- After a solid rebound in the third quarter, growth momentum in emerging markets (EMs) has slowed, and the near-term outlook is facing headwinds from the recent resurgence in COVID-19 cases in Europe, the U.S., as well as in several key EMs. S&P Global Ratings' baseline assumption is that the recovery will strengthen starting in mid-2021, when a safe and effective vaccine becomes widely available.
- Important recent developments--including the outcome of the U.S. presidential election and the progress on the vaccine--affect the distribution of risks around our central scenario for EM economies, rather than alter the baseline forecast at this point. We now view the risks to EMs' growth in 2021 as balanced.
- Record-breaking stimulus measures in most advanced economies are likely to continue to fuel general appetite for EM assets as we head into 2021, in search for higher yield. However, several country-specific risk factors can trigger significant variation in EMs' performance next year. Some of these risk factors, such as weakening fiscal positions, uncertainty over growth trajectories, and political and social instability, have been amplified by the pandemic-induced downturn.
EMs continue to recover from a sharp drop in economic activity. After a solid rebound in the third quarter, growth momentum has slowed in the fourth quarter, and the near-term outlook is facing headwinds from the recent resurgence in COVID-19 cases in Europe, the U.S., as well in several key EMs. S&P Global Ratings' baseline assumption is that the recovery will strengthen starting in mid-2021, when a safe and effective vaccine becomes widely available.
We expect the average EM (excluding China) GDP to expand 5.9% in 2021, after a contraction of 6.1% in 2020 (see table 1). Our baseline EM growth forecast hasn't materially changed since our last macro update two months ago. The updated projections imply a shallower contraction this year (+0.3 percentage point [ppt]), but also a slightly weaker rebound in 2021 (-0.3 ppt), compared with our previous expectations (see table 2).
|Real GDP (%)|
|EM Ex. China||4.0||2.6||-6.1||5.9|
|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, 2023 = FY 2023 / 24. f--Forecast. GDP--Gross domestic product. Source: Oxford Economics.|
|Real GDP Changes From September Baseline, Percentage Points|
|EM Ex. China||0.3||(0.3)|
|For India, 2019 = FY 2019 / 20, 2020 = FY 2020 / 21, 2021 = FY 2021 / 22, 2022 = FY 2022 / 23, 2023 = FY 2023 / 24. f--Forecast. GDP--Gross domestic product. Source: Oxford Economics.|
Our growth outlook for China and India remains broadly unchanged, but we now expect the recovery paths for most of the other emerging Asian economies to be more gradual. Even so, most EMs in Asia should return to their pre-pandemic (fourth quarter 2019) GDP levels next year. We also expect emerging European economies to reach their pre-pandemic levels in 2021, despite a recent setback in the recovery.
Major economies in Latin America were some of the worst hit by the COVID-19 downturn among EMs, and we expect they will also be among the slowest to recover. We have revised our average 2020 GDP growth forecast for the five largest Latin American economies by about 1 ppt to a 7.3% contraction. However, our 2021 forecast remains broadly unchanged at a 3.8% growth, implying that by the end of next year, the region will still be about 3% below its pre-pandemic GDP level.
Important recent developments--including the outcome of the U.S. presidential election and the progress on the vaccine--affect the distribution of risks around our central scenario for EM economies, rather than alter the baseline forecast at this point. We now see the risks to EM growth in 2021 as balanced.
Available third-quarter GDP readings confirm the strength of the initial rebound in EMs from the deep decline in economic activity in the second quarter, when lockdowns at home and in key trading partners were the strictest. In many economies, the rebound in GDP during the third quarter was stronger than we expected, prompting an adjustment to our 2020 GDP growth estimates. Latin America's GDP expanded 10% in quarterly terms in the third quarter (non-annualized), after declining 13.5% in the second quarter, compared with our expectation of 7.5%. Still, by the end of the year, the region will be about 5% below its pre-pandemic GDP level. Turkey's economy grew 15.6% (6.7% year-on-year), powered by a large credit stimulus. High-frequency data point to a strong rebound in South Africa's GDP in the third quarter.
A closer look at the data reveals that robust exports are fueling EMs' recovery, lifting industrial output (charts 1 and 2). Key engines of China's recovery--infrastructure and property--have boosted demand for industrial metals and ores, benefiting EM commodity exporters with strong trade ties with China (Brazil, Chile, South Africa, and Indonesia). China's resilient demand for agricultural commodities also helped. Brazil's soybean exports rose 20% in the third quarter from the previous-year quarter. Thanks to strong U.S. demand, Mexico's manufacturing exports rose 4% year-on-year in September. By contrast, for key oil producers--Saudi Arabia and Russia--the agreed production cuts as part of the supply deal are still in place, which puts a ceiling on output and exports.
At the same time, household spending across EM remains sluggish, with notable exceptions of Brazil and Turkey. This is in contrast with the U.S. and Europe, where consumers are taking the lead in the recovery (chart 3).
The weakness in consumer spending goes beyond the people-facing services sector, which continues to suffer from mandatory closures and cautious consumer behavior. The recovery in EM retail sales is also weak and lagging those in advanced economies (chart 3). In the U.S. and the eurozone, retail sales were up 5.7% and 2.1%, respectively, in September year-on-year. In emerging Asian economies (excluding China and India), retail sales in September were more than 6% below year-on-year, while the average gap in Latin America was 1.5%. Key reason for a slower recovery in EM consumer spending, in our view, is less generous government support than in developed markets (DM), which has a direct negative impact on income, but also indirect impact on consumer confidence. Not surprisingly, EM economies which enjoyed a larger stimulus have seen a stronger rebound in consumer spending. For instance, due to the Brazilian government's monthly emergency stipend program, which reached 67 million people, retail sales were up 7% in September year-on-year. Also, Turkey's large credit stimulus ushered a strong recovery in consumer spending, with retail sales up more than 9% in September year-on-year.
Global economic recovery will continue to support EMs' exports next year. However, an improvement in domestic demand would prompt self-sustained recovery in EM, which otherwise will remain vulnerable to swings in external demand.
Our Baseline Forecast And Key Risks
Pandemic developments and vaccine assumptions: higher probability of an earlier COVID-19 vaccine
S&P Global Ratings believes there remains a high degree of uncertainty over the evolution of the pandemic. Reports that at least one experimental vaccine is highly effective and might gain initial approval by the end of the year are promising, but this is merely the first step toward a return to social and economic normality. Equally critical is the widespread availability of effective immunization, which could occur by the middle of next year. We use this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
Pandemic picture remains mixed, with a periodic shift among EMs. Emerging Europe has become a virus hotspot in the fourth quarter. The number of infections is rising in Poland (although they seem to have peaked in the second week of November following the renewed lockdown), Russia, and Turkey. The situation in Brazil has improved, but reported new daily cases have edged up recently (chart 4). The Polish government announced a range of restrictions, notably on the hospitality sector, schools, and social gatherings, while governments in Russia and Turkey responded to the second wave with only targeted restrictions.
Nevertheless, mobility dipped across all key emerging European economies, amid the rising consumer risk aversion (chart 5). Brazil is now leading the pack in terms of getting closer to the pre-pandemic level of activity, and the rest of key Latin American economies are on the improving trend.
Near-term outlook for emerging Europe has dimmed, and we penciled in a sequential contraction in Poland and Turkey during the fourth quarter. In Poland, this mostly reflects the impact of the lockdown, while our forecast for Turkey reflects the adjustment after an exceptionally strong recovery in the third quarter as interest rates have risen and the credit stimulus is being withdrawn. We expect growth for the rest of EMs in the fourth quarter, albeit at a slower fast pace than in the third quarter.
We forecast the recovery across all EMs to continue in the first half of 2021, even in the absence of the vaccine. But we expect the rebound to be limited and prone to setbacks. The arrival of the effective vaccine would foster the normalization of activity in the people-facing services sector, enable the resumption of travel (albeit with a lag), and boost consumer and business confidence, all of which would lead to a faster recovery in EM.
The good news is that vaccine development has been more rapid than our baseline projections. There are still important milestones to be reached, including regulatory approvals, large-scale production and distribution, and the public's acceptance. But the probability of the start of large-scale immunization earlier than our baseline has risen. It's likely that some EMs will get the vaccine around the same time as DMs, while others will struggle to get the vaccine and effectively distribute it. Still, the boost to confidence and the pick-up in global demand should lift growth across EMs.
Global Financing Conditions: Supportive Of EM Assets, But Differentiation Ahead
Record-breaking stimulus measures in most advanced economies are likely to continue to fuel general appetite for EM assets as we head into 2021, in search for higher yield. EM hard-currency sovereign spreads narrowed further since the end of the third quarter, by 50-350 bps according to J.P. Morgan's EMBI spread index, which is now only about 50 bps wider than the pre-pandemic level. A similar dynamic took place among corporate spreads, with Latin American credit, which underperformed among EMs during the height of the pandemic in the second quarter, outperforming this quarter. On aggregate, Latin American corporate spreads narrowed 80 bps this quarter, versus 25 bps for the broader EM high-grade group, according to ICE BofA EM Corporate Bond Spread indices.
However, 2021 could be a year of significant differentiation among EM assets. November was a good month for risk assets across the board, in the aftermath of U.S. election and the news of the progress on the vaccine, propelling all major EM currencies. However, several country-specific risk factors can trigger significant variation in performance of EMs next year. Some of these risk factors, such as weakening fiscal positions, uncertainty over growth trajectories, and political and social instability, have been amplified by the pandemic-induced downturn. And while investors expect a more predictable U.S. policy trajectory under the Biden administration, notably on trade, in our view, it is too early to assess Mr. Biden's policies on EM.
Policies: The Expected Phaseout Of Stimulus In Several EMs Could Slow The Recovery
Fiscal and monetary support varied across EMs in 2020. Important for the recovery path is not only the scale, but also the speed with which such support is withdrawn. Compared with our previous expectations, the threat of premature policy tightening in EM in Asia has receded. We expect a tightening in China next year, but our forecast already incorporates it. In Latin America, fiscal stimulus varied widely, from 12% of GDP in Brazil to 1% of GDP in Mexico. However, these measures are set to expire in most Latin American countries by the end of this year. Given that domestic demand is still very fragile, the impact of less fiscal support on growth could be quite noticeable.
Monetary policy will remain broadly accommodative across EMs. We expect central banks in emerging Asia--outside India and China--to lower rates further, taking advantage of easier global monetary settings and low domestic inflation. In Latin America, large output gaps should keep demand-side inflation pressures subdued. This will encourage most central banks to keep interest rates near their current all-time lows. At the same time, our baseline assumption is that several central banks, including those in Brazil, Russia, and South Africa, have reached the end of the easing cycle. The Turkish central bank has already tightened policy in response to the exchange-rate and inflationary pressures, and is likely to tighten further.
Emerging Asia: No Major Changes For China And India, A Slower Climb Back For The Rest Of The Pack
We expect emerging Asian economies to grow 7.6%, compared with our previous forecast of 7.7% next year, following an estimated 1.6% contraction this year. Our growth outlook for China and India remains broadly unchanged, but we now expect the recovery paths for most of the other emerging Asian economies to be more gradual. Nevertheless, most EMs in Asia should return to their pre-pandemic (fourth quarter 2019) GDP levels next year.
