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
The recovery in emerging countries remains fragile. Several economies in Asia and Latin America went through an air-pocket in Q2 2021. The emergence of Covid-19 variants has triggered new waves of the pandemic resulting in production stoppages, which have been temporary so far but which are eroding business confidence. Companies are also struggling with supply-side constraints, including supply-chain bottlenecks and energy shortages, which are contributing to fueling inflation and indirectly straining household confidence. Lastly, the Chinese economy is a source of concern with its sluggish household consumption and with the construction and real estate sectors in great distress
The Chinese economy is in the midst of a period of major adjustments. They arose after Beijing tightened regulations in a variety of sectors, from housing to certain new technologies and activities linked to the societal challenges facing the country. The adjustments can also be attributed to the debt excess problem of some state-owned and private enterprises, and reflect the authorities’ determination to tighten their access to credit and to clean up practices in the financial sector. As a result, an increasing number of corporates is defaulting, and the troubles of the property developer Evergrande are symptomatic of the changes under way
India’s economic and financial situation has consolidated slightly since the summer. After contracting sharply in Q2 following the spread of the Covid-19 pandemic, economic activity rebounded strongly in Q3. Even so, at end-September, only 20% of the population was fully vaccinated, which means the country is not sheltered from a third wave of the pandemic. Growth prospects are still looking good for the rest of the year. Household consumption will benefit from falling inflation and higher government spending. Business leaders are still confident, even though they are taking a cautious approach to investment plans. Borrowing rates are low, and the banking sector, though still fragile, is doing better than it was three years ago
Although the political situation has stabilised somewhat following the appointment of a new prime minister, the economic environment has deteriorated. The spread of the Covid-19 pandemic in April forced the government to reintroduce lockdown measures that led to an economic contraction in Q2 2021. The situation is unlikely to improve before Q4, once health restrictions are lifted thanks to an accelerated vaccination campaign. In an attempt to boost growth, the government launched a series of economic support plans, even though fiscal revenue fell short of the full-year target in the first seven months of the year. Consequently, according to the Ministry of Finances, the fiscal deficit is expected to swell to between 6
The third wave of the Covid-19 pandemic is unlikely to jeopardise the dynamic momentum of South Korea’s economic recovery. Solid fundamentals, diversified exports and massive fiscal and monetary support should help limit the impact of the crisis on the country’s medium and long term growth prospects. In contrast, an ageing population continues to erode the country’s growth potential and public finances, even though the government has implemented a series of structural reforms. Household debt has picked up rapidly over the past 18 months. The associated credit risks are limited, however, thanks to the implementation of macroprudential measures and the comfortable level of household financial assets.
The recovery has failed to consolidate in Q2 2021, with production stalling over the quarter despite the dynamism of external demand and the normalization of activity in the service sector. The slowdown of the epidemic since the summer and the acceleration of the vaccination campaign, however, point to a rebound in the second half of the year. But upside risk to growth will be challenged by the persistence of supply constraints in industry, the risk of electricity rationing, the slowdown in China and aggressive monetary tightening to counter soaring inflation. Against this backdrop, the real is still struggling to appreciate despite the rise in rates and the good performance of external accounts. The currency’s weakness make the process of controlling inflation more difficult
Mexico’s medium-term economic prospects continue to deteriorate. The robust recovery already seems to be running out of steam, while the economy’s structural weaknesses (low investment and competitiveness) have been exacerbated by the Covid-19 crisis and by the government’s lack of fiscal support. Yet economic policy is unlikely to change much over the next two years. Following mid-term elections, the governing coalition managed to maintain a simple majority in the Chamber of Deputies. And the government’s 2022 budget proposal confirms its determination to maintain austerity through the end of its mandate in 2024
Hungary is benefiting fully from a high international trade exposure, which is now driving its growth. Supply-side pressures are increasing, with high capacity utilisation rates and rising scarcity of labour. These local issues come on top of global industrial shortages. This has resulted in a significant acceleration in inflation, to which the Central Bank has responded with its first policy rate increase in 10 years. Nevertheless, monetary policy remains relatively accommodative, as the Central Bank has acquired the equivalent of nearly 5 points of GDP of government debt in 2021. This support is important in a context where access to European funding (including the resilience and recovery plan) remains subject to sticking points (notably the rule of law clause)
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.
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.
