As the new year gets underway, emerging countries are benefiting from a combination of favourable factors for a recovery (catching-up movements in foreign trade, a weak dollar, rising commodity prices, and domestic financing costs that are lower than pre-crisis levels). Yet lots of uncertainty and threats remain: the rollout of vaccination campaigns, the risk of a surge in insolvency cases among the poorest countries, despite financial support from international institutions and official creditors, and a rise in non-performing loans in banking systems as of 2021. The main risk in the medium term is the combination of a probable loss of growth potential due to the pandemic and the private sector’s record-high debt burden.
Economic growth reached 2.3% in 2020. Activity has rebounded rapidly since March and the recovery has gradually spread from industry to services. Infrastructure and real estate projects continue to drive investment, but it is also beginning to strengthen in the manufacturing sector, encouraged by solid export performance. Private consumption is still lagging, but yet has picked up vigorously since the summer. Whereas fiscal policy should continue to be growth-supportive in the short term, the monetary authorities are expected to adjust their priorities. Credit conditions should be tightened slowly, especially via the introduction of new prudential rules. Corporate defaults are likely to increase alongside efforts to clean up the financial sector
The economy has rebounded strongly since July, driven by the recovery in industry, which then spread to the services sector starting in October. Although the recovery still seems to be fragile, the central bank has raised its growth forecast for fiscal year 2020/2021 to -7.5%. Fiscal year 2021/2022 is expected to see a major automatic rebound in growth. Lacking the means to support growth through a fiscal stimulus package, the government has set out to create a more propitious environment for investment that would enable medium-term growth to return to a pace of about 7%. The latest reforms are working in this direction. Yet passing reform measures does not guarantee that they will be implemented, much less that they will be successful.
Malaysia is one of the emerging Asian countries hit hardest by the Covid-19 crisis. Although a recovery is underway, it is bound to be hampered by new lockdowns in Q4 2020 and January 2021. Public finances have deteriorated sharply, but the government does not seem inclined to pursue fiscal consolidation. It is giving priority to the economic recovery and support for the most fragile households. The public debt ratio will continue to deteriorate, and in December, the rating agency Fitch downgraded Malaysia’s sovereign rating. Yet refinancing risks are moderate: the debt structure is not very risky and the country has a large domestic bond market. Malaysia will continue to report a current account surplus and has a solid banking sector.
The Covid-19 epidemic was well controlled last year and lockdown was swiftly eased. Productive activity has rebounded vigorously since May, notably driven by a solid recovery in exports. Fiscal support measures have been moderate, primarily based on the accelerated implementation of already-planned investment projects. In the end, economic growth and macroeconomic balances were only moderately and temporarily affected in 2020. However, there remains a weak link in the economy: banks are insufficiently capitalised while corporates, especially state-owned enterprises, are excessively indebted. Some of these institutions could be severely weakened when monetary support measures come to an end in 2021.
An active economic policy has helped attenuate the magnitude of the recessionary shock in 2020. The recovery in Q3 was vigorous and was prolonged into Q4. However, the economy showed signs of slowing down towards year-end. Brazil’s external vulnerability did not deteriorate despite high volatility of both portfolio and direct investments as well as a sharp depreciation of the real in 2020. In 2021, the economy will benefit from the recovery in commodity prices and the maintenance of accommodative measures on the monetary side
Peru is one of the Latin American countries to have suffered most from the Covid-19 crisis. After a sharp contraction in Q2 2020, the recovery that began in Q3 has continued. This said, economic activity is unlikely to regain its pre-crisis level before the end of 2022. The economic contraction and the massive stimulus programme introduced by the government have hit public finances, but the deterioration is likely to remain manageable, for the short term at least. However, the deterioration of the political climate seen over the past few years is affecting the medium-term outlook.
Fiscal support and the resilience of exports helped limit the economic recession in 2020. A strong recovery is likely in 2021, thanks primarily to a rapid vaccination campaign. The shekel has strengthened on the back of a growing current account surplus and massive capital inflows. The situation for public finances is more uncertain. In addition to the structural deterioration of recent years, the lack of a budget law against a background of repeated government instability is not helpful for budget consolidation. Although solid solvency indicators eliminate any short-term risk, a lack of reforms could weigh on potential growth over the medium to long term.
The scenario of a partial and still fragile economic recovery is confirmed against a backdrop of a spreading pandemic at end-2020. Household consumption is the only component that managed to contribute to growth, but it could run out of steam with the upsurge in inflation. The recovery is expected to broaden in 2021, thanks to the expected resumption of production in the extractive industries, higher oil prices and the improvement in business confidence in the manufacturing sector. Yet monetary and fiscal supports will be relatively small. Public finances have been fairly resilient, and foreign reserves have consolidated despite capital outflows, since the rouble served as the adjustment variable
The second wave of Covid-19 that swept Poland in Q4 2020 was more severe than the first wave in Q2 2020. In contrast, economic growth was not hit nearly as hard thanks to the resilience of industrial output and demand (exports and household consumption). The authorities’ stimulus measures combined with industry’s competitiveness – which was not undermined much by the pandemic – bolstered growth, and the trade surplus increased. Against the background, a somewhat weak zloty is more a choice than a by-product of deteriorated fundamentals. The European budget agreement, as Poland is one of the main beneficiaries of the Recovery Plan, should provide additional support for growth.
Economic growth experienced several short-lived boom-bust wild swings in 2020, amplified by trade openness and the severity of the second wave of Covid-19 in the fall. However, the recovery in the 3rd quarter proved strong. Industrial production and exports both performed well, boosted by a stable exchange rate (and substantial foreign currency reserves). In addition, thanks to very modest debt levels, the government was able to offer rapid and substantial support to the economy.
Ethiopia is expected to report its lowest growth rate since 2003. Although the population has been relatively spared by the brunt of the Covid-19 pandemic, the cyclical economic environment has deteriorated sharply. The country has been hard hit by both a domestic shock and a decline in external revenues, which is squeezing its structurally low foreign reserves. Support from multilateral creditors will limit liquidity risk in the short term, but the current situation largely underscores the need for reforms. At the same time, political risk is rising with the emergence of socio-political tensions that pose significant challenges for Ethiopia’s political and economic stability.
With real GDP contracting by 8.5% in 2020, Tunisia was one of the region’s most severely hit economies. The prospects of a recovery are highly uncertain. The economy is threatened by the resurgence of the pandemic, but the government no longer has the manoeuvring room that it had in 2020. The budget deficit and public debt have soared to alarming levels, which calls for a difficult consolidation of public finances. Although FX reserves have been stable, the country’s external vulnerability is growing. The pandemic’s shock has aggravated a structural deterioration in fundamentals. This could have lasting consequences.
