A breakthrough has recently been made in the process of restructuring the Ethiopian government's external debt. The peace agreement between the federal authorities and the Tigray rebel forces, signed in November 2022, ended two years of civil war and cleared the way for negotiations with international institutions to resume. Consequently, almost three years after requesting a debt restructuring under the G20 Common Framework, Ethiopia reached an agreement on an interim suspension of its bilateral debt service. However, this is only the first step on its journey, as the Ethiopian government must now reach agreements with all of its external creditors in order to fully restructure its debt
Growth in emerging countries held up quite well in H1 2023, thanks to countries in Asia, Brazil and Mexico. In Asia, inflation returned to very moderate levels in August or September (with the exception of India) and, compared to other areas, monetary tightening between mid-2021 and mid-2023 was on a much smaller scale. This helped offset the drop in exports. However, Central European countries did not benefit from this offset effect. Business and household surveys indicate that disparities between areas became more pronounced over the summer. These surveys also show that the heavyweights in Latin America (Brazil, Mexico) are better positioned within the major EM regions.
After some hesitation, the Chinese authorities finally stepped up their stimulus measures over the summer. The recent slight upturn in economic growth is set to continue in Q4 2023. However, action by the central bank and the government remains constrained, cautious and measured, while internal and external obstacles to economic activity are still powerful. In the real estate sector, even if activity stabilises in the short term thanks to support measures, it is likely to remain hampered by the financial fragility of developers and weak buyer sentiment. In the export sector, enterprises are affected by the slowdown in global demand and US-China tensions, while multinationals are starting to rethink their production strategies.
The Hong Kong economy is struggling to recover from the series of shocks experienced between 2019 and 2022. Following political and institutional upheavals in 2019 and 2020, the territory was severely affected by the health crisis up until last year. In 2023, activity is recovering, but Hong Kong is now facing the weakening in external demand and, above all, significant tightening of monetary conditions. The rise in interest rates since March 2022 has impacted domestic demand, particularly through its effects on the property market. Fiscal policy, meanwhile, remains resolutely expansionary.
In Q2 2023, Indian economic growth remained solid. But since the summer, the situation has deteriorated slightly. In addition to the contraction in exports, rural demand is slowing. Inflation has rebounded and downward pressures on the rupee have increased slightly due to the sharp slowdown in capital inflows. External accounts are expected to remain under pressure until the end of the year. The sharp rise in oil prices and a below-normal monsoon are weighing on the trade deficit and fuelling inflationary pressures. In addition, the narrowing yield spread between Indian and US government bonds is limiting portfolio investment. So far, the banking sector has weathered the rise in interest rates well
Despite the global economic slowdown, Indonesia’s economic growth has remained robust. Inflationary pressures remain contained despite rising rice prices. Public finances have strengthened and the fiscal deficit has fallen below the regulatory threshold of 3% of GDP a year earlier than expected. Although government debt is higher than before the crisis, it remains modest and its refinancing is less reliant on portfolio investments. The increase in the payment of interests on debt should be monitored as it reduces the government’s fiscal leeway to support the economy
The normalisation of economic policy (tightening of monetary policy and a dose of fiscal restraint) has restored confidence among investors and rating agencies. Official foreign exchange reserves consolidated over the summer, the lira is much more stable and risk premiums have eased. Economic growth remains resilient despite the slowdown in domestic credit, and the budget deficit is much lower than expected given pre-election promises. However, inflation has accelerated once again and the current account deficit has just about stabilised. The rebalancing of growth and de-dollarization have not yet been achieved, but it is more likely now that these will be seen in 2024.
The current government is running for a third term in the general elections on 15th October. Whatever the outcome, the future government will face three major economic challenges: a marked slowdown in growth, a deterioration in budget deficit and an increase in credit risk. However, this increase in risk is not a real cause for concern. There are safeguards against rising public debt. The country also has comfortable external liquidity and the banking sector is strong. The decline in inflation has facilitated the shift in gear in monetary policy, but this seems premature given strong pressure on wages.
