The health crisis has slammed an economy that was already suffering from more than two years of recession. GDP will probably contract by more than 10% in 2020. With the technical rebound that began in late Q2 and the signing of a public debt restructuring agreement, the country should manage to pull out of recession in the second half. Yet financial instability persists with the erosion of foreign reserves, the stark disconnection between official and parallel exchange rates and expectations of surging inflation. The authorities have tightened forex controls again. IMF support is essential for financial stability but might not suffice for a sustainable recovery.
The Hungarian economy was hit particularly hard by the effects of the Covid-19 pandemic in the 2nd quarter of 2020, due to the weight of exports in its GDP. The shock seems to have been absorbed relatively well, with the government and central bank focusing on supporting the labour market and introducing the necessary moratoriums on interest payments and loan repayments. The stimulus measures introduced have been constrained in particular by the need to avoid an excessive depreciation of the forint. The reduction in government debt, interrupted this year, is likely to get back on track quickly, within the framework of an unchanged strategy: maintaining a moderate corporate tax in order to continue to attract foreign investment in the manufacturing sector.
Since late spring, Turkey has enjoyed a rapid, buoyant recovery. This is rather typical for an economy regularly hit by external shocks that are magnified by capital outflows. Turkey has managed to bounce back yet again thanks to strong economic policy support. The bad news is that it is accumulating several imbalances, including another significant current account deficit and a sharp increase in credit growth, which is accelerating faster than during previous recovery phases. These two factors, which put downside pressure on the lira while driving up inflation, signal a deterioration in the quality of growth and imply higher debt ratios.
The Egyptian economy has performed pretty well in the face of the pandemic. Activity has been bolstered by major public investment projects, whilst inflation has fallen well below the central bank’s target. The fiscal and current account deficits are likely to increase, but international support and access to capital markets at favourable conditions have contributed to a macroeconomic stabilisation. The continuation of a high policy rate at the central bank has helped keep the Egyptian market attractive to international investors. Thanks to injections of liquidity, lending remains strong, although this increases the exposure of banks to sovereign debt and credit risk in an increasingly uncertain environment.
Lebanese GDP could fall by a quarter in 2020 under the combined effect of the deep economic crisis that has taken place since 2019 and the Beirut port explosion. In the short term, hopes of a recovery are limited. The economic system that closely links the public finances, commercial banks and the central bank appears to be on its last legs. The system of multiple exchange rates will not prevent the exhaustion of foreign currency reserves in the near future. Meanwhile, the government, which is in default on its foreign currency debt, has been forced to monetize its fiscal deficit. Commercial banks have built up record exposure to sovereign debt and substantial external liabilities.
Despite rapid support measures, the economy will not escape a severe recession this year. With the abrupt halting of tourism activity, the drop-off in exports to Europe and the collapse of domestic demand in Q2, GDP will contract by about 6%. Although there are high hopes that a good agricultural harvest will fuel a rebound in 2021, the recovery of non-agricultural activities will take time. In contrast, Morocco’s macroeconomic stability does not seem to be threatened. But growing pressure on public finances leaves the authorities very little manoeuvring room.
With the country in recession for the fifth consecutive year (latest estimates put the contraction in 2020 at 4%), the current crisis is acting as a catalyst for existing weaknesses and further damaging the country’s economic prospects. The combined effect of lower oil prices and production and the depreciation of the currency has increased pressure on the capacity for external financing and the sustainability of Angola’s debt. The country has seen a significant decline in its currency reserves, which could become insufficient as the financing deficit increases. Currently under negotiation, the expected support of bilateral creditors (most notably China) is becoming crucial.
Since mid-April, calm has been restored in the financial markets of emerging economies. In most countries, exchange rates have begun to appreciate again, while money market rates and bond yields have eased thanks to the general easing of policy rates and greater use of quantitative easing by national central banks, external financial support, and the return of portfolio investment. As is often the case, the equity markets have exuberantly – and prematurely – welcomed this return to normal. Indeed, the economic recovery seems to be taking shape, but it remains very fragile.
