Excluding China, activity in emerging countries was stagnant in Q2 2022 and business and household confidence surveys indicate that the economic slowdown will continue. Inflation continues to rise and is being accompanied by new decisions of monetary tightening, including by central banks in Asia. The deterioration in external demand and tighter domestic financial conditions have combined with the monetary tightening in the United States and USD appreciation to trigger the slowdown in activity. This is a double whammy for emerging countries. But developing countries, which are also facing the food crisis and a situation of over-indebtedness, are in a more worrisome situation.
Although it remains dynamic, economic growth slowed in the first quarter of the current fiscal year. Monetary policy tightening, a very mixed monsoon season and disruption to global value chains are expected to weigh on activity during the next two quarters. The central bank has revised its economic growth forecasts downwards for the current fiscal year as a whole. At the same time, pressures on external accounts and the rupee are set to remain strong. Despite this rather unfavourable environment, enterprises and banks are holding up well.
During the first six months of 2022, the economy proved to be quite resilient to the consequences of the conflict in Ukraine and China’s zero-Covid policy. In particular, it benefited from the higher prices of exported commodities (mainly coal and palm oil). Its public finances and external accounts consolidated despite rising subsidies and net capital outflows. However, the situation could deteriorate in the fourth quarter and the medium-term outlook is less favourable. Although the fiscal deficit and government debt remain modest, refinancing risks will increase in 2023 in conjunction with the end of purchases by the central bank of government’s bonds, which have been in place since 2020. Moreover, pressures on the rupiah will intensify with the fall in commodity prices.
The recovery is continuing in Thailand. The rebound in private consumption and the gradual return of tourists should help, at least in the short term, to compensate for the slowdown in exports. However, the risks to growth remain on the downside, due to rising inflation, monetary tightening, the weakness in global demand and the absence of Chinese tourists. In the run-up to the elections in May 2023 political tensions could increase again. However, medium-term strategic investments, including the Eastern Economic Corridor programme, should not be jeopardised.
The economic slowdown is likely to continue in the coming quarters. Poland is facing several challenges. Firstly, the country is highly dependent on coal imports, and the price of this commodity has soared since the end of 2021. The Central Bank has moved towards a less restrictive monetary policy despite high inflationary pressures. Finally, the moratorium on mortgage repayments in 2022 and 2023 will have a negative impact on banks’ balance sheets in the short term. However, the Polish economy does have numerous strengths and should show resilience.
All growth drivers weakened in the second quarter of 2022. With a high exposure to Russia for its oil and gas supplies, Slovakia could be amongst the most affected Central European countries by the consequences of the war in Ukraine. The steep rise in energy costs, as well as supply disruptions, will have an adverse impact on industrial activity, which has not yet returned to its pre-Covid level. Moreover, inflation has increased rapidly but is still more moderate compared to other countries in the region. Finally, public and external accounts will deteriorate in the short term, but this situation remains manageable.
Accelerating growth, slowing inflation, falling unemployment and the interruption of monetary tightening differentiate Brazil from most of the world’s major economies. These developments, which are largely attributable to fiscal stimuli (higher social transfers, reduction in taxes and fuel prices), are complicating the task of monetary authorities by partially diluting the restrictive effects of their policy. In the second half of the year, the maintenance of fiscal stimulus should again help limit the slowdown in activity. Brazil’s solid economic performance has allowed financial assets to hold up well despite the general elections and a deteriorating global environment.
The economic dynamism seen in the first half of 2022 is waning. The rebound in private consumption is being held back by rising inflationary pressures, while exports are weakening due to slowing growth in the United States and global demand. Structural weaknesses in the economy (low investment, lack of infrastructure) are also limiting the growth recovery. Moreover, a deterioration in public finances is increasingly likely in the medium term. The very limited rise in fiscal income will not be enough to compensate for the necessary increase in government spending that is expected in the coming years. In addition, sovereign wealth funds have been used over the past two years and the government no longer has any reserves.
