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24 {0} Emerging(s) found
    10 July 2022
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    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. In this context, the emerging borrowers most exposed to potential payment difficulties include speculative-grade sovereign entities in countries currently posting both weak public finances and widening current account imbalances. They are not so many facing this situation. 
    Economic activity contracted in April and May 2022 as a result of severe mobility restrictions imposed in industrial regions such as Shanghai. Since late May, these restrictions have been gradually lifted, and activity has begun to bounce back. However, downside risks to economic growth remain high. The authorities therefore continue to ease their policy mix cautiously. On the fiscal front, support measures remain focused on infrastructure projects and aid to enterprises. On the monetary front, interest rates have been cut since the beginning of the year, and targeted lending programmes have been extended. However, the effectiveness of the central bank’s action is reduced by the weak demand for credit. Moreover, the international environment and the risks of capital outflows could limit its room for manoeuvre. 
    At the end of the 2021/2022 fiscal year, India’s real GDP exceeded its pre-crisis level, and economic activity indicators were positive in April and May 2022. Activity has been supported by a recovery in domestic demand and dynamic exports. Faced with rising inflation and downward pressure on the rupee (due to capital outflows and a widening trade deficit), the monetary authorities raised their policy rates in May and June – further increases are expected. Conversely, fiscal policy is more expansionary than anticipated. Multilateral institutions and India’s Central Bank have revised their growth forecasts downwards (between 6.9% and 7.5% for the 2022/2023 fiscal year vs. 8.7% in the previous year). However, the public debt-to-GDP ratio should continue to decline thanks to the sharp rise in nominal GDP. The country is taking advantage of the embargo imposed by the US and EU on Russian oil imports to try to reduce its energy bill. 
    Korea’s solid macroeconomic fundamentals have made it one of the countries that has best withstood the COVID-19 pandemic. Economic growth prospects remain relatively positive. The new government, in office since May, spelled out its intention to continue the reforms begun during the previous administration, and, in particular, aims to increase research and development expenditure. Household debt rose rapidly in 2021 and is high, but the macro-prudential measures put in place by the authorities seem to be bearing fruit: the rise in debt has slowed and financial stability risks are contained.
    The Taiwanese economy has been very resilient to the multiple external shocks of the past two years. The export sector has benefited greatly from the rise in global demand for high-tech goods. In addition, domestic demand has benefited from fiscal support and an accommodative monetary policy. In 2022, economic growth is constrained by many factors (the wave of Omicron in the spring, supply disruptions linked to the chaotic situation in China, rising inflation and monetary policy tightening, and a less favourable international environment). The economic growth slowdown may lead only to a limited deterioration in the quality of bank loans. Nevertheless, the real estate sector, after a sharp rise in prices since 2019, could see a correction.
    The economic situation in Turkey offers striking contrasts between (i) sustained growth until Q1 2022 and stubbornly huge inflation, (ii) much greater confidence among companies than among households, (iii) a primary budget surplus and a deteriorating current account deficit due to the surge in the price of energy, and (iv) domestic borrowing conditions for the State at an unprecedented negative real rate despite massive outflows from portfolio investments. Economic policy still combines a deliberately accommodative monetary policy and a competitive exchange rate to stimulate investment, exports and import substitution. The government will now use fiscal leverage to mitigate the economic cost of inflation and is multiplying ad hoc measures to stabilise, unsuccessfully so far, foreign exchange reserves.
    Economic growth remained very dynamic until the first quarter of this year. Strong wages growth and significant government measures to back up purchasing power over this period have supported consumer spending. Inflation rose sharply in recent months but remained lower compared to other Central European countries, due to a price cap on certain food and energy related goods. Economic growth is expected to slow down significantly in 2023, owing to the deterioration in the international environment, monetary and fiscal tightening from H2 2022. The temporary suspension of European funds presents a serious challenge given that budget and current account deficits have increased and external liquidity has eroded.  
    The last two quarters have been marked by slower growth in economic activity. This is mainly attributed to weaker levels of consumer spending. Furthermore, the country is still very exposed to supply chain disruptions in the automotive sector to a great extent, which adversely impacts both industrial activity and exports. The expected slowdown in the global economy in 2022 will also affect growth given the country’s high exposure to trade. Inflation has probably not yet peaked, which means that monetary tightening is likely to continue in the short term.
    Economic activity held up well in the first half of the year, but a slowdown in GDP growth is coming and expected to intensify over the second semester. The recovery of the labour market continues. However, the retreat of unemployment has come at the cost of a temporary drop in productivity. Inflation, which has registered double digits growth over the past nine months, is spreading more widely throughout the economy. Looking forward, monetary policy could be increasingly constrained by the announcement of new fiscal support. The latter coupled with the continued weakening of the main fiscal rule could weigh on risk premia and inflation expectations. The enthusiasm that prevailed earlier in the year for Brazilian assets is losing steam.
    Peruvian GDP returned to its pre-crisis level thanks to the strong upturn in activity recorded in 2021. However, the country’s capacity to rebound further is limited and short-to-medium-term growth prospects are moderate. Firstly, inflation pressures are weighing on private consumption and disruptions in the value chains are hampering the export sector. Secondly, the continuing political crisis is dampening the investment outlook. In addition, public finances have deteriorated over the past two years. It is not so much the level of debt, which is still moderate, but its composition which is worrying and is making the country more vulnerable to changes in investor sentiment.
    The economic recovery should be sustained in 2022 due to the sharp increase in hydrocarbon production following the OPEC+ agreements and due to stronger growth in household consumption. The current oil trend is favourable to public finances, while the process of fiscal consolidation and revenue diversification is expected to continue. It has already led to a significant reduction in the fiscal breakeven oil price and therefore less exposure to oil market volatility. In the meantime, tensions have emerged on the interbank market and have required an injection of liquidity by the central bank. The fast growth in bank lending and less pro-cyclical management of budget surpluses have forced banks to use external resources, and therefore to reduce their net external assets, in order to finance their activity. 
    Following five consecutive years of recession, Angola’s economic outlook is brightening: the country should return to growth, expected to be +3% in 2022, benefiting from a favourable economic situation marked by the upward trajectory of the oil price and a resumption of national production of hydrocarbons.  The resulting increase in budget revenues and exports should support the kwanza. This dynamic is helping to ease the pressures on the country’s external financing needs and debