 17% in the second quarter due to its tight lockdown. It was successful in containing the virus outbreak, and the economy is now recovering on the back of improved domestic activity and a recovery in labor markets. We forecast a contraction of 5% this year, down from our previous forecast of a 2% contraction. In Indonesia, policymakers avoided wide-scale lockdowns and economic activity contracted less than the other Asian EMs. However, the economic recovery is more gradual as consumer sentiment remains downbeat, jobs recovery remains modest, and operating conditions for firms are challenging. We forecast a contraction of 1.1% this year for Indonesia, down from a previous contraction of 0.7%.

For more details on our EM Asia macroeconomic assumptions, see "Asia-Pacific's Recovery: The Hard Work Begins," published on Sept. 24, 2020.


Most of our upward adjustments to 2020 GDP growth for EMs are in Emerging Europe. We have revised our growth forecast for Poland upward to -3.4% this year (from -4.0% previously), followed by a solid recovery to 4.5% in 2021. The rapid deployment of fiscal and monetary support in the first half of the year proved successful in preventing a greater drop in GDP. Poland will be one of main beneficiaries of the EU Recovery Fund, which will support investment and job creation starting in mid-2021.

We have also revised upward Russia's GDP growth forecast to -3.5% (previously -4.8%), but lowered 2021 growth projections to 2.9% (from 4.5%). This year, our growth revisions were mostly data-driven, reflecting a better performance in the second quarter. While Russia's second quarter GDP decline was one of the smallest across key EMs, the recovery is also modest and has lost some momentum in the third quarter. The recent rise in COVID-19 infections in some regions, and the expected localized tightening of containment measures, including in the capital, Moscow, suggest a weaker performance in the fourth quarter. Rising oil prices and the expected increase in oil production should support the recovery next year. The temporary relaxation of the fiscal rule into 2021 should allow Russia to avoid a fiscal cliff; however, overall fiscal support to the economy remains relatively modest. Risks of sanctions are rising, weighing on currency and bond yields. The weaker ruble is helping exporters and the budget, but it may prevent the central bank from continuing to ease policy. In our view, the central bank is approaching the end of the easing cycle.

Our upward revision for Turkey's GDP growth, to -2.5%, from -3.3% previously, reflects the impact of a strong credit stimulus engineered by the government, which underpinned a faster recovery in domestic demand and imports. Coupled with a slump in revenues from goods exports and tourism, this has led to a widening of the current account deficit to close to 8% of quarterly GDP in the second quarter, from an overall surplus in 2019. Capital outflows amplified current account pressures, leading to a 12% depreciation of the Turkish lira versus the US$ in the third quarter, and pushing core inflation up to 11.0% in August from 10.3% in July. In response, the central bank has tightened policy--with the weighted average cost of CBRT funding up 300 bps in the third quarter--and domestic demand is cooling. Exports should drive the recovery next year, but mainly goods exports, helped by a recovery in external demand and a more competitive exchange rate, with the recovery in international tourism likely lagging behind. Risks to our 4% GDP growth forecast in 2021 are on the downside. The net foreign exchange (FX) reserves of Turkey's central bank have decreased substantially this year, and continued pressures on the lira could ultimately force the central bank to sharply raise interest rates, derailing recovery. We also continue to see risks of international sanctions, which could sour sentiment further.

We have again lowered our GDP growth forecast for South Africa, to -8.2% from -6.9% previously, mostly because of the adverse pandemic situation that has brought longer lockdowns that have constrained most economic sectors. That said, tightening containment measures at the end of July proved to be effective in rapidly driving a decline in new infections throughout August, allowing the government to ease restrictions once again toward the end of August. Economic activity is gaining speed, but long-standing structural weaknesses and rising debt levels will constrain the recovery. The hit to the labor market will also weigh on the recovery prospects. Although official unemployment dropped to 23.3% in the second quarter from 30.1% in first quarter, this reflects a sharp fall in the labor force to 47.3% from 60.3%, as discouraged jobseekers left the labor market.

