For emerging economies, the balance prospects/risks has been deteriorating since end-2021. For 2022, a bigger than expected growth slowdown is very likely, sometimes with social instability as already seen in Kazakhstan. Over the last three months, Turkey has experienced a mini financial crisis again. Monetary and exchange rate policy is betting on exports and investment to support growth and rebuild the major economic balances over the medium term, albeit at the price of short-term financial instability. This is a daring gamble that could force the authorities to introduce genuine foreign exchange controls instead of the incentive measures they have implemented so far.
Economic indicators for the fourth quarter of 2021 confirm that China’s economic growth has been heavily constrained by the crisis in the real estate and construction sectors, the authorities’ zero-Covid strategy and the persisting weakness of household consumption. Export activity remains buoyant. However, it could start flagging in the very short term due to weaker momentum in global demand and the Omicron wave’s repercussions on factory production and the transportation of goods. The Chinese authorities are gradually easing their monetary and fiscal policies to support economic activity. At the same time, they are expected to continue cleaning up the property market, reducing financial risk and tightening regulation.
Economic growth is still vulnerable to another epidemic wave as less than 50% of the population was fully vaccinated at the end of December 2021. Activity has already been losing momentum since December, and it could be curbed even further by the new epidemic wave that swept the country in January at a time when labour market conditions are still deteriorated. Inflation is another risk factor looming over the recovery. Not only does it reduce household purchasing power, but it could also convince the monetary authorities to raise policy rates
Vietnam weathered the 2020 health crisis without any major waves of infection, without a contraction in GDP and without a notable deterioration in its macroeconomic fundamentals. In 2021, the situation was much more complicated. In Q3, an upsurge in the number of Covid-19 cases and strict lockdown measures brought the economy to a standstill. The epidemic curve deteriorated further in Q4, but the economy picked up again thanks to the increase in vaccinations and the adjustment of the “zero Covid” strategy. In the manufacturing sector, production and exports rebounded, and growth prospects are still solid. In contrast, private consumption and activity in the services sector remain weak. The government still has some manoeuvring room to boost its fiscal support.
Thailand’s economic growth prospects over the short and medium term are limited. Private consumption and the tourist sector, the main engines of growth, will remain weak for some time. In tourism in particular, it is highly unlikely that the activity levels of 2019 will return before 2024. Moreover, the structural weaknesses of the economy (lack of investment and infrastructure) have been worsened by the pandemic and will hold back the recovery, particularly in exports. This said, although the country’s external vulnerability has increased over the last two years, it remains moderate for the time being.
Despite the acceleration of the vaccination campaign, the anticipated rebound of growth in H2 2021 did not materialize. Instead, the economy fell into a recession in Q3 while available indicators for Q4 continued to show signs of weakness. Meanwhile, binding aspects of the spending cap have been called into question translating into an increased defiance of the market towards the sovereign. As the general election looms (October), economic prospects are expected to be very mild. Uncertainties regarding the evolution of the epidemic, the electoral cycle, the fiscal trajectory, the persistence of inflation and the tightening of monetary and financial conditions are all expected to act as potential brakes on the recovery.
Looking beyond the strong recovery in 2021, the Argentine economy remains fragile. Production in primary and secondary sectors has returned to its pre-pandemic levels. However, the economy remains constrained by high though largely repressed inflation, which is hitting household consumption and services. Since December 2021, a new wave of Covid-19 infections has introduced additional uncertainty. The mid-term elections have weakened the government coalition, which is still negotiating with the IMF. Monetary policy is tightening and the normalisation of budget deficit financing will require a slowdown in expenditures, although a drastic consolidation is unlikely. However, time is running out
Gabriel Boric won the second-round presidential election in December. He will take up his post in mid-March and will face many challenges during his term. The new government will have to deal with a fragmented legislative assembly and high levels of popular expectation. Economic growth is likely to slow as exceptional support measures are gradually withdrawn. Although vaccination levels are high, activity could be weakened by new waves of infection and the accompanying restrictions. Lastly, consolidating public finances whilst fulfilling promises to reform education, healthcare and pensions would seem to be the biggest difficulty.
After showing rather strong resilience to the pandemic and the collapse of international oil prices in 2020, the Russian economy rebounded strongly in 2021. Yet two major risks are currently threatening growth: inflation and a tightening of international sanctions. These sanctions could even add to the inflationary risk. Nonetheless, the government has the financial capacity to support the economy, with solid public finances and low refinancing risks. Moreover, even if international sanctions were tightened to the point that foreign investors were denied access to Russia’s secondary debt market, the government would still be able to finance itself on the domestic market.
The Ukrainian economy has suffered an accumulation of external and domestic shocks: the pandemic (vaccination rates are still low), the ongoing geopolitical risk, and domestic political tensions. Adding to these factors, inflation has accelerated over the past year. However, the Covid-19 crisis has been much better absorbed than was the case for the crises of 2008 and 2014. The current account balance has recovered and foreign currency reserves have increased, thanks in particular to higher commodity prices (cereals and metals). International support (mainly from the IMF and European Union) provided the required complement, allowing fiscal support to the economy. However, the country remains exposed to a sudden stop of capital flows
The Israeli economy goes into 2022 in a favourable position. After a strong recovery in 2021, growth is likely to receive continued support from household consumption and exports. Although inflation is rising, it remains under control, which should allow the continuation of an accommodative monetary policy. Macroeconomic fundamentals remain very favourable for the shekel, although monetary tightening in the US and a possible correction in US equity markets could slow its rise. The vulnerability of public finances to an increase in interest rates remains limited, due to the essentially domestic financing of the budget deficit and the low risk of any substantial monetary tightening in the short term.
In Ghana, the warning signs are multiplying. Although economic growth has been fairly resilient, public finances have deteriorated sharply at a time of surging inflation. This is unsettling investors and threatening economic prospects. The central bank has already reacted by raising its key policy rate. But the authorities must reassure that they are capable of reducing the fiscal deficit. For the moment, they have failed to do so. Yet severe financial constraints and a dangerously high debt burden could force them to make adjustments.
Economic recovery is likely to be strong in 2022, driven by buoyant household consumption and rising oil GDP. Labour market reforms are having a positive effect on domestic demand, most notably via a significant increase in women’s participation rates. Inflationary risk remains moderate, even though wage pressures have increased recently. With the increases in oil prices and output, there is likely to be a budget surplus this year. This is due in particular to progress in the diversification of fiscal revenue. The higher level of oil prices will be a test for the government’s willingness to continue the budget consolidation process
