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Economic Outlook EMEA Emerging Markets Q2 2022: Weaker Growth, Higher Inflation, Tighter Financing Conditions


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Economic Outlook EMEA Emerging Markets Q2 2022: Weaker Growth, Higher Inflation, Tighter Financing Conditions

(Editor's Note: This article was republished on March 30, 2022, to correct inflation and policy rate data for Poland in table 3 and to correctly characterize Turkey's GDP growth of 11% in 2021 as one of the highest rates among all the key EMs.)

The outlook for key emerging economies in EMEA has changed considerably, with the fallout from the Russia-Ukraine conflict now dominating the growth prospects and risks for the region. The situation continues to evolve, and so the full implications of the conflict for both regional and global economies are highly uncertain. S&P Global Ratings' baseline assumption is that the conflict will have the most acute impact on commodity markets, supply chains, and investor and consumer confidence in the first and second quarters of 2022, with the effects lessening but lingering in the rest of the year and beyond.

Severe international sanctions and a disruption to established ties with Western businesses will push the Russian economy into a deep recession this year. Our revised forecast is for real GDP to decline by 8.5% in 2022 and remain flat in 2023 (see table 1), but there is a high degree of uncertainty around this forecast.

Because of its geographical and economic proximity, emerging Europe is the region most exposed to the conflict through the trade, financing, and confidence channels. Another consequence is higher oil prices, as most emerging European economies are net energy importers. They are also exposed to elevated and highly volatile European gas prices. Higher energy and food prices are adding to significant inflationary pressures, with weaker exchange rates exacerbating these trends. Consequently, we have shaved off more than 1 percentage point from our previous GDP growth forecast for Poland and Turkey (see tables 1 and 2).

Table 1

GDP Forecasts
Annual growth rates (%) 2020 2021 2022f 2023f 2024f 2025f


(2.4) 5.6 3.6 3.1 2.7 2.4


(3.0) 4.7 (8.5) 0.3 1.0 1.3

South Africa

(6.4) 4.9 1.9 1.7 1.5 1.8


1.8 11.0 2.4 2.9 3.3 3.5
f--S&P Global Ratings forecast. Sources: Oxford Economics, S&P Global Ratings.

Table 2

Real GDP Changes From November Baseline
Percentage points 2021 2022f 2023f
Poland 0.4 (1.4) (0.2)
Russia 0.5 (11.2) (1.7)
South Africa 0.0 (0.5) 0.2
Turkey 1.3 (1.3) (0.2)
f--S&P Global Ratings forecast. Sources: Oxford Economics, S&P Global Ratings.

For the rest of the EMs in EMEA, the picture is mixed. Direct trade links with Russia are generally limited, while a commodity price rally is benefiting some commodity exporters, such as Saudi Arabia (oil) and South Africa (iron ore and platinum group metals). However, the deceleration in global growth and the hit to confidence may limit these gains. In addition, economies that export various commodities but import oil, like South Africa, are facing a larger oil import bill and higher domestic energy prices. Rising food prices and disruption to the food supply are important risks for North Africa.

A prolonged conflict resulting in more severe disruptions to trade, supply chains, and possibly energy supply is a key downside risk for EMs in the region. The concurrent risks of faster Fed tightening and negative investor sentiment due to the escalating conflict may trigger financial market volatility, leading to weaker exchange rates and significantly higher yields.

EMs Ended 2021 Strongly

The key EM economies in EMEA finished 2021 on a firm footing. The COVID-19 pandemic worsened in the fourth quarter, but the impact on economic activity was limited, in line with our expectations. GDP growth for the whole of 2021 was stronger than we anticipated in Poland, Russia, and Turkey (see tables 1 and 2). Turkey's economy grew by 1.5% in quarterly terms in the fourth quarter, driven by robust exports and surprisingly strong consumption, possibly reflecting households' frontloading of purchases amid sharp currency depreciation. Overall, Turkey's GDP growth reached 11% in 2021, one of the highest rates among all the key EMs. South Africa's economy recovered strongly after a riot-induced contraction in the third quarter.

Economic performance early in 2022 was mixed, with Poland and South Africa enjoying strong growth, but high-frequency activity indicators pointing to a weak start to the year for Turkey. Leading indicators, such as S&P Global's (previously IHS-Markit's) Manufacturing Purchasing Managers' Index, painted a similar picture (see chart 1).

Chart 1


We do not yet have hard trade and activity data for March 2022, and only limited information on confidence indicators. For example, Poland's national survey indicates a sharp drop in consumer confidence this month.

So far, the fallout of the Russia-Ukraine conflict is mainly visible in surging commodity prices and the reactions of the financial markets. The Russian ruble exchange rate depreciated sharply in February before regaining some ground, while the Turkish lira has resumed its decline (see chart 2).

Chart 2


Trade Disruption And Lower Demand Will Weigh On EMs' Exports

Manufacturing and commodity exports have been a key driver of emerging EMEA's recovery from the pandemic-related downturn, as global demand switched from services to goods. We had expected a softening in goods exports this year, reflecting a shift in global spending back to services, but we now expect a much more pronounced moderation for many emerging economies in EMEA.

Trade exposure to Russia and Ukraine is about 2%-3% of GDP for the major economies in Central and Eastern Europe (CEE), so this region is most exposed to trade disruption and lower demand. For the rest, exposure is below 1% of GDP. However, second-round effects via slower growth in key trade partners will have a negative effect on the whole region. The eurozone is a key trade partner for many EM economies in EMEA, especially CEE and North Africa. Slower growth in the eurozone due to the spillover from the Russia-Ukraine conflict will dampen demand for foreign goods, weighing on EMEA's exports.


Chart 3


Another important risk stems from supply chain disruptions. For example, semiconductor manufacturers are heavily reliant on the supply of neon from Ukraine, which accounts for over 70% of neon exports. We also observe some disruptions in the automotive sector in Europe due to the sector's reliance on cable harnesses from Ukraine. The CEE economies are particularly exposed to this risk, as their manufacturing sector is closely integrated with European supply chains.

Trade routes are facing disruption too. Maritime disruptions in the Black and Azov seas are particularly severe, while the New Silk Road rail corridors from China to EU that go through Belarus, Russia, and Ukraine are facing significant delays.

Commodity Prices Are Surging

The fallout from the Russia-Ukraine conflict has upended our previous assumptions underpinning our November 2021 base case of softening commodity prices. Russia and Ukraine are major exporters across many commodity classes (see chart 4). Russia is an important exporter of hydrocarbons, fertilizers, and metals, while Russia and Ukraine are major producers of grains, particularly wheat and corn. In addition, Belarus, which is subject to international sanctions, is a major exporter of fertilizers, particularly potash, accounting for one-fifth of the world's total exports.

Chart 4


Commodity prices have surged across many categories (see chart 5). The ongoing price rally across energy markets has prompted us to raise our Brent oil forecast for the remainder of 2022 to $85 per barrel.

Chart 5


Prices for other commodities have jumped as well, with double-digit price increases for precious and industrial metals since the beginning of the year. Global food prices have also gone up, with wheat prices rising by more than 40% since the start of 2022.

Morocco, Tunisia, and Turkey are among the most exposed to rising energy prices, being significant net energy importers (see chart 5). At the same time, Gulf Cooperation Council economies (for example, Saudi Arabia), and oil-exporting economies in Sub-Saharan Africa (Angola, Nigeria) are benefiting from higher oil prices.

Chart 6


Russia and Ukraine are primary commodity suppliers for many EM economies in EMEA. Russia supplies around one-half of the total gas consumed in CEE countries as well as Turkey. Both Russia and Ukraine are also key wheat providers for many economies in the region. North Africa and Turkey are among the world's largest importers of wheat, with Russia and Ukraine accounting for the largest part of their wheat imports (more than 70%). As of now, exports of grains from Russia and Ukraine are facing logistical problems, as most exports are transported via the Black and Azov seas.

Rising food prices will increase the inflation rate for many countries in the region, since foodstuffs account for a high proportion of EMs' consumer price index baskets. The average across key EMs in EMEA is around 22%, compared with 15% in the eurozone, and it is much higher in some EMs.

Higher Inflation, Tighter Financing Conditions

These developments suggest that higher inflation lies in store, prompting us to make significant revisions to our inflation forecasts (see tables 3-6 below for our country forecast summaries).

Monetary policy in most of the key EMs in EMEA is likely to focus on containing exchange rate and inflationary pressures rather than supporting growth, especially taking into account swifter policy tightening by the U.S. Federal Reserve. This frontloaded tightening is another change from our November 2021 baseline. We now assume that the Fed will start tightening monetary policy sooner and faster than we expected in November 2021. Our base case is for an increase of 200 basis points (bps) in the federal funds rate in 2022, including the March 2022 hike, followed by a 100 bps increase in 2023. The Fed's tapering of asset purchases has ended, and we now expect an announcement on its strategy for reducing the size of its balance sheet as early as May 2022.

Taking these developments into account, we now expect higher policy rates in most key EMs in EMEA. Although Turkey's inflation is high and real interest rates deeply negative, we don't see any signs of a shift in the Turkey's central bank's monetary policy stance.

Rising risk premiums, reflected in a widening of spreads, have already tightened financing conditions for EMs in EMEA. Spreads in emerging European countries have risen most sharply, reflecting their geographical and economic proximity to the conflict. Risk premiums may rise even more if the conflict continues to escalate.

Our Forecasts For Russia, Poland, Turkey, And South Africa


Severe international sanctions and decisions by Western businesses to either halt operations in Russia or cut ties with the country altogether will have a significant impact on the economy in the short term, but also likely in the longer term. A combination of financial, trade, and technology sanctions has never been imposed on a large, globally integrated economy before, so we have little to go on to predict just how great the impact will be. Suffice to say it will be significant.

We pencil in an 8.5% decline in Russia's real GDP this year, emphasizing a very high degree of uncertainty over our forecast. The largest annual drop in Russian GDP was in 1992, when the economy shrank by 14.5%. This was part of a much larger multiyear shrinkage of about 40% during the transition from a centrally planned to a market-oriented economy in the early 1990s. The Russian economy contracted by 5.3% in 1998 during the Russian financial crisis, and by 7.8% during the global financial crisis. The 2015 recession--triggered by falling oil prices and international sanctions--was milder, with GDP declining by 2%, while the COVID-19-related downturn resulted in a 3% drop in output in 2020.

Large-scale capital outflows have led to a sharp decline in the ruble exchange rate, prompting the central bank to hike the key rate to 20% from 9.5% and introduce capital-control measures. These measures seem to have stabilized the banking sector and the ruble for now, and the currency has regained some of its losses. The pass-through of large currency depreciation to domestic prices is fueling inflation, which we expect to average 16% this year, hitting consumer purchasing power. Investment is set to decline sharply amid a confidence shock, significant tightening of financing conditions, and uncertainty about future demand. Even though a fiscal response will likely offset some of these trends, the overall decline in domestic demand will be sizable.

Even under the assumption that sanctions will spare Russia's commodity exports, we expect a significant decline in overall export volumes this year. This is because of trade restrictions on non-commodity exports, logistical issues, and the unwillingness of some established trade partners to buy Russian products. But owing to a massive drop in imports, foreign trade should make a significant positive contribution to GDP growth, partially mitigating a deep fall in domestic demand. In this scenario, the current account should record a meaningful surplus owning to high commodity prices.

Key downside risks to this base case include lasting large-scale supply chain disruptions affecting output in various sectors of the economy, and a significant prolonged disruption to Russia's commodity exports.


Economic fallout from the conflict is interrupting strong growth momentum in Poland. We have revised our GDP growth forecast for 2022 down to 3.6% from 5.0% in our November 2021 forecast. While exports to Russia as a share of total Polish exports make up only 3%, down from more than 5% before the 2014 conflict, the Polish manufacturing sector is closely integrated with European supply chains, and will therefore suffer from supply chain disruptions due to the conflict, as well as weaker demand from Europe. At the same time, the conflict-related confidence shock will weigh on private investment. There are notable uncertainties around the inflows of refugees and their integration into Poland's labor market, as well as outflows of workers from the construction sector.

We have significantly raised our inflation forecast to 8.6% in 2022 from 5.1% previously, reflecting upside inflation surprises, higher oil price assumptions, the weaker currency, looser fiscal policy, and an increase in the minimum wage. The central bank has changed its stance significantly since our last forecast update, and has subsequently hiked several times, bringing the policy rate to 3.5%. We have revised our expectations and now see the reference rate reaching 5% by the end of this year and 5.5% by end-2023.


For Turkey, the spillovers from the conflict are amplifying domestic challenges, pushing up already high inflation, worsening external accounts, and further clouding the economic outlook. In our baseline scenario, we expect GDP growth to slow sharply from 11% in 2021 to 2.4% in 2022, a downward revision from 3.7% previously. High-frequency activity data point to a weaker start to the year, with industrial production and retail sales contracting in January 2022. Exports have been one of Turkey's key growth drivers, but trade prospects have dimmed. Exports to Russia and Ukraine accounted for around 4% of total exports in 2021, and Turkey also faces weaker demand from the eurozone, its major export destination. Higher exports to the Gulf may partially offset these losses.

The prospects for tourism are uncertain, with potential upside from stronger European tourism thanks to improvements in the pandemic and a competitive lira. However, there will likely be a lower number of visitors from Russia, which accounted for 19% of all foreign arrivals last year. That said, Turkey can potentially benefit from being one of the few destinations with direct flights from Russia and visa-free travel arrangements. In any case, the current account deficit is set to widen due to lower exports and a rising energy imports bill. In an environment of faster Fed tightening, this will keep the Turkish lira under pressure. Rising food and energy prices and the weaker currency will worsen an already dire inflation outlook. We already raised our forecast for annual average inflation significantly in early February, to 49.5% for 2022 (see "Turkey Macroeconomic Update: Higher Inflation, Uncertain Growth Path," published Feb. 3, 2022, on RatingsDirect). We now see it averaging 55% this year.

South Africa

We have lowered our 2022 GDP growth forecast for South Africa to 1.9% from 2.4% in November 2021. We expect economic growth to decelerate as most GDP components have reached their pre-pandemic levels, while rising inflation will exert pressure on households' real incomes. South Africa's exporters should benefit from ongoing price rallies across the iron ore and platinum group metal markets, and we expect exports to perform strongly in 2022. Having said that, problems with energy infrastructure persist and constrain production and exports. On the back of rising oil prices, we have raised our inflation forecast to 5.9% on average in 2022. Taking into account rising inflation risks and accelerated Fed tightening, we now expect the South African Reserve Bank to raise the key rate to 5% by the end of the year. Terms of trade have improved thanks to higher metal prices, although rising oil prices offset some of the gains, and we expect this improvement to support the South African rand in an environment of Fed tightening and market volatility.

Table 3

Russia Economic Forecast Summary
2020 2021 2022f 2023f 2024f 2025f
GDP (%) (3.0) 5.6 (8.5) 0.3 1.0 1.3
Inflation (annual average, %) 3.4 6.7 16.0 9.0 5.5 5.0
Policy rate (% end-year) 4.25 8.50 18.00 10.00 8.00 8.00
Unemployment rate (%) 5.8 4.8 6.5 7.0 6.0 6.0
Exchange rate versus $ (year average) 72.11 73.65 108.53 115.00 115.00 115.00
Exchange rate versus $ (end-year) 73.88 74.29 115.00 115.00 115.00 115.00
f--S&P Global Ratings forecast. Sources: Oxford Economics, S&P Global Ratings.

Table 4

Poland Economic Forecast Summary
2020 2021 2022f 2023f 2024f 2025f
GDP (%) 2.4 5.6 3.6 3.1 2.7 2.4
Inflation (annual average, %) 3.7 5.2 8.6 5.1 4.1 2.2
Policy rate (% end-year) 0.10 1.75 5.00 5.50 5.50 5.50
Unemployment rate (%) 3.2 3.4 2.8 2.7 2.6 2.6
Exchange rate versus $ (year average) 3.90 3.86 4.32 4.13 3.93 3.77
Exchange rate versus $ (end-year) 3.76 4.06 4.32 4.07 3.84 3.75
f--S&P Global Ratings forecast. Sources: Oxford Economics, S&P Global Ratings.

Table 5

Turkey Economic Forecast Summary
2020 2021 2022f 2023f 2024f 2025f
GDP (%) 1.8 11.0 2.4 2.9 3.3 3.5
Inflation (annual average, %) 12.3 19.6 55.0 17.0 12.0 10.0
Policy rate (% end-year) 17.03 14.00 13.00 9.50 9.50 9.50
Unemployment rate (%) 13.2 12.0 11.9 11.1 10.1 9.4
Exchange rate versus $ (year average) 7.01 8.87 15.30 16.30 16.83 17.10
Exchange rate versus $ (end-year) 7.44 13.32 16.00 16.50 17.00 17.20
f--S&P Global Ratings forecast. Sources: Oxford Economics, S&P Global Ratings.

Table 6

South Africa Economic Forecast Summary
2020 2021 2022f 2023f 2024f 2025f
GDP (%) (6.4) 4.9 1.9 1.7 1.5 1.8
Inflation (annual average, %) 3.3 4.6 5.9 4.7 4.8 4.8
Policy rate (% end-year) 3.50 3.75 5.00 5.75 6.38 6.75
Unemployment rate (%) 29.2 34.0 32.4 31.6 31.1 30.7
Exchange rate versus $ (year average) 16.5 14.8 15.6 16.7 16.8 17.1
Exchange rate versus $ (end-year) 14.6 16.0 15.9 16.9 16.8 17.2
f--S&P Global Ratings forecast. Sources: Oxford Economics, S&P Global Ratings.

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