Turkey is enjoying strong economic growth in 2021, following the credit-driven stimulus implemented in 2020. The cumulative performance over 2020 and 2021 has allowed the country to close the growth gap that resulted from the series of shocks between 2018 and 2020. Investment and the industrial sector have thus regained their previous size. Foreign currency reserves have recovered from the low levels they reached in 2020. Nevertheless, this has come at a price: inflation is running well ahead of levels seen in other emerging economies. As well as common factors (rising prices for oil and other commodities), there are specific country drivers (depreciation of the lira, untimely monetary policy decisions)
Economic growth remained rather strong in FY 2020/21 thanks mainly to the dynamic momentum of household consumption and the moderate support of public spending. This bolstered the retail and construction sectors. Through cautious management of public finances, the government reported a slightly smaller fiscal deficit in FY 2020/21, and it should continue to report an improvement this year despite possible upward pressures on current expenditures. The main obstacle to a more ambitious fiscal policy lies in the government’s debt service, which despite better financing conditions, will only narrow very gradually
The United Arab Emirates (UAE) was hit by a twin shock with the fall in oil prices in 2020 and the pandemic’s impact on the services sector. The 2020 recession was severe, and the recovery this year is expected to be mild. Despite the positive prospects of the World Expo, Dubai’s economic activity will continue to be restrained by structural difficulties in the real estate market and uncertainty in the tourism and logistics sectors, which are unlikely to return to normal before 2023. Against this backdrop, public finances and the external accounts remain very favourable thanks to the accumulation of years of surpluses, but credit risk is on the rise
Algeria has not pulled out of the crisis yet, but it is no longer in the danger zone. Real GDP growth swung back into positive territory in Q1 2021, and external pressures have eased considerably. The factors behind these improvements are essentially cyclical, however, starting with the upturn in oil prices and strong European demand for natural gas. But this will not be enough to balance public finances. The vaccination campaign has not advanced enough to rule out the emergence of a new wave of contaminations. Against this backdrop, parliament just adopted the new government’s action plan. Although diversification efforts are highlighted once again, the lack of quantified targets and a precise timetable throws doubts on their implementation
In Ethiopia, the coronavirus pandemic triggered an economic crisis that has jeopardised the country’s development model of the past decade. Belated reforms, major logistics costs and a shortage of foreign currency have sharply slowed economic modernisation. Civil war in the Tigray region also threatens the country’s political stability and worsens the humanitarian crisis. With no resources, Ethiopia lacks the means to face up to the pandemic’s economic fallout, and is still highly dependent on international aid. The ratio of foreign currency debt to export receipts has become excessively high. The country has requested foreign debt treatment as part of the G20s’ common framework for debt restructuring
Emerging countries have continued to recover since the beginning of the year, although the recovery remains fragile. Household confidence indicators are lagging behind those of business sentiment, illustrating the constraints on domestic demand: the pandemic risk persists, inflation is accelerating, and governments are facing rising financing costs, which reduces their fiscal manoeuvring room. Despite buoyant foreign trade, the horizon is not clear enough yet for investment to rebound. Fortunately, the vast majority of central banks have been maintaining a proactive stance so far, despite inflationary pressures. But monetary policy is bound to tighten across the board.
Economic growth rebounded very rapidly following the Covid-19 shock, but this rebound has also been characterised by mixed performances between sectors and between demand components. Growth of industrial production and exports accelerated vigorously until early 2021 and is now gradually returning to normal. Meanwhile, the services sector and private consumption were slower to rebound, and their recovery still proved to be fragile in Q2 2021. Consequently, the authorities are likely to be increasingly cautious about tightening economic policy. Even so, they should still give priority to slowing down domestic credit growth and adjusting the fiscal deficits.
The second wave of the pandemic seems to have passed after new cases peaked in May. Economic activity is unlikely to contract as much as it did last year, and the decline should be limited to the second quarter. Yet the second wave is estimated to have cost more than 2 percentage points of GDP, and it comes at a time when households are still struggling to recover from the impact of the first wave. In 2020, 75 million people dropped below the poverty line. Moreover, the rebound expected this year might not suffice to stabilise the public debt ratio, which could lead the rating agencies to downgrade India’s sovereign rating. In this very uncertain environment, the rupee is not benefitting from the strength of India’s external accounts.
The health crisis is barely improving in the Philippines. After a particularly severe second wave, the number of new Covid-19 cases seems to have levelled off, albeit at a high level. Yet the full vaccination rate is very low, which means that the tight health restrictions which must be kept in place are weighing on domestic demand and the tourism sector. After contracting by more than 9% in 2020, GDP should rebound moderately in 2021. Even so, the country still has high growth potential thanks to the reforms undertaken over the past decade, which are paying off.
After a modest contraction in 2020, the Russian economy has registered a solid growth rebound since March 2021 driven by the strength of domestic demand and exports. The third wave of the epidemic seen since June, alongside strong inflationary pressure and the resulting tightening of monetary policy, could, however, hold back the recovery. This said, the threats to the economy remain under control. Public finances have been boosted by a sharp rise in global oil prices and the debt refinancing risk is limited despite the latest US sanctions. Lastly, foreign exchange reserves cover the totality of external debt.
Covid-19 was only a temporary brake on Polish growth. The economy is outperforming its neighbours’, with a shallower recession in 2020 and an earlier recovery. Credit risk appears to be under relatively good control, despite high levels of participation for the loan repayment moratorium scheme. Supply side constraints are even raising fears of a temporary overheating of the economy, with an increase in inflation. However, a strong current account surplus and the good control of government debt are stabilising factors. Poland’s economic growth potential remains unchanged, even though the prospect of international tax harmonisation may slow down foreign investment.
The Romanian economy is in the midst of a spectacular rebound. Real GDP has already returned to pre-Covid levels, and growth should reach 8.2% in 2021. But this performance has been accompanied by high fiscal and external deficits. Consequently, contrary to the other Central European countries, public debt is unlikely to narrow by 2022. Private-sector borrowers benefited from a moratorium on debt payments, but debt formerly under moratorium now presents a non-performing loan ratio of 10.9%. Nonetheless, the banking system should be able to absorb these losses. However, one factor worth monitoring is the rapid growth in housing loans.
The Serbian economy was only moderately affected by the consequences of the Covid-19 pandemic in 2020. Activity barely contracted, whilst the central bank maintained an adequate level of foreign-currency liquidity against a background of significant euroisation of the economy. These good performances can be linked to the economy’s attractiveness for international investors, as well as to past fiscal consolidation measures, which meant that the government had more scope to support the economy last year. In the short term, the recovery is likely to be strong, in particular thanks to exports, and inflation should remain under control. Looking further ahead, the ability of the authorities to maintain the economy’s competitiveness will be crucial in reducing currency risk.
The Brazilian economy has been surprisingly resilient given the challenging sanitary situation it faced in Q1. A more supportive external environment, a stronger recovery in services and a rebound in confidence, should help support the short-term outlook – especially as the epidemic slows down with improving vaccination coverage. Accelerating inflation continues to be a concern and could lead to a more vigorous tightening of monetary policy at the end of the summer. While the currency and portfolio investments stand to benefit from more aggressive rate hikes, the latter also risk slowing down the recovery and adversely affecting public finances. So far though, the sovereign has recorded better fiscal metrics than expected, which have translated into lower risk premiums.
The economy should rebound strongly in 2021 thanks to a successful vaccination campaign, improved prospects for global growth and higher copper prices. According to the monthly economic index, in early Q2, real GDP returned to the pre-pandemic level of December 2019. Looking beyond 2021, economic growth prospects could be marred by persistent political tensions plaguing the country. Debates over the presidential election on the one hand and the process of drawing up a new constitution on the other will probably disrupt the implementation of economic policy as well as private sector investment decisions by both resident and non-resident investors.
The Saudi economy took a double hit in 2020: the consequences of the Covid-19 pandemic amplified the recessionary impact of falling oil prices and production. In addition to the economic consequences, these two exogenous shocks have had negative consequences for the reform process, and particularly for the dynamism of the private sector. The recovery expected in 2021 will be timid, due to a further slowdown in oil activity. Budget deficits are likely to persist over the medium term, resulting in an increase in government debt. Macroeconomic imbalances remain moderate, but the continued dependence on oil in the context of economic transition remains a significant source of vulnerability.
After declining 1.9% in 2020, Nigeria’s GDP is unlikely to rebound but mildly in 2021 due to persistent and significant macroeconomic imbalances. Despite the first signs of stabilization, inflation is still very high, and several adjustments to the naira have failed to correct the dysfunctions in the foreign exchange market. Although the rebound in oil prices should help reduce somewhat the squeeze on external liquidity, it will surely take more than that to restore the confidence of investors. Without reforms and with no fiscal manoeuvring room, the economy will continue to be vulnerable to external shocks.
South Africa has been severely hit by the Covid-19 crisis, after already several years of very low economic growth and social and political tensions. Real GDP collapsed by 7% in 2020 and public finances have deteriorated significantly. However, South Africa has also benefitted from a strong improvement in its external accounts. The boom in export receipts has supported the rebound in activity and fiscal revenue over the past year. This better-than-expected macroeconomic performance has reassured investors and facilitated the coverage of the government’s financing needs. However, in the medium term, challenges remain unchanged: large and difficult reforms remain necessary to elevate the country’s growth potential and improve public debt sustainability.