Egyptian external accounts have been under pressure since the beginning of the year and the outlook is uncertain. Although the current account was able to withstand external shocks thanks to the rise in gas revenues, only the massive support of the Gulf countries enabled Egypt to cope with portfolio investment outflows and to avoid a foreign exchange crisis. The dynamic remains negative in the short term, given the drop in net foreign currency assets in the banking system and persistent exchange rate pressures, despite depreciation of more than 20% since the beginning of the year
The Qatari economy, which is poorly diversified and based on long-term gas export contracts, has not experienced the same volatility as elsewhere in the Gulf during the last five years. In the short term, high oil prices and the forthcoming World Cup will support growth and enable a return to substantial external and budgetary surpluses. Likewise, the reduction in banks’ external liabilities should continue. Inflation will remain relatively moderate thanks to government intervention and the impact of the stronger dollar on import prices. In the medium term, the macroeconomic outlook is very positive as a result of the significant increase in gas revenues. However, it is less certain in the longer term, in the context of the energy transition
Two years after the shock of the pandemic, Tunisia is now being hit hard by the consequences of the conflict in Ukraine. The rise in commodity prices is leading to a dangerous deterioration in external accounts and public finances. Inflation is at historically high levels, weighing further on economic activity, which has already been struggling to recover since the 2020 crisis. In the absence of any financial room for manoeuvre, Tunisia is hoping to obtain support from the IMF to ease macroeconomic tensions. There are pressing needs.
In 2020-2021, thanks to its diversified economy, Kenya was relatively more resilient to the shock of the pandemic than other sub-Saharan African economies. But in 2022-2023, the recovery will be constrained by the indirect effects of the war in Ukraine and subject to significant downside risks. The country faces a deterioration in its terms of trade. Accelerating inflation will weigh on domestic demand, with the risk of fuelling social instability. This could complicate fiscal consolidation efforts, which are necessary to maintain the support of multilateral creditors, particularly the IMF. The new president has ruled out the option of preventive debt restructuring. But the government’s external liquidity and solvency remain fragile.
Significant uncertainty remains following the general elections in Kenya. Against a sensitive socio-economic backdrop, the first challenge for William Ruto, the new president, is the continuation of fiscal consolidation and public debt reduction measures. Although he rules out a preventive debt restructuring, the high level of sovereign risk requires a slowdown in the deterioration of public finances. The budget deficit averaged -7.7% of GDP over the period 2015/21 and public debt reached almost 70% of GDP in 2021 (compared with 49% in 2015). Moreover, the interest charge on public debt now represents more than 20% of budgetary revenues and its total service absorbs 50% of revenues (compared with 38% in 2015). Kenya’s financing capacity is currently heavily constrained
The recovery in activity since the end of the lockdowns imposed in Shanghai in the spring has been very gradual. It picked up in August, notably supported by public investment and tax measures, but it is likely to lose steam again in September. As exports begin to suffer from weaker global demand, the continuation of the zero-Covid strategy and the serious crisis in the property sector continue to weigh heavily on confidence, private consumption and investment. An easing of the health policy and more wide-ranging actions to support the property market seem to be the only measures capable of lifting the Chinese economy out of its current gloom.
In Chile, a large majority of voters (nearly 62%, with an exceptional voter turnout) rejected the draft new constitution in the referendum held on 4 September. The draft, which contains almost 400 articles, did not propose a profound reform of the Chilean economic model; the Central Bank had to remain independent, while property and labour rights were not called into question. But it guaranteed better access for the population to a set of social rights (housing, education and access to healthcare), whereas the State currently only pays for those needs not covered by the private sector. This meant a substantial and long-term increase in public spending
The IMF and the Government of Pakistan have reached an agreement to complete the combined 7th and 8th reviews of Pakistan’s Extended Fund Facility which has been interrupted since March. If the IMF Executive Board approves the deal in the coming weeks, Pakistan will receive the equivalent of almost USD 1.2 billion. An extension of the support programme from September 2022 to June 2023 could allow the country to receive an additional SDR 720 million (i.e. approximately USD 947 million). Although this agreement will partially and temporarily ease pressure on the country’s external accounts, the risk of a balance-of-payments crisis remains high. The high pressures on the Pakistani rupee have not eased
Emerging countries have recently faced a series of unexpected and severe shocks that will significantly dampen their economic performance in 2022. Global inflation has increased due to rising commodity prices and world supply disruptions resulting from the conflict in Ukraine. The lockdowns in China’s industrial regions during the spring have aggravated supply problems and further worsened the global economic outlook. Moreover, monetary policies have tightened in most countries, while external financing conditions have also deteriorated due to the weakening in global investor sentiment and US monetary policy tightening. Emerging markets have already faced a bout of large capital outflows since the beginning of the year
Emerging countries are now facing another major shock whereas the post-pandemic recovery has remained fragile. The war in Ukraine will impact emerging countries through its negative effects on foreign trade, capital flows and, above all, inflation. The indirect effect of soaring global commodity prices on inflation households’ purchasing power may be particularly severe, and affect mostly low-income countries in Africa, Central Europe and the Balkan region. In spite of these gloomier prospects, we do not expect a broad-based worsening in sovereign and external solvency in emerging countries in the short term. However, a few governments, especially in Africa and the Middle East, may rapidly experience payment difficulties.