We expect China's economy to grow 7.0% in 2021, marginally higher than our previous forecast of 6.9%, after an estimated 2.1% growth this year (unchanged from the previous projection). Our forecast assumes a substantial rotation in demand from infrastructure investment, property, and exports to private consumption. Recent data point to an ongoing improvement, and we expect consumers to run-down higher saving and bring spending back to normal levels, implying real consumption growth of about 9% in 2021. In India, we maintain our forecast of a 9% contraction in fiscal 2020-2021 and 10% in fiscal 2021-22. While upside risks( to our growth outlook for India have increased as activity is picking up at a faster speed, the pandemic is not yet under control, which prompts us to be cautious about growth expectations. We have lowered our 2021 GDP growth forecasts by roughly one percentage point for Indonesia, Malaysia, and Thailand, mainly due to a slower recovery in domestic demand, but have kept our projections unchanged for the Philippines.
Monetary and fiscal support will vary across the region in 2021. Financial conditions in China are likely to tighten, driven by a tighter fiscal and macroprudential policy stance (see "China's Tighter Financial Conditions Start To Bite," published Nov. 19, 2020). We don't expect much fiscal support in India, where broad stimulus measures have been lacking. However, in most of the rest of emerging Asia, we expect policy support to either remain accommodative, or loosen further.
The emerging Asia--outside of India and China--has adopted significantly accommodative fiscal policy this year and we expect only gradual consolidation beginning in 2021. Policymakers are keen to prevent a sharp unwinding of stimulus measures. In Thailand, direct fiscal stimulus for 2020, which is among the highest in the region at 8.2% of GDP, is likely to remain high in 2021 as the government aims to keep spending mostly unchanged. In the Philippines, the fiscal response has been small so far, at about 2.3% of GDP, but we expect a boost from fiscal impulse in the second half of next year if key infrastructure projects start to ramp up again.
We expect central banks in emerging Asia--outside India and China--to ease their monetary policies further, taking advantage of easier global monetary settings and low domestic inflation. Core inflation is either low and stable, or declining, for several EMs despite significant policy rate cuts this year. As a result, real policy rates are rising. In Malaysia, where headline inflation is negative and core inflation has fallen about 50 bps to 1%, we expect the central bank to cut its policy rate once more by 25 bps to 1.50%, following 125 bps in reductions this year. We expect Indonesia's central bank to cut policy rates by 25 bps over next few months. Steady external conditions mean that there is little risk of the depreciating currency and the central bank will lean against ongoing disinflation. However, the central bank is sensitive to a potential weakening of the Indonesian rupiah, which prevents further easing.
The risks to our outlook on emerging Asia are now more balanced, as acute downside risks ease and upside risks emerge. An early vaccine rollout would bring forward the recovery next year. A new U.S. administration lowers the probability of an escalating trade war. The Regional Comprehensive Economic Partnership (RCEP), the first broad Asia-Pacific free trade agreement in history, increases the likelihood of faster growth in the medium term.
For more details on our macroeconomic assumptions for emerging Asia, see "Asia-Pacific Forecasts Stabilize, Risks Now Balanced" published on Nov. 30, 2020.
Emerging EMEA: Near-Term Growth Prospects Have Slipped in Emerging Europe, But Likely To Firm Up Next Year
Our near-term outlook for emerging European economies has weakened following the resurgence of the virus in the fourth quarter. After a temporary setback, we expect the recovery to gain speed in the second and third quarter of 2021, and for key economies in the region to reach the fourth-quarter 2019 GDP levels over the course of next year.
After a solid rebound in the third quarter, we expect the Polish economy to contract in the fourth quarter, due to containment measures and the spike in risk aversion among households and businesses. We believe restrictions on economic activity will be eased only gradually in the first quarter of next year and for recovery to be subdued in the same period. This has prompted us to revise down our 2021 GDP growth forecast to 3.8% from 4.5% previously, following an estimated 3% contraction this year (an upward revision by 0.4 ppt on stronger-than-expected rebound in the third quarter).
