2021 M11 3
The latest World Economic Outlook from the IMF paints a broadly positive picture of the growth outlook for EM economies, with a significant number seeing their growth forecasts upgraded for next year. This is reflective of the fact that EM economies are beginning to catch up, having lagged in the post-pandemic re-opening and recovery, and paving the way for faster growth next year. But it is clear from the IMF’s various fiscal forecasts that the pandemic has widened dispersion among EM from the perspective of fundamental economic strength. In this piece we provide some key takeaways for EM debt investors.
While a range of EMs from across the globe saw strong revisions to their growth forecasts, the Latin American region stands out. There, a combination of stronger remittances (e.g., Mexico), slowing COVID case rates, and the return of tourism (e.g., in Mexico and the Caribbean) appear to be driving growth upgrades.
Elsewhere, strong upward revisions were awarded to South Africa, Israel and Turkey. In contrast, growth forecasts were generally downgraded in Asia, given the slow removal of lockdown measures – albeit with some notable exceptions, such as Pakistan and South Korea.
In the context of the strong commodity market rebound experienced this year, growth forecasts for some Gulf economies make for disappointing reading. Among these, Oman stands out for its particularly large downgrade, as expectations of a bumper 2022 are shelved.
In Africa, a relatively slow recovery from COVID-19 has weighed on some countries’ forecasts – particularly in East Africa – but things look slightly brighter for some of the more commodity-heavy countries, with the exception of Angola, where the rebound remains disappointing.
The fiscal picture across emerging markets is more diverse. IMF forecasts point to a better path ahead for debt/GDP in some of the countries that were most severely impacted last year – including South Africa, Brazil and many frontier markets. However, among the latter, several African countries saw deteriorating debt/GDP forecasts, especially Mozambique (delayed gas production/investment), but also Nigeria (costly fuel subsidy), Ghana and Ivory Coast. Challenges are also forecast for parts of Asia, with downgrades for countries including India, South Korea and Thailand contrasting with China’s upgrade.
As for countries’ current account balances, the picture is generally positive, with the majority of countries seeing upgrades in their external balances. In Asia, China is notable for improving external trends, while the weight of lost tourism revenues is seen clearly in the contrasting forecasts for Thailand. In Latin America, a large part of the Caribbean saw upgrades, as did Peru. While Brazil, Chile and Mexico saw their forecasts downgraded, we think that reflects a relatively backward-looking perspective, with our outlook suggesting better outcomes on trade if supply bottlenecks ease. Meanwhile in the Middle East, Gulf Cooperation Council countries enjoyed broad-based upgrades to forecasts as oil price strength boosts the public coffers.
As emerging markets gradually catch up with their developed market peers in reopening their economies, we are expecting stronger growth into 2022 – a view that the latest IMF forecasts seem to support. At the same time, emerging markets (in the main) have been prudent in their fiscal and monetary policies, resulting in upgraded forecasts in several countries in the EM debt universe on fiscal, debt and external metrics. However, the pandemic has widened the dispersion in this universe and with the global economy still facing some challenges we will continue to see winners and losers – something clearly shown by the diversity of forecasts in the IMF’s latest World Economic Outlook.