Latin America

Our macro narrative for Latin America hasn't changed materially since last quarter. The recovery from the pandemic-driven downturn is underway across the region's major economies as social distancing measures are gradually phased out. However, the recovery in the coming years will be constrained by structural weakness in investment dynamics, higher unemployment levels, and in some cases limited government support to households and businesses, which will further hamper investment and employment. We forecast that most Latin American economies won't return to pre-pandemic GDP levels until 2022 or 2023, and the permanent income losses will average about 6% of GDP.

We now see the region contracting slightly more this year but also recovering slightly faster next year (-8.5% for 2020 and 4.5% in 2021). Adjustments to our GDP projections this round mostly reflect a different-than-expected performance in the second quarter. The Brazilian economy, despite being one of the economies with the highest incidence of COVID-19 cases, performed better than we expected in the second quarter. We now forecast the economy to contract 5.8% this year, better than the 7.0% decline previously projected, before expanding 3.5% in 2021. Conversely, Argentina, Colombia, and Mexico all fared worse than we anticipated in the second quarter, with quarterly annualized declines of close to 50%. These economies either had very stringent lockdowns (Argentina and Colombia) or very limited government stimulus (Mexico). Our 2020 GDP forecasts now stand at -12.5% for Argentina, -8.0% for Colombia, and -10.4% for Mexico, and we increased our 2021 forecasts moderately, partially offsetting the downward revisions to 2020. Chile performed broadly as we expected, and we've kept our forecast for the economy to contract 6.5% this year and expand 5.5% in 2021.

An important downside risk across the region will be the potential for bouts of social instability with implications for investment, given the outsized impact of the pandemic downturn on lower-income households in an already polarized political environment in most Latin American countries.

For more details on our Latin American macroeconomic assumptions, see "Latin America's Pre-COVID-19 Growth Challenges Won't Go Away Post-Pandemic," published on Sept. 24, 2020.

Table 1

Real GDP (%)
2018 2019 2020f 2021f
Latin America 1.4 0.5 (8.3) 4.0
EM-EMEA 2.8 1.3 (3.8) 3.5
EM-Asia 6.5 5.4 (1.6) 7.7
EM-16 5.1 4.0 (2.8) 6.5
EM-14 2.9 1.9 (5.3) 4.6
EM excluding China 4.0 2.6 (6.4) 6.2
Source: Oxford Economics; F--S&P Global Ratings forecast. Note: GDP aggregates are based on GDP PPP Weights. EM-14 excludes China and India. For India, 2019=FY 2019/20, 2020=FY 2020/21, 2021=FY 2021/22, 2022=FY 2022/23, and 2023=FY 2023/24.

Table 2

Real GDP Changes From June Baseline (Percentage Points)
2020f 2021f
Latin America (0.8) 0.5
EM-EMEA 0.7 (0.7)
EM-Asia (0.9) 0.1
EM-16 (0.6) (0.0)
EM-14 (0.7) (0.1)
EM excluding China (1.7) 0.4
Source: Oxford Economics; F--S&P Global Ratings forecast. For India, 2019 FY 2019/20, 2020=FY 2020/21, 2021=FY 2021/22, 2022=FY 2022/23, 2023=FY 2023/24.

Table 3

CPI Inflation % (Year Average)
2019 2020F 2021F 2022F
Argentina 53.5 43.0 40.0 38.5
Brazil 3.7 2.7 3.0 3.5
Chile 2.3 2.8 2.6 3.0
Colombia 3.5 2.6 2.3 3.0
Mexico 3.6 3.5 3.7 3.4
China 2.9 3.1 1.7 1.8
India 4.8 5.2 4.5 4.5
Indonesia 2.8 2.2 3.3 3.3
Malaysia 0.7 (1.5) 2.2 2.1
Philippines 2.5 2.5 2.5 2.7
Thailand 0.7 (1.3) 1.1 0.8
Poland 2.1 3.3 1.6 2.1
Russia 4.5 3.2 3.5 4.0
Saudi Arabia (1.2) 3.0 2.6 2.1
South Africa 4.1 3.3 4.0 4.4
Turkey 15.2 11.7 10.4 9.1
F--S&P Global Ratings' forecast. For India, 2019 = FY 2019 / 20, 2020 = FY 2020 / 21, 2021 = FY 2021 / 22, 2022 = FY 2022 / 23, 2023 = FY 2023 / 24. Source: Oxford Economics.