In their spring outlook, the IMF economists expect to see a multi-speed (and incomplete) recovery of the global economy in 2021. Indeed, speed is the key word for 2021 because the emerging countries are racing against time on several fronts. In our eyes, the greatest short-term risks are linked to the race between the rollout of vaccinations and the spread of the pandemic, and between higher food prices and the partial catching-up of revenues for low-income households. If this divergence persists, we could see a rise in social risks, which may have a much more destabilisation capacity than financial risks.
At the end of the annual “Two Sessions”, China’s major political event, Beijing announced its economic targets for 2021 as well as the priorities of its new five-year plan. By setting this year’s real GDP growth target at simply “more than 6%”, which is lower than forecasts, the authorities are signalling that the economic recovery following the Covid-19 crisis is no longer the main focus of concern. In the short term, they will continue to cautiously tighten monetary policy and gradually scale back fiscal support measures. Above all, the authorities have affirmed their medium-term development strategy, which aims to boost innovation and drastically expand China’s technological independence.
The economic recovery could be weakened by a second wave of Covid-19 and a fresh surge in inflation. With the government seeking to step up the pace of reforms to support growth over the medium term and improve the business environment, the number of protests against the moves is mounting, with protestors’ ire directed particularly at the privatisations that the government is counting on to cut its budget deficit. In the banking sector, banks currently are able to deal with the expected rise in credit risk. Nevertheless, in order to support a resumption of lending growth, a new injection of capital into state-owned banks has already been planned, alongside the creation of a defeasance structure.
Having contracted by 2.1% in 2020, the Indonesian economy is likely to see only a modest recovery in 2021. Domestic demand is struggling to recover. Consumer sentiment remains weak and any resurgence in the pandemic could undermine the recovery, at a time when a very low percentage of the population has been vaccinated. Moreover, despite the highly expansionary monetary policy, bank lending has continued on its downward trend. The financial position of Indonesian companies prior to the Covid-19 crisis was more fragile than those of ASEAN peers, and they are likely to seek to consolidate their positions rather than invest in an uncertain future. The banking sector remains solid and well-placed to deal with an expected increase in credit risk.
After a severe recession in 2020, economic growth will rebound moderately in 2021-2022. The main growth engines – private consumption and the tourism industry – were weakened by the abrupt shutdown of economic activity as of Q2 2020, and the dynamics of the recovery will continue to depend on the evolution of the health situation. As in 2020, the authorities will take advantage of the comfortable manoeuvring room built up prior to the crisis to provide economic support. In the medium to long term, political tensions, exacerbated by the economic crisis, will continue to strain Thailand’s long-term growth potential.
The health crisis continues to worsen – undermining the economy to a point of entertaining a recessionary risk in the first half of 2021. In this context, confidence has plummeted and financial markets have retreated. The vaccination campaign – after facing significant logistical challenges – has finally begun to accelerate since mid-March and with the concomitant introduction of new restrictive measures, the hope is that the epidemic curve will reach an inflection point over the next two months. Faced with rising inflation and inflation expectations, the Central Bank launched its monetary tightening cycle, which – against a backdrop of slowing economic activity and a high sovereign interest burden – has exacerbated budgetary pressures and risks
Thanks to a strong Q4 rebound, the contraction in real GDP was limited to 8.2% in 2020, the public deficit did not swell as much as expected, and 2021 growth prospects were given a boost. Yet the recovery is still fragile: private consumption and investment have both taken a lasting hit from the 2020 crisis, and the export sector will not benefit fully from the expected rebound in US growth. The crisis also exacerbated concerns about the vulnerability of public finances and the decline in investment, which will undermine medium to long-term growth prospects.
EcoEmerging is the monthly review of the economies of emerging countries. Written by economists from the Country Risk Team of BNP Paribas Economic Research, this publication offers an overview of the economy of a selection of countries through the analysis of the main available economic indicators.
Each economist bases their analysis on the quarterly data (real GDP, inflation, fiscal balance, public debt, foreign exchange reserves, etc.) and focuses on the economic situation of one or more emerging countries in order to keep up with developments in the past quarter. The key themes that they look at include industrial production, quarterly gross domestic product (GDP) and inflation expectations with changes in consumer prices (CPI) and producer prices (PPI), employment and unemployment figures, the real estate market and stakeholder opinions (e.g. household confidence and the business climate). The author comments on the main factors that influence and determine the economic activity of the country concerned and on the economic outlook.
It provides an outline of an emerging economy using indicators for the past quarter and it looks ahead in order to better understand and anticipate the main economic problems of the country in question.
