After years of financing through international markets and China, Kenya is facing a considerable increase in external debt servicing, which has led to strong pressure on external liquidity and on the shilling. Sustained economic growth in 2021-2022 was not enough to stabilise debt ratios. Renewed in late May 2023, support from multilateral creditors has helped to partially reconstitute official foreign exchange reserves and somewhat reassured investors. But the risk of social instability has increased significantly due to committed fiscal consolidation efforts and persistent high inflation.
The Ivorian economy seems to have weathered well the various external shocks since 2020. Growth has remained robust and inflation relatively under control. However, the measures put in place by the authorities to protect the population and the continuation of major public infrastructure projects have significantly widened the budget deficit, while financing conditions have deteriorated. In order to reduce pressure on public finances and external accounts, the authorities have called on the IMF. They have embarked on a fiscal consolidation programme that could prove difficult to complete.
Apart from being located in South Asia, Sri Lanka, Pakistan and Bangladesh have the common weakness of being very vulnerable to exogenous shocks, particularly those related to the commodity cycle and climate change. The Covid-19 epidemic and the very sharp rise in commodity prices in 2021 and 2022 have therefore exacerbated the macroeconomic imbalances of these countries, whose public finances and external accounts were already fragile. Consequently, Sri Lanka defaulted on its external debt in 2022. This is not yet the case in Pakistan, although the risk is very high. As for Bangladesh, it has been much more resilient to shocks than its two neighbours and should escape a default.
According to the United Nations, India’s population surpassed that of China in April. This strong population growth is seen as a considerable asset for the Indian economy. However, the very high level of youth unemployment (despite robust economic growth) is a source of concern, and some fear that India’s demographic advantage may become a social risk.
On May 14th, legislative elections were held in Thailand to renew the 500 members of the House of Representatives. The "democratic" parties have presumably won more than 300 seats. The two main opposition parties, Pheu Thai and Move Forward, have won more than 290 seats. The opposition parties are discussing to recommend one nominee for the position of Prime Minister.
Earlier this week, Hungary published its GDP data for the first quarter. It fell by 0.2 % compared with the previous quarter after -0.6% in Q4 and -0.8% in Q3. This is not a major surprise given that high frequency indicators such as retail sales and industrial production were already pointing to a weakening in economic activity. Elsewhere, in the region, GDP growth was also soft though we observe a better performance in Czech Republic Romania and Poland. The Hungarian economy is experiencing numerous challenges while some positive developments provide some relief.
Emerging markets exports contracted sharply in late 2022-early 2023, particularly in Asia due to the turnaround in the global electronic cycle. But US/China structural decoupling is probably already at work.
The candidate of the outgoing majority, Bola Tinubu, won a close victory in the presidential elections of February 25. Coming challenges are significant: revive the first African economic power and consolidate macroeconomic stability, which has deteriorated dangerously despite high global oil prices.
In 2022 as a whole, average economic growth in Emerging Markets (EMs) slowed to an estimated 3.8% down from 6.6% in 2021. The slowdown followed the post-Covid shock rebound of 2021 and was much aggravated by the rise of powerful headwinds throughout the year, including: the repercussions of Russia’s war in Ukraine on activity in Europe and global inflation, monetary tightening to fight against price pressures, the weakening in Chinese economic growth (notably resulting from Covid-related disruptions and the crisis in the property sector), and the downturn in world trade.
Tunisia is raising concern. The CDS premium on 5-year sovereign bonds has risen from less than 730 basis points (bps) at the end of November to 1072 bps currently. At this level, the country is joining the category of emerging issuers considered to be close to default by investors. There are many reasons for this.
In Q4 2022, China’s economic growth slowed to 2.9% year-on-year (y/y) from 3.9% in Q3. In quarter-on-quarter terms, activity stagnated. Our Pulse below highlights a broad-based weakening in economic activity during the last quarter of 2022.
The sudden and ill-prepared abandonment of the zero-Covid policy at the start of December 2022 has plunged China into further turbulence. The large epidemic wave has hindered production in the manufacturing sector and again delayed the recovery in private consumption and activity in the services sector. However, assuming that the pandemic starts to ease off in February 2023, domestic demand should finally rebound, helped by additional monetary and fiscal support measures. On the other hand, exports are likely to remain affected by the weakness in global demand. While the current account surplus should narrow in 2023, how capital flows will develop is more uncertain.
The Indian economy coped well with the external environment in 2022, but slowed down mainly because of inflationary pressures. Over the fiscal year which will end in March 2023, the budget deficit could exceed the initial target, but the overrun should be marginal and the debt-to-GDP ratio should continue to fall. The government’s refinancing risks remain contained. On the other hand, the tensions on external accounts are likely to remain relatively strong, mainly as a result of the fall in exports in an unfavourable international context. Nonetheless, the central bank should be able to contain the depreciation of the rupee. While foreign exchange reserves have fallen significantly, they are still sufficient to cover the country’s external financing needs.
Malaysia’s economy held up well in 2022. Economic growth may have exceeded 8% and public finances strengthened thanks to the sharp rise in oil revenues. Furthermore, although external accounts weakened due to capital outflows and increased imports, the current account balance remained in surplus and the ringgit depreciated moderately against the dollar over the year as a whole. The outlook for 2023 is less favourable. Economic growth is expected to decelerate given the monetary tightening and the global economic slowdown. Public finance risks are still contained even though debt remains above pre-crisis levels. The new government should present its 2023 budget in parliament at the end of February. Its budgetary strategy should be in line with that of the previous government
The government of the Philippines maintained health restrictions linked to the pandemic for longer than the average period in emerging countries, with some regions still under lockdown until April 2022. The rebound in activity is not yet finished, and the strength of consumer spending, still supported by remittances, should help to offset the effects of higher inflation and the slowdown in global growth. Economic growth is expected to slow in 2023, but should remain solid. However, the after-effects from the crisis and health measures are weighing on the medium-term outlook.