Egypt’s management of external accounts, which consists of buying time thanks to external support between two drastic exchange rate readjustments, is reaching its limits. The persistence of a significant external financing need, notably due to the amortisation of external debt, and international creditors (Gulf States and the IMF) who condition their support on painful and politically costly reforms, have led the Egyptian economy to a dead end. The banks’ net external position is deteriorating at an alarming rate. Restrictions on foreign currency transactions are increasing, with negative consequences on activity in a country highly dependent on imports
Brazil’s cyclical performance continues to boast positive surprises. Growth and employment have held up well, core inflation is retreating, trade surpluses are beating all-time records and the real is holding its ground despite a rising dollar. Against this backdrop, the Central Bank eased its monetary policy in August for the first time in a year. These developments coupled with the revival of social policies, have helped spur a rise in Lula's approval ratings. In search of new growth drivers to reduce inequality and accelerate the energy transition, the President unveiled the third act of his Growth Acceleration Pact (Novo PAC). Financing the investment programme, however, poses questions in the face of the recently enacted fiscal framework
Mexico’s economic activity is expected to slow in the next few quarters under the combined effect of the slowdown in the US economy and the continuation of high interest rates. Beyond 2024, growth could be supported by a new driver, nearshoring, the effects of which are starting to be seen in export and investment data. The next administration, to be elected in June 2024, will therefore face the challenge of implementing the structural reforms necessary to take full advantage of this new relocation strategy and maintain financial support for Pemex, while limiting the slippage in public finance.
The current period is very favourable for the Saudi economy due to high oil revenues and implementation of extensive reform and investment programmes. Nevertheless, despite real progress in diversification, activity remains vulnerable to oil market vagaries and OPEC production policy. A moderate upturn in activity is expected in 2024 after a slight recession this year. Oil revenues remain decisive for maintaining budgetary balance and implementing Vision 2030 investments. However, the scale of funding requirements and the lack of attractiveness of the Kingdom to foreign investors mean massive use of debt as well as the sale of public assets
Since the beginning of 2023, Angola’s oil production has fallen short of the target set by the government and is declining compared to 2022, which is severely penalising economic growth. Combined with the fall in Brent prices, this underperformance is weakening the external accounts of the country, which is also dealing with particularly high external debt repayments. Dollar liquidity therefore fell in Q2 2023 and the Kwanza depreciated sharply. The government’s solvency also deteriorated. To counteract this, the authorities announced major budget cuts at the beginning of August. In the short term, the rise in Brent prices will stabilise foreign exchange reserves, which still stand at a satisfactory level
The Ghanaian economy is gradually recovering from the severe macroeconomic crisis of 2022. GDP growth is holding up better than expected and inflation has started to fall even though it remains too high. In terms of public finances, progress is also encouraging. In addition to satisfactory budget implementation during the first six months of the year, the authorities completed their domestic debt restructuration operation. However, the country remains in default on its external debt. Despite the support from the FMI, it also lacks a cushion to protect it from a possible new external shock.
Even though economic growth in early 2023 was better than forecast for emerging countries, the slowdown scenario is seemingly coming to pass for the rest of the year. In 2024, the strength of the recovery will hinge on the geopolitical climate and on how far monetary policy is eased in the US and the euro zone. It will also hinge on the investment outlook for emerging countries. The UNCTAD’s annual report gives cause for optimism around the investment outlook, except for low-income economies.
The economic rebound that has followed the abandonment of the zero-Covid policy is quickly losing momentum. Domestic demand is held back by a significant fall in consumer and investor confidence, and export momentum is stalling. The authorities are cautiously easing monetary policy, but this may end up having limited effects on credit activity. Further stimulus measures are expected in the short term. They should, among other things, aim to encourage youth employment.