The consumption-driven rebound should accelerate in the second quarter of 2021. Starting in the third quarter next year, we expect investment to be an important driver of growth. Poland is set to be one of the main beneficiaries of the European Next Generation (it should receive about 6% of GDP in grants) and the SURE program (Support to mitigate Unemployment Risks in an Emergency from which the country should receive loans of approximately 2% of GDP). Yet more support might be available from other European facilities. Given the pronounced role the EU funds play in Poland's growth model, our baseline scenario assumes the EU and the Polish (as well as the Hungarian) authorities will be able to find a compromise over the potential rule of law conditionality of some portions of funding.
We have kept our GDP forecast for Russia unchanged at a 3.5% contraction this year and 2.9% growth in 2021. The third-quarter outcomes (down 3.6% year-on-year, about 6% growth in quarterly terms) were in line with our expectations. And we have already factored in a slowdown in the fourth quarter following Russia's tightening of measures to contain the second wave of the virus. Government spending has picked up in the fourth quarter, supporting the recovery. Overall direct fiscal support, which we estimate at 2.5% of GDP, is modest compared with those DMs and several key EMs. The temporary relaxation of the fiscal rule into 2021 will help avoid the sharp spending consolidation. Growth next year will be supported by the easing of restrictive measures, as well as the recovery of global economy and oil markets. Our baseline scenario assumes a rise in Brent oil price to an average of $50/bbl in 2021, as well as the increase in oil production as the restrictions on supply as part of OPEC deal are relaxed gradually.
We believe the central bank of Russia has reached the end of the easing cycle, and expect it to keep the key rate at the current level of 4.25% in 2021. Inflation has picked up recently and exceeded the target of 4% in November due to a revival in consumer demand, and the pass-through of previous currency depreciation to domestic prices, in our view. Uncertainty remains high regarding international sanctions, which weigh on investor sentiment and could put at risk capital flows to Russia, further weakening the exchange rate. We note that the Russian ruble has become more sensitive to capital flow dynamics amid lower oil prices and the country's shrinking current account surplus.
A large credit stimulus propelled domestic demand in Turkey in the third quarter, but came at the expense of a return of macroeconomic imbalances, balance of payments vulnerabilities, and currency volatility. Exports also bounced back. But due to the rapid rise in imports, the contribution of net exports to growth was negative, and the current account deficit remained sizeable. The fourth-quarter performance is looking much weaker as far as growth is concerned, and we expect a GDP contraction in sequential terms. This reflects the worsening pandemic situation, lower demand from the eurozone, as well as the adjustment after an exceptionally strong recovery in the third quarter, as interest rates have risen and the credit stimulus is being withdrawn. We have revised our GDP estimates to a 1.5% contraction (from 2.5% previously), but lowered the 2021 growth to 3.6% (from 4.0%). Recent changes of leadership at the Ministry of Finance and the central bank have improved investor sentiment, but we have yet to see whether this is a broader strategy to return to more conventional and transparent macroeconomic policies over the medium term, as opposed to just a short-term change.
Latin America: No Major Changes, But Recovery Likely To Be Slow And Prone To Setbacks
We continue to expect the recovery in most major Latin American economies from the pandemic-induced downturn to be among the slowest among EMs. We inched up our average 2020 GDP forecast for the five largest Latin American economies by about 1 ppt to a 7.3% contraction, due to stronger-than-expected external demand for the region's manufacturing and commodity goods in the third quarter. However, our 2021 forecast remains broadly unchanged at 3.8%, implying that by the end of next year, the region will still be about 3% below its pre-pandemic GDP level. Most economies in the region won't return to their pre-pandemic GDP levels until the second half of 2022, Mexico in 2023, and Argentina beyond our forecast horizon, which ends in 2023.
The low or insufficient levels of government support to labor markets and businesses in most countries of the region, combined with economic weaknesses that preceded the pandemic, are the main reasons why we expect Latin America's growth to underperform those of most EMs. The primary reason why we expect Mexico's economic recovery to take longer than those most of its regional peers is because the damage to the labor market has been more severe, and investment weakness that preceded the pandemic is likely to remain in place after COVID-19 fades. We expect Mexico's GDP growth of 3.9% in 2021, which implies a tepid recovery from the estimated 9.3% contraction this year.