The economy has been recovering gradually since March, and the rebound in real GDP was strong enough in Q2 2020 to enable it to recover rapidly the ground lost in Q1. Yet the shock triggered by the pandemic and the ensuing lockdown measures has severely weakened some sectors (such as export-oriented industries), some corporates (notably micro-enterprises and SMEs) and some households (especially low-income earners). The central bank has cautiously eased credit conditions and the government has introduced a stimulus plan estimated at about 5 points of GDP for 2020. Public investment in infrastructure projects remains the instrument of choice, but direct support to corporates and households is also expected to boost private demand.
India should report an unprecedented contraction in real GDP this year. The big question is how strong will it rebound thereafter? The rating agencies have begun to doubt whether India will return to its potential growth rate in the years ahead because its economic slowdown began much earlier than the Covid-19 crisis. India’s slowdown dates back at least to 2018, and could even be an extension of the 2009 financial crisis. Since 2014, real GDP growth seems to have been driven solely by positive external shocks, creating the illusion of robust growth. Yet the banking sector is still much too fragile to restore GDP to the growth rates of the past.
While the Covid-19 epidemic continues to spread, restrictions have started to ease in parts of the country. A severe contraction of economic activity is anticipated in Q2 with the latest data indicating that a low point was reached in April. A rapid recovery of economic activity will be constrained by the economy’s weak growth engines, especially investment. Fiscal and monetary policy measures have continued to be deployed or extended to help cushion the impact of the crisis. While the currency continues to exhibit weakness and fiscal balances keep deteriorating, continued monetary easing has helped boost the stock market.
The Russian economy is more solid today than it was five years ago. After the 2014-15 crisis, the government managed to rebuild its sovereign wealth fund, which is now enabling it to offset the loss of oil revenue. Public finances are less dependent on oil revenues, thanks to the VAT increase in 2019, and the government should have no trouble meeting its short-term commitments. Yet lockdown restrictions and the collapse of commodity prices will have a big impact on both growth and the banking sector, which is still fragile, although it is less vulnerable to a forex shock.
The Polish economy has to smooth the impact of the Covid-19 pandemic, which hit not only through the decline in foreign demand but also through the lockdown’s impact on domestic consumption. Yet the country has enough policy leeway to do so, thanks notably to a reasonable level of public debt before the slowdown began. GDP is unlikely to return to pre-crisis levels before mid-2021, which is bound to curb investment. Thereafter, Poland is expected to return to its robust growth trajectory since its strengths remain intact (competitiveness, labour supply, low wage costs and productivity gains), which have transformed the country into the European Union’s 5th biggest industrial sector.
Ukraine is usually quite prone to boom bust cycles. Yet high volatility has not allowed to stabilize growth towards a higher level, and fickle capital inflows have reinforced the importance of funding from foreign institutions, notably from the IMF and the European Union. Such official financing, coupled with the structural progress it has made in recent years, seem to have helped the country to cope with the Covid-19 crisis, at least for the moment, with fewer negative financial consequences than initially feared. Strong foreign demand for Ukraine’s grain, lower oil prices and the foreign financing are all favourable factors that have helped the country weather the crisis, and raise hopes for a rapid economic recovery once the Covid-19 crisis is over.
Slovenia’s economy is in a relatively favourable position to face the Covid-19 crisis. The past three years were marked by robust growth, fiscal surpluses and the gradual clean-up of bank balance sheets. Yet as a small, open economy closely tied to the European Union, Slovenia could be significantly impacted by the crisis. European fiscal and monetary support as well as healthy public finances should soften the impact of the crisis on public finances and growth prospects.
Growth prospects are deteriorating constantly in Mexico. In the short term, several factors are weakening the economy, including the impact of lockdown restrictions on domestic demand, the decline in oil prices, the disruption of supply chains and sluggish external demand. Without a fiscal stimulus package, the support measures announced by the central bank will not suffice to offset the enormous shock. In the medium term, the economy’s capacity to rebound is limited. The downturn in the business climate and other pre-crisis factors that contributed to the slowdown, coupled with the government’s contradictory signals, will continue to weigh on investment.
The economic rebound expected in H2 2020 has been slow in the making. For the moment, the pandemic seems to be under control, and there have already been several phases of reopening, but domestic demand remains sluggish. Exports also fell sharply again in May. Above all, it is the absence of international tourists that is straining growth prospects, at least in the short term, because fiscal and monetary support measures – though massive – will not suffice to totally absorb the shock. As a result, the recovery is likely to be more restrained than in the other Asian countries.