Vietnam benefited from a solid recovery in its economic growth in 2022, supported by the dynamism of both the export sector and domestic demand. However, the country has also become increasingly vulnerable to the deterioration of the international environment. Exports fell in Q4 2022 and these difficulties are expected to persist in the short term. Inflation accelerated in 2022, the dong depreciated under the effect of US monetary tightening and capital outflows, and the Central Bank began to increase its policy rates. In addition, there was a confidence shock caused by reports of fraud in the local bond market. Against this backdrop, liquidity tensions emerged in the financial sector
Türkiye has enjoyed a period of financial calm since mid-2022 with exchange rate stability relative to the first half of the year, lower risk premiums and bond yields. Growth stagnated in Q3 2022, but monthly inflation slowed and the economic indicators available for Q4 2022 continued to be positive. For 2023, a slowdown is inevitable given the weaker levels of activity expected from the country’s main trading partners. But domestic demand could mitigate the external shock and the fall in oil prices should help to reduce the current account deficit. However, it is still too early to draw any conclusions about the success of economic policy combining fiscal support, monetary easing, and measures to channel the growth of credit and to encourage liraization.
Economic activity weakened in the third quarter. The outlook remains gloomy in the short term. Last September, the central bank ended its monetary tightening cycle in the face of downside risks to growth. This policy is currently not very consistent with the trajectory of inflation. Meanwhile, fiscal policy was tightened in the second half of the year due to the marked deterioration in budget deficit. The EU’s freezing of funds in 2022, depriving the Hungarian authorities of a source of income, has probably weighed on their decision. While this recalibration limits support for growth, it strengthens the credibility of Hungary’s fiscal policy.
GDP growth was resilient in the first three quarters of 2022 but is expected to slow down significantly in 2023. Inflation will be a key feature to monitor as price stability is one of the economic convergence criteria for Bulgaria’s future entry into the Eurozone in 2024. Another point of concern is that the political scene continues to be subject to uncertainty given the many changes in the government over the past 20 months. Investment has suffered as a result of this situation. However, the commitment of the authorities towards reforms does not appear to have been affected.
Israeli economic performance was particularly strong in 2022 and remained above OECD average. Growth was very buoyant thanks to the dynamism of consumption and investment, while the fiscal year should end with a surplus. Although relatively moderate, inflation accelerated during 2022 and forced the Central Bank to tighten significantly its monetary policy. Against this backdrop, which is not favourable to consumption and investment, activity should slow this year. The continued depreciation of the shekel was an additional inflationary factor. The fall in the exchange rate against the USD reflects the general strengthening of the dollar, but also Israeli investors' management of their assets in dollars. External accounts remain solid, thanks to strong competitiveness in some key sectors
Luiz Inacio Lula da Silva started his third term as President of Brazil amidst a tense socio-political climate and more benign economic environment. Despite the many obstacles lying ahead of him, Lula bolsters ambitious social and environmental objectives. Their realisation will rely, amongst other, on an increase in public spending and a more interventionist credit policy. In the absence of a credible redefinition of the fiscal framework, market participants and the Central Bank fear that the use of these policies will come at the expense of greater macroeconomic imbalances.
Chile is unlikely to escape a recession in 2023. The slowdown in global demand will weigh on exports, while domestic demand continues to be eroded by high inflation and interest rates due to restrictive monetary policy. The investment outlook remains closely linked to the political climate in the country, and in particular to the implementation of the two principal reforms announced by the government: the new constitutional process (which is expected to continue throughout 2023), and the implementation of pensions reform.
The Moroccan economy will continue to experience significant external and budgetary imbalances despite the drop in global commodity prices. However, the country's macroeconomic stability is not under threat. Forex reserves are comfortable and the structure of public debt is favourable. Moreover, the economy should benefit from a rebound in agricultural production after a historic fall in 2022. However, the authorities still have a complex task to accomplish in an international climate that remains very unstable. Indeed, they must maintain a prudent economic policy, but they also might need to shore up economic activity once again. A pronounced growth slowdown in GDP excluding agriculture is expected.
Chinese economic activity recovered in Q3 2022 (+3.9% quarter-on-quarter and +3.9% year-on-year) following the contraction seen during the lockdown period in Q2 (-2.7% q/q and +0.4% y/y.). The recovery was mainly driven by the industrial sector and helped by the support measures taken by the authorities. In particular, higher public investment stimulated construction activity in infrastructure and tax incentives encouraged car sales. On the other hand, the easing of domestic credit conditions and the support measures for property developers had a very limited impact, and the contraction in the property sector continued. The weakness in private consumption and in activity in the services sector is a cause for concern
Gabriel Boric, the candidate of the very broad left-wing coalition, won the second round of the presidential election last December. He took office in mid-March, and is already facing numerous challenges. His general policy speech at the beginning of June, and then the tax reforms he brought forward at the end of June, have confirmed his intention to implement economic and social policies which differ from those of previous governments. His ambitious objective for his term of office is to begin a rapid "green transition", but also to find the "right balance" between the need for reforms in favour of greater social justice and the need to remain "fiscally responsible"