After a strong start in 2022, China’s economic growth slowed in March. Headwinds are expected to persist in the very short term. Firstly, the rapid surge in the number of Covid-19 cases has led many regions to impose severe mobility restrictions. Secondly, the property market correction continues. Thirdly, producers and exporters will be affected by the impact of the war in Ukraine on commodity prices and world trade. Therefore, China’s official economic growth target, which has been set at 5.5% for 2022, seems highly ambitious. The Chinese authorities are accelerating the pace of fiscal and monetary easing.
After a record contraction in the economy in 2020, South Africa’s GDP grew by 4.9% in 2021. This was the highest growth rate since 2007. The strong recovery in the first half of 2021 was held back by rioting over the summer and the return of health protection measures in the face of the Omicron variant in the fourth quarter of 2021. The pace of recovery is likely to continue to slow, with GDP forecast to grow by 1.3% in 2022, according to our estimates. Economic activity will remain structurally constrained by weak potential growth. Inflation keeps accelerating. By the end of 2021, inflation had hit 6% year-on-year (3
Colombia’s public finances have come under the spotlight in recent years amidst recurrent adverse external shocks, rising social spending pressures, ongoing challenges in raising revenues, persistent (optimistic) biases in fiscal planning and, as of late, the back loading of fiscal consolidation plans following the Covid-19 shock. The rapid progression of the public debt ratio and the capacity for future policy adjustment have, in particular, become points of concern and have, since the summer 2021, materialized in Colombia losing its investment grade status
At first glance, Indonesia consolidated its external accounts in 2021. Foreign exchange reserves amounted to USD 131 bn, the equivalent of 8.3 months of imports of goods and services, while the external debt came to only 35% of GDP, which is less than the pre-Covid level. Moreover, the current account showed a slight surplus (0.3% of GDP) for the first time since 2011. The strong performance of the current account reflects the steep increase in the trade surplus, which swelled to 4.1% of GDP, from an average of 1.3% over the past five years. Although imports increased by nearly 6 points of GDP compared to 2020, Indonesia reported a sharp rise in exports, driven up by higher commodity prices for coal, iron ore and palm oil
Despite a significant improvement in macroeconomic indicators over the past five years, foreign currency liquidity remains a major source of vulnerability for the Egyptian economy. The net foreign asset position of commercial banks has steadily deteriorated over the past year and was in deficit by USD10 billion in December 2021, by far its lowest level for a decade. Meanwhile, gross currency reserves at the central bank grew only very slightly over the year. This deterioration of the external position of the banking system as a whole reflects that of the external accounts. The current account deficit is increasing following a sharp rise in imports
For emerging economies, the balance prospects/risks has been deteriorating since end-2021. For 2022, a bigger than expected growth slowdown is very likely, sometimes with social instability as already seen in Kazakhstan. Over the last three months, Turkey has experienced a mini financial crisis again. Monetary and exchange rate policy is betting on exports and investment to support growth and rebuild the major economic balances over the medium term, albeit at the price of short-term financial instability. This is a daring gamble that could force the authorities to introduce genuine foreign exchange controls instead of the incentive measures they have implemented so far.
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.