The massive use of expatriate workers, a key element in the Gulf states’ economic models, has been called into question by the economic recession, widening budget deficits and employment nationalisation programmes, particularly in the public sector. The construction and services sectors, which also depend massively on foreign workers, are suffering as a result of cuts in public spending. However, it is far from certain that the expected reduction in expatriate employment in the short term will result in a significant and lasting increase in employment for Gulf nationals. The Gulf states are likely to have difficulties to go without foreign labour.
The shock triggered by the Covid-19 epidemic has been violent and has hit an already very fragile economy. Over the past five years, economic growth has averaged only 0.8% and the country has slipped into recession since mid-2019. The economic contraction and the deterioration in public finances will be on an unprecedented scale in 2020. Real GDP may well not return to its pre-crisis level before 2025. The government has been adept in adjusting its financing strategy to cover its needs, which have increased steeply following the introduction of the fiscal stimulus plan. The support expected from multilateral lenders in the short term is reassuring, but trends in government debt will continue to be a concern over the medium term.
Although the pandemic is well contained from a health perspective, the Covid-19 crisis combined with the downturn in oil prices will have severe economic consequences. With no real fiscal leeway, the government has implemented a very modest economic stimulus plan, while massive capital outflows and the collapse of oil exports have fuelled the rapid erosion of foreign reserves, bringing the naira under pressure. The deterioration in public and external accounts despite support from donor funds hampers any prospects of a recovery. Just four years after the last recession, real GDP is expected to contract significantly again in 2020. Without an upturn in oil prices, the rebound will be mild in 2021.
Emerging countries have been severely affected by the COVID-19 pandemic even though the official number of confirmed cases and deaths (excluding China) is still low compared to the figures for the developed countries. A wave of slowdowns and recessions is only just beginning, and the economic fallout will probably spread beyond 2020, because the real shock (shutdown of business due to confinement measures) is compounded by a financial shock and commodity price shock. Capital outflows and the freeze on bond issues in international markets increases refinancing risk in US dollars. Preventative safety nets are being set up to reduce defaults, but the solution for the most vulnerable countries is probably a sovereign debt moratorium or a debt relief.
China’s population and its economy were the first to be struck by the coronavirus epidemic. Activity contracted abruptly during the month of February before rebounding thereafter at a very gradual pace. Although the situation on the supply side is expected to return to normal in Q2, the demand shock will persist. Domestic investment and consumption will suffer from the effects of lost household and corporate revenues while world demand is falling. The authorities still have substantial resources to intervene to help restart the economy. Central government finances are not threatened. However, after the shock to GDP growth, the expected upsurge in domestic debt ratios will once again aggravate vulnerabilities in the financial sector.
India was not spared the coronavirus pandemic. The economic slowdown will be all the more severe with a protracted lockdown of the population. The government also lacks the fiscal capacity of the other Asian countries to bolster its economy. Already strained by the economic slowdown of the past two years, public finances are bound to deteriorate further. Public debt could reach 75% of GDP by 2022. Refinancing risks are low, but the cost of borrowing could rise for the long term if the rating agencies were to sanction its public debt and deficit overruns. India still has sufficient foreign reserves to cover its short-term liabilities.
The massive economic shock resulting from the coronavirus sanitary crisis will delay Brazil’s economic recovery, suspend the process of fiscal consolidation and stall progress on reforms. While the extent of the recessionary shock remains highly uncertain, measures – both fiscal and monetary – have been taken to mitigate the impact of confinement measures on economic activity, prevent a sharp upturn in unemployment and ensure that tensions over liquidity do not materialize into solvency problems. Intervention capacities on the monetary side are ample and contrast with those on the fiscal side, which are more limited due to the fragilities of public accounts. Brazil’s financial markets, which came under significant stress in Q1, will continue to be challenged.
The Turkish economy is facing problems of a sort it has dealt with in the past: a global crisis, that will trigger a sharp fall in exports, coupled with a contraction of external financing. Unlike in 2018, Turkey’s economy does not appear to be overheating, whilst the fall in oil prices and the emergence of a current account surplus are two factors that will reduce the risk. That said, the relatively weak levels of currency reserves, the high level of external debt and the recent rise in non-performing loans are all significant risk factors. In front of the current shock, the economic policy response will have to address foreign currency liquidity needs properly in a context of dwindling capital flows.
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.