In India, economic growth is holding up thanks in particular to slowing inflation and early signs of an improvement in the labour market. Public finances, which consolidated slightly during the fiscal year 2022/2023, remain much more fragile than five years ago. The government is favouring growth over fiscal consolidation. Capital expenditure continues to increase, even though room for manoeuvre is shrinking due to the high and rising interest payments on government debt. The sharp rise in public investment has improved the quality of infrastructure, which should attract a little more foreign investment
Taiwanese economic activity has slowed sharply since spring 2022. The island is particularly vulnerable to weakening global demand and the downturn in the electronics cycle due to its dependence on semiconductor exports. At the same time, its position as a quasi-monopoly on the most sophisticated microprocessor market probably protects it against the threat of Chinese aggression, at least in the short term. From a strictly macroeconomic point of view, Taiwan has solid fundamentals – and in particular a very comfortable external financial position – that strengthen its ability to withstand external shocks.
Since the presidential and legislative elections in May, the Turkish lira has fallen sharply again and domestic interest rates have increased. Calm has returned in recent weeks with the monetary turnaround of the central bank (CBRT), now led by Hafize Gaye Erkan, and the return of Mehmet Simsek, who in the past has been the AKP government’s guarantor to foreign markets and investors, at the head of the Ministry of Treasury and Finance. But their task of rebalancing a real economy in a state of overheating and faced with stubbornly high inflation is a challenge. More than the recent slowdown in growth, the likely risk of worsening twin deficits must be closely monitored. However, the alarmist analyses that conclude that there is a risk of a balance-of-payments crisis are exaggerated.
Economic activity has weakened significantly in the last three quarters. In Q1 2023, GDP contraction was largely attributed to the drop in domestic demand. For 2023, the scenario of a weak recession seems to be emerging, due to a strong negative carry-over effect. Moreover, prospects for a recovery are weak in the short term, as inflation remains very high and the real estate market is showing signs of weakness. In 2022, budget and current account deficits increased due to the energy shock. However, debt ratios (public and external) worsened slightly. In 2023, external accounts are expected to improve thanks to the easing of commodity and energy prices.
Very dynamic to date, economic growth is now expected to weaken, and the authorities will face several challenges in 2023. Consolidation of public accounts is a priority in the short term, failing which, Romania could be subject to further disciplinary measures by the European Union. Inflation remains high although it has fallen since the end of 2022, which should encourage monetary authorities to favour a status quo. The current account deficit widened to nearly 10% of GDP in 2022, but should ease in the short term due to the drop in energy prices. Despite the size of current account and budget deficits, Romania continues to attract foreign capital flows.
A wind of optimism is currently blowing over Brazil. Brazilian assets recovered strongly in Q2 2023 on the back of reform progress and positive surprises from growth, inflation, the labour market and external accounts. The short-term outlook has also improved. New fiscal measures combined with a softening of energy prices and the prospects of monetary easing in H2 has helped mitigate the expected economic slowdown this year. However, flashing green lights conceal the underlying weaknesses of internal demand as well as differentiated performances across sectors. In the absence of higher revenues, the primary result targets defined by the new fiscal framework is expected to be difficult to achieve.
Chile seems to have made more progress with the energy transition than most Latin American countries. The combination of a favourable geography, significant resources, the aspirations of public opinion and political will has favoured implementation of a number of measures for almost 25 years. Since he came to power in 2022, Gabriel Boric has undertaken to exceed the goals set up to that point, on a country level, by achieving carbon neutrality before 2050, and on an international level, by developing lithium and green hydrogen production and export capacities.
For about a decade now, the exploitation of new natural gas reserves in the Eastern Mediterranean has had significant economic consequences for producing countries, and has been upgrading the region’s position on the international gas market. Egypt still dominates the sector, with significant reserves and export infrastructure, but Israeli production is increasingly impacting the region’s exports. 2022 was a very favourable year for the sector due to rising prices and European demand. Despite the current decline in prices on the European market, this trend should continue in the coming years
Egypt is heavily exposed to the consequences of global warming due to its Mediterranean geographical location, high population growth and the importance of the agricultural sector. Already deemed critical, water stress is likely to increase in the medium and long term. The deteriorating trend of various vulnerability and resilience indicators, currently at medium levels, is increasing climate risk in the long term. The financial resources of the Egyptian government are extremely constrained, given the deteriorating macroeconomic situation and the unfavourable outlook. Transformation of the energy mix may be partially funded by private capital. However, funding for climate change reduction and adaptation policies, by definition less profitable in the short term, remains problematic.
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.
