Eco Emerging

Double whammy

10/09/2022
PDF

Excluding China, activity in emerging countries was stagnant in Q2 2022 and business and household confidence surveys indicate that the economic slowdown will continue. Inflation continues to rise and is being accompanied by new decisions of monetary tightening, including by central banks in Asia. The deterioration in external demand and tighter domestic financial conditions have combined with the monetary tightening in the United States and USD appreciation to trigger the slowdown in activity. This is a double whammy for emerging countries. But developing countries, which are also facing the food crisis and a situation of over-indebtedness, are in a more worrisome situation.

Economic growth slowdown confirmed

Emerging countries: USD-denominated debt of non-bank sector

Signs of a slowdown or contraction in activity have been confirmed since the spring and have become more numerous over the summer. China started the ball rolling with a 2.6% fall in its GDP in Q2 compared to Q1. Excluding China, real GDP of our sample of the 26 main emerging countries stagnated. It even contracted in some of them (South Africa, India, Poland, Taiwan). Including China, real GDP fell by 1% in Q2 2022 compared to Q1. Over the course of the summer, the opinions of manufacturers about their order books continued to worsen, particularly for large exporter countries in Asia (China, South Korea, Taiwan) and in Central Europe (Hungary, Czech Republic). Global trade is slowing, oil and metal prices have turned around since mid-June and the Baltic Dry Index (benchmark price index for maritime transport and leading indicator for trade) has normalised after its rise in 2021.

In a number of countries, consumer confidence has fallen back to its spring 2020 level. The main reason is the acceleration in inflation. Inflation exceeds 15% year-on-year in most central European countries; it is between 8% and 14% in Latin America (excluding Argentina) and is now spreading in Asia (with the exception of China, Hong Kong and Taiwan) in a range between 4% to 8%. As a result, monetary policies are continuing to tighten, including in Asia.

Double whammy

The deterioration in external demand and tighter domestic financial conditions (inflation and rise in key policy rates) have combined with the monetary tightening in the United States and the appreciation of the US dollar to trigger the slowdown of activity. Yet, according to the Institute for International Finance (IIF), bond portfolio investment flows to emerging countries excluding China have been rather resilient; they amounted to USD 75 bn over the nine first months of the year. In other words, sovereign debt yields in local currency have not suffered a double whammy (i.e. the effect of the rise of the US interest rates + the effect of investment withdrawals by non-residents).

However, emerging countries are inherently more sensitive than advanced countries to the tightening of US financial conditions. Firstly, the US dollar and commodity prices are generally negatively correlated and changes in the latter are often stronger than those in the US currency, with the result that commodity exporting countries suffer a loss of purchasing power. Secondly, the appreciation in the value of the US dollar increases the burden of external debt. Finally, financing costs in US dollars are rising, all the more so as risk premiums tend to widen.

According to IIF estimates, the share of non-bank sector debt (i.e. States + companies + households) denominated in dollars has risen sharply in Turkey and Latin America (Chile, Colombia, Mexico). For the other emerging countries, this share has remained stable and moderate (chart 1). The dollar effect should therefore not be overestimated or generalised. Furthermore, the risk premiums on foreign-currency bond debt of sovereign borrowers classified as “investment grade" (mainly emerging countries) have remained stable since the beginning of the year.

However, many developing countries, which are much more fragile, have financed themselves on the international bond market and have obtained funding from China. The share of USD-denominated public debt in those countries has risen sharply over the past decade. They are also countries in the speculative grade category whose risk premiums have widened considerably.

Moreover, developing countries are also faced with another double whammy. According to the Global Report on food crisis, 45 countries totalling 180 million people are at risk of, or are already, facing a food crisis because of external or internal conflicts, weather conditions or economic shocks such as the Covid pandemic. According to the IIF, of 35 countries facing a food crisis, around half of these (mainly in Africa) are experiencing major difficulties in repaying their debt servicing costs (debtdistress situation), which will amount to over USD 10 billion in 2023. In these circumstances, calls from countries to renegotiate their debt can only increase.

Article completed on 4 October 2022

THE ECONOMISTS WHO PARTICIPATED IN THIS ARTICLE

Other articles from the same publication

China
A weaker economy ahead of the Party Congress

A weaker economy ahead of the Party Congress

The recovery in activity since the end of the lockdowns imposed in Shanghai in the spring has been very gradual. It picked up in August, notably supported by public investment and tax measures, but it is likely to lose steam again in September [...]

Read the article
India
Firm resistance against strong pressures

Firm resistance against strong pressures

Although it remains dynamic, economic growth slowed in the first quarter of the current fiscal year [...]

Read the article
Indonesia
A less favourable outlook

A less favourable outlook

During the first six months of 2022, the economy proved to be quite resilient to the consequences of the conflict in Ukraine and China’s zero-Covid policy [...]

Read the article
Thailand
Cautious optimism

Cautious optimism

The recovery is continuing in Thailand. The rebound in private consumption and the gradual return of tourists should help, at least in the short term, to compensate for the slowdown in exports [...]

Read the article
Poland
Losing steam

Losing steam

The economic slowdown is likely to continue in the coming quarters. Poland is facing several challenges. Firstly, the country is highly dependent on coal imports, and the price of this commodity has soared since the end of 2021 [...]

Read the article
Slovakia
Energy dependency

Energy dependency

All growth drivers weakened in the second quarter of 2022. With a high exposure to Russia for its oil and gas supplies, Slovakia could be amongst the most affected Central European countries by the consequences of the war in Ukraine [...]

Read the article
Brazil
Bucking the trend

Bucking the trend

Accelerating growth, slowing inflation, falling unemployment and the interruption of monetary tightening differentiate Brazil from most of the world’s major economies [...]

Read the article
Mexico
Prudence

Prudence

The economic dynamism seen in the first half of 2022 is waning. The rebound in private consumption is being held back by rising inflationary pressures, while exports are weakening due to slowing growth in the United States and global demand [...]

Read the article
Egypt
Persistent pressure on the balance of payments

Persistent pressure on the balance of payments

Egyptian external accounts have been under pressure since the beginning of the year and the outlook is uncertain [...]

Read the article
Qatar
Gas revenues provide robust economic prospects

Gas revenues provide robust economic prospects

The Qatari economy, which is poorly diversified and based on long-term gas export contracts, has not experienced the same volatility as elsewhere in the Gulf during the last five years [...]

Read the article
Tunisia
Growing concerns

Growing concerns

Two years after the shock of the pandemic, Tunisia is now being hit hard by the consequences of the conflict in Ukraine. The rise in commodity prices is leading to a dangerous deterioration in external accounts and public finances [...]

Read the article
Kenya
Uncertainties

Uncertainties

In 2020-2021, thanks to its diversified economy, Kenya was relatively more resilient to the shock of the pandemic than other sub-Saharan African economies [...]

Read the article