- Emerging markets (EMs) continue to struggle with managing the pandemic as cases remain stubbornly high and lockdowns continue; however, the economic impact of restrictions has lessened.
- We have raised our GDP growth forecasts for EMs (excluding China and India) this year to 4.6% from 4.4% previously on the back of a stronger-than-expected first quarter and a likely pickup in vaccinations, mobility and activity.
- The risks to our outlook are on the downside and reflect a slower pace of vaccinations leading to a delayed exit from the pandemic, and sooner-than-expected lift-off of U.S. rates in response to a U.S. inflation surprise.
Most EMs continue to struggle with handling the pandemic. Unlike the advanced economies – the U.S. and U.K. in particular – vaccination rollout remains low (see chart 1). This reflects both the demand and the supply side: vaccine hesitancy remains a challenge as does the supply of vaccines and the logistical difficulties in distributing them. As a result, as the COVID-19 virus continues to mutate, caseloads and hospitalizations remain stubbornly high. For example, the Delta variant originated in India, and is now hitting Southeast Asia particularly hard. This leads to the now familiar result: new lockdowns, which restrict mobility and impede the rebound in sectors requiring person-to-person contact. In short, the mutations of the virus continue to outpace the vaccination progress.
The silver lining in this narrative is that countries are learning to live with the virus. Specifically, the economic impact of mobility restrictions appears to have fallen appreciably. While this process of adaptation is occurring across all countries, it's particularly important in EMs, given their slower progress in vaccinations. Indeed, in the majority of EMs we cover, output in the first quarter of 2021 was better than expected, particularly in Latin America. And in many cases, this was not a repeat of the previous export-led trend driven by tech in Asia and hard commodities in Latin America and South Africa; domestic demand made a strong contribution as well. The stronger start to the year provides a base for higher growth in 2021, assuming an unchanged profile for the rest of the year.
As the global economy recovers quickly, inflation pressures have emerged first in EMs. They stem from rising commodity prices, fiscal stimulus, weaker exchange rates, and supply-demand mismatches interacting with weakly anchored inflation expectations. Central banks in Brazil, Russia, and Turkey have already raised policy rates in order to tighten financial conditions to rein in inflationary pressures, while additional counties in Latin America and EM EMEA are likely to do so as well by end of the year. In contrast, inflation pressures in EM Asia remain muted outside of India.
Growth Forecasts And Narratives
We have raised our EM-14 2021 GDP growth forecast by 20 basis points to 4.6% in 2021 since our previous credit conditions round (see table 1). This mostly reflects the stronger-than-expected first-quarter performance noted above, but with wide variations across sub-regions. We revised our growth forecast for Latin America upward by more than a full percentage point to 5.7% and for EM EMEA by 0.4% to 4.1%, while we lowered it for EM Asia by 0.3% to 8%. Our forecasts for 2022 and beyond remain broadly unchanged. The detailed macro forecast tables (GDP, inflation, unemployment, exchange rates, and policy rates) appear in the Appendix.
|Real GDP Growth|
|EM Ex. China||2.6||-5.2||6.1||4.9||4.0||4.0|
|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, 2023 = FY 2023 / 24, 2024 = FY 2024 / 25|
The narratives corresponding to our sub-regional forecasts are as follows:
Regional EM Summaries
Latin America (Argentina, Brazil, Chile, Colombia, and Mexico)
Latin America has been one of the hardest-hit regions by the pandemic among EMs, and we continue to expect it to be one of the slowest to recover. We have increased our average GDP growth projections for this year, lowered them for 2022, and kept our long-term assumptions broadly unchanged. On average, we expect GDP in the region to return to its pre-pandemic level in mid-2022.
- We now project the 2021 average growth in the five largest Latin American economies to be 5.7% (just over one percentage point higher than our previous forecast), following a 6.6% contraction in 2020. The main driver of our upward revisions to the 2021 GDP growth is stronger-than-expected activity in the first quarter, especially in the services sector.
- For 2022, we project an expansion of 2.5%, versus 2.7% previously. Latin American economies will face three unfavorable dynamics next year: monetary and fiscal tightening, and a higher-than-usual degree of policy uncertainty. Inflation, both headline and core, has surprised to the upside in most cases, pushing inflation expectations above central bank targets.
- Employment in the typical Latin American economy is still 5%-10% below pre-pandemic levels, underemployment rates are still high, and progress on both metrics has slowed in recent months. As a result, vaccination progress will be key in further increasing employment and supporting consumption by allowing sectors to continue to re-open and increase hiring. We expect the normalization of labor market dynamics in the region to be a multi-year process.
- Over the medium term, we expect growth to be just shy of 2.5%. The reason for such a relatively slow pace is low productivity and inefficient investment. Specifically, investment growth averaged 0.5% in the pre-Covid decade, and on average, one unit of investment in Latin America returns 50% less of GDP than in other EMs.