Fiscal stimulus responses, which varied widely across Latin America, with as high as 12% of GDP in Brazil to as low as 1% of GDP in Mexico, are set to expire in most countries by the end of this year. Given that domestic demand is still very fragile, the impact of less fiscal support on economic growth could be quite noticeable. For example, the Brazilian government's monthly emergency stipend program, which reached 67 million people and was key in supporting stronger consumption during the downturn than among its regional peers, is set to expire at the end of this year. We expect the Brazilian economy, which has perked up thanks to strong stimulus and robust commodity exports to China, to lose some momentum in early 2021, as the monthly emergency stipend to households expire. We forecast growth of 3.2% in 2021, after an expected 4.7% contraction this year.
Monetary policy is likely to remain accommodative, with large output keeping demand-side inflation pressures low, which will encourage most central banks in the region to keep interest rates near their current all-time lows. There's some pressure to increase interest rates in Brazil due to a rising fiscal premium, and we expect rates to slowly rise towards the end of 2021, but even in that case, real interest rates will remain negative or near zero. Monetary stimulus abroad is further lowering borrowing costs in Latin America, a dynamic that is likely to remain in place into 2021 and for some time beyond it. However, fiscal stimulus has a much larger impact than monetary stimulus on the average Latin American household's propensity to spend.
All economies in the region are highly vulnerable to setbacks due to the fragility of the recovery. Moreover, given the sharp deterioration in fiscal dynamics as a result of the pandemic, if the region were to suffer another severe shock to growth, governments would likely face significant constraints in their fiscal response. On the upside, the rising prospects of a COVID-19 vaccine being widely available would result in a faster-than-expected economic recovery. Therefore, we currently view the risks to our growth outlook for Latin America as balanced.
For more details on our Latin American macroeconomic assumptions, see "Latin America’s Economic Recovery From The Pandemic Will Be Highly Vulnerable To Setbacks", published on Dec. 1, 2020.
|Real GDP (%)|
|For India, 2019 = FY 2019 / 20, 2020 = FY 2020 / 21, 2021 = FY 2021 / 22, 2022 = FY 2022 / 23, 2023 = FY 2023 / 24. f--Forecast. GDP--Gross domestic product. Source: Oxford Economics.|
|CPI Inflation (%, Year Average)|
|For India, 2019 = FY 2019 / 20, 2020 = FY 2020 / 21, 2021 = FY 2021 / 22, 2022 = FY 2022 / 23, 2023 = FY 2023 / 24. f--Forecast. CPI--Consumer price index. Source: Oxford Economics.|
|Unemployment (%, Year Average)|
|f--Forecast. Source: Oxford Economics.|
|Exchange Rates Against The U.S. Dollar (Year Average)|
|f--Forecast. Source: Oxford Economics.|
|Exchange Rates Against The U.S. Dollar (End Of Period)|
|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. f--Forecast. Source: Oxford Economics.|
|Policy Rates (%, End of Period)|
|f--Forecast. Source: Oxford Economics.|
- The Eurozone Can Still Rebound In 2021 After Lighter Lockdowns, Dec. 1, 2020
- Staying Home For The Holidays, Dec. 2, 2020
- Latin America’s Economic Recovery From The Pandemic Will Be Highly Vulnerable To Setbacks, Dec. 1, 2020
- Asia-Pacific Forecasts Stabilize, Risks Now Balanced, Nov. 30, 2020
- China's Tighter Financial Conditions Start To Bite, Nov. 20, 2020
This report does not constitute a rating action.
|Lead Economist, Emerging Markets:||Tatiana Lysenko, Paris + 33 14 420 6748;|
|Senior Economist, Emerging Markets:||Elijah Oliveros-Rosen, New York + 1 (212) 438 2228;|
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