Table 4

Policy Rates % (End of Period)
2019 2020F 2021F 2022F
Argentina 55.00 33.00 30.00 25.00
Brazil 4.50 2.00 3.00 4.50
Chile 1.75 0.50 1.00 2.00
Colombia 4.25 1.75 2.75 4.00
Mexico 7.25 4.25 4.25 5.00
India 4.40 3.50 4.50 5.00
Indonesia 5.00 4.00 4.00 4.25
Malaysia 3.00 1.50 1.50 2.00
Philippines 4.00 1.75 1.75 2.75
Thailand 1.25 0.50 0.50 0.50
Poland 1.50 0.10 0.10 0.98
Russia 6.25 4.25 4.25 4.75
South Africa 6.50 3.50 3.75 4.50
Turkey 11.43 11.25 10.05 8.63
F--S&P Global Ratings' forecast. Source: Oxford Economics.

Table 5

Exchange Rates % (End Of Period)
2019 2020F 2021F 2022F
Argentina 59.89 85.00 115.00 125.00
Brazil 4.03 5.25 5.05 5.00
Chile 745.00 765.00 760.00 755.00
Colombia 3,277.00 3,700.00 3,675.00 3,650.00
Mexico 18.93 21.50 21.25 21.00
China 6.99 6.80 6.86 6.98
India 74.40 74.00 74.50 75.00
Indonesia 13,883.00 14,800.00 14,961.00 15,150.00
Malaysia 4.09 4.18 4.21 4.23
Philippines 50.74 49.00 52.00 51.20
Thailand 30.15 31.40 31.20 31.00
Poland 3.80 3.80 3.75 3.85
Russia 61.91 76.00 73.00 74.00
Saudi Arabia 3.75 3.75 3.75 3.75
South Africa 14.04 16.50 16.25 16.13
Turkey 5.95 7.50 7.52 7.90
F--S&P Global Ratings' forecast. End of Period - Q4 values. For India, 2019 = FY 2019 / 20, 2020 = FY 2020 / 21, 2021 = FY 2021 / 22, 2022 = FY 2022 / 23, 2023 = FY 2023 / 24. Source: Oxford Economics.

Table 6

Unemployment % (Year Average)
2019 2020F 2021F 2022F
Argentina 9.8 12.7 11.5 10.1
Brazil 11.9 13.4 12.9 12.2
Chile 7.2 11.1 10.4 9.2
Colombia 10.5 15.4 14.5 13.6
Mexico 3.5 5.1 4.8 4.4
China 5.2 5.7 5.5 5.2
Indonesia 5.1 6.3 6.0 5.5
Malaysia 3.3 4.5 4.1 3.5
Philippines 5.1 12.3 9.3 7.3
Thailand 1.0 1.8 1.7 1.3
Poland 3.3 3.7 4.8 4.1
Russia 4.6 5.8 5.4 4.7
Saudi Arabia 5.7 12.0 10.0 8.0
South Africa 28.7 33.8 30.8 30.1
Turkey 13.7 14.0 13.4 12.0
F--S&P Global Ratings' forecast. Source: Oxford Economics.

Related Research

This report does not constitute a rating action.

Lead Economist, Emerging Markets:Tatiana Lysenko, Paris (33) 1-4420-6748;
Senior Economist, Emerging Markets:Elijah Oliveros-Rosen, New York (1) 212-438-2228;

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