Recent social and political instability will likely weigh on investor sentiment. Ongoing protests in Colombia over a proposed tax bill, the rise of anti-establishment political leaders in countries such as Peru, and an uncertain outlook for the drafting of Chile's new constitution reduce the level of policy predictability. The hardest-hit by the pandemic in Latin America have mostly been middle- and lower-income households, with important implications for policy, which at this point are highly uncertain.
To read our full report on Latin America, see Economic Outlook Latin America Q3 2021: Despite A Stronger 2021, Long-Term Growth Obstacles Abound.
EM EMEA (Poland, Russia, Saudi Arabia, South Africa, and Turkey)
EM EMEA economies continue to be among the leaders in terms of getting back to pre-pandemic levels of activity. While vaccine deployment in the region remains highly uneven, we have received a clear confirmation that new pandemic waves have a milder economic impact on domestic activity in key EMEA EMs, compared with the first wave. However, a faster vaccination pace is necessary to keep economic activity on track, prevent 'on-and-off' lockdowns, and ensure a sustainable return to full capacity. Bringing the pandemic under control is also necessary for the resumption of travel, which is important for the economies where international tourism contributes meaningfully to growth (Turkey).
- We now expect average EM EMEA GDP growth of 4.1% this year, up from 3.7% previously. The upward revisions mainly reflect better-than-expected first-quarter growth, and the strength of data for April-May. Upside growth surprises came mostly from stronger-than-expected domestic demand, rather than exports. In fact, export volumes have eased recently. Our 2022 GDP growth forecast is fractionally higher than our previous projection, at 3.1%.
- Even though export volumes softened, trade remains an important factor supporting growth in the region. Resilient global demand for manufacturing products is supporting the industrial sector, especially in countries that are closely integrated into the German industrial supply chain (Poland). And for commodity exporters (South Africa), rising prices have not only a direct positive effect on the mining sector, but also indirect positive impact on income and domestic demand.
- Inflation has also surprised on the upside in several EMEA EMs, and this has already brought forward monetary policy normalization (Russia). In Turkey, following the hike in March, the central bank has since kept the policy rate at 19%. At the same time, the risk of excessive fiscal tightening has receded. This year, fiscal dynamics have been positive in most key EMEA EMs, thanks to stronger activity and higher inflation that are boosting revenues. Given still significant economic slack, fiscal support is set to continue, although on a smaller scale compared with last year.
Risks to the baseline are broadly the same as in the first quarter. A third wave/slower progress in vaccinations remains a key risk to the outlook. Another risk stems from an abrupt tightening in financial conditions, linked to the divergence in economic performance between the U.S. and the rest of the world, to which Turkey is particularly vulnerable. Country-specific risks vary and include additional sanctions on Russia, balance of payments stress in Turkey, fiscal risks in South Africa, and delays in the implementation of the national recovery plan in Poland.
To read our full report on EM EMEA, see Economic Outlook EMEA Emerging Markets Q3 2021: Faster Growth, Higher Inflation.
EM Asia (India, Indonesia, Malaysia, the Philippines, and Thailand)
Fresh COVID-19 waves in EM Asia weighed on activity in the second quarter and still present the key risk to our economic outlook. There were substantial pandemic waves in India, Malaysia, and the Philippines, and a moderate escalation in Thailand. Policymakers responded by imposing lockdowns of varying intensity and duration that curtailed activity, but that were broadly successful in preventing the pandemic from escalating. New cases across the region are now either easing or have plateaued.
Economic growth has been stronger than expected for much of the region, highlighting that robust recovery is possible once lockdowns and the pandemic subside. First-quarter GDP growth numbers (year over year) were more than 50 basis points higher than consensus in India, Malaysia, and Thailand. Recovering private demand and strong merchandise trade were key drivers, with some growth support from fiscal spending as well. Growth in Indonesia was at consensus, while the Philippines was the exception as it missed forecasts due to tight lockdowns.
- We now expect growth of 7.5% in 2021 for the EM Asia (excluding China), down 1.2 percentage points from our earlier forecast of 8.7%. An escalation of the pandemic and subsequent lockdowns are the key drivers for the downward revision. We expect a resilient recovery following the opening up of economies, driving our forecast for a 7.0% growth in 2022, up from 5.9% earlier. Permanent costs will increase due to the fresh downturn, and by the end of our forecast horizon, output will be 60 basis points lower than our previous forecast.
- Vaccination remains slower than in the U.S. or Europe. This has been hampered by limited global supplies as well as logistical challenges in distributing the available vaccines. Daily vaccines administered are currently 0.2 doses per day per 100 people for the region overall. At this rate, it would be another 23 months before 70% of EM Asia's population is fully vaccinated.
- Strong growth in electronics exports helped support trade and manufacturing in the region late last year. The pace of growth in electronics trade is now slowing, but broader exports are now recovering faster. In addition, technology firms in the region are highlighting that semiconductor shortages will persist until mid-2022, which means strong demand will help the technology supply chain in EM Asia. There's also a broadening out of demand by geographies. Prior to April, China and the U.S. were the key export destinations, but exports to the rest of the world are now picking up.
- Energy price inflation is rising in parts of the region on higher commodity prices, but broader inflationary pressures are still subdued. Core inflation has been slowing for several months across the region as private demand is below normal, meaning that output gaps are still negative. Central banks will keep monetary policy settings unchanged this year. Fiscal policy space is limited across the region following significant spending in the past year.
To read our full report on APAC, see Economic Research: Asia-Pacific's Recovery Regains Its Footing.
Risks Related To Slow Vaccination And An Uneven Global Recovery
The top risk facing EMs is a slower-than-expected rollout of the vaccines. While countries have learned to live with the pandemic and at least partially mitigate the effects of virus spikes on economic activity, this is not the end game. The pandemic will subside once vaccinations reach a level consistent with herd immunity. This, in turn, means that the hardest-hit sectors can fully re-open and activity can return to normal, even if that new normal doesn't exactly resemble the pre-COVID world. Once consumers and firms believe that the pandemic has receded, precautionary savings can be unwound and deferred investment can commence, as well as any new investment related to changes in composition of production. Slower rollout of vaccines, whether from hesitancy on the part of populations or difficulties in accessing supplies, will impede this adjustment.
A second, partly exogenous, risk to EMs is an uneven recovery from the pandemic, featuring outsized U.S. growth and inflation leading to an early tightening of U.S. monetary policy. While this is not our baseline ([cite US macro report], higher U.S. rates can have a number of potentially negative effects on EMs. First, the U.S. dollar-denominated debt will be costlier, so countries that need to borrow or refinance debt in greenbacks will find it more expensive to do so. Second, capital flows to EMs could be less forthcoming to the extent that these flows chase relative yields and relative growth rates (and exchange rates), which would be higher in the U.S. in this scenario. Third, if the U.S. Federal Reserve needs to tighten quickly, this could force a repricing of a large range of assets and result in potential de-risking, leading to higher volatility and wider spreads for riskier EM borrowers. Finally, a stronger U.S. dollar would lift import costs, and potentially, inflation and policy rates in EMs, especially among those where exchange rates passthrough effects on prices and spillovers from U.S. inflation are higher.
While EM policymakers can't control U.S. inflation dynamics and the policy response, they can implement measures to influence domestic growth. In the context of the current pandemic, a key measure is stepping up vaccinations where this is a demand (hesitancy), rather than a supply, issue. This would increase the likelihood of uninterrupted economic recoveries, and narrow GDP growth gaps with the rest of the world in the countries where those exist.
EMs To Grapple With Greater Risks And Slower Recovery
While macro developments in EMs are looking up, this group of countries will lag the advanced economies in the rebound from COVID-19. It also faces higher risks. The main cause of the slower rebound will be the slower pace of vaccinations. This both reduces the speed of re-opening (including an overhang of uncertainty holding down consumption and investment) and increases the risk of further waves of infection and variants of the virus continue to spread. This group of economies is also relatively more exposed to spillovers – both positive (demand for commodities) and negative (risk-sensitive financial flows and conditions). While some of these risks are exogenous to EMs, they underscore the need to ensure that domestic sources of growth are supported and external vulnerabilities are minimized.
|Real GDP Growth|
|For India, 2019 = FY 2019 / 20, 2020 = FY 2020 / 21, 2021 = FY 2021 / 22, 2022 = FY 2022 / 23, 2023 = FY 2023 / 24, 2024 = FY 2024 / 25. Source: Oxford Economics. F--S&P Global Ratings forecast.|
|CPI Inflation % (Year Average)|
|CPI--Consmer price index. 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, 2024 = FY 2024 / 25.|
|Unemployment % (Year Average)|
|Source: Oxford Economics. f--S&P Global Ratings forecast.|
|Exchange Rates % (Year Average)|
|Source: Oxford Economics. f--S&P Global Ratings forecast.|
|Exchange Rates % (End of Period)|
|Source: Oxford Economics. 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, 2024 = FY 2024 / 25.|
|Policy Rates % (End of Period)|
|2019||2020||2021f||2022 f||2023 f||2024 f|
|Source: Oxford Economics. f--S&P Global Ratings forecast.|
The views expressed here are the independent opinions of S&P Global Ratings' economics group, which is separate from but provides forecasts and other input to S&P Global Ratings' analysts. S&P Global Ratings' analysts use these views in determining and assigning credit ratings in ratings committees, which exercise analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.
This report does not constitute a rating action.
|Global Chief Economist:||Paul F Gruenwald, New York + 1 (212) 437 1710;|
|Lead Economist, EM EMEA:||Tatiana Lysenko, Paris + 33 14 420 6748;|
|Lead Economist, Latin America:||Elijah Oliveros-Rosen, New York + 1 (212) 438 2228;|
|Economist, Asia-Pacific:||Vishrut Rana, Singapore + 65 6216 1008;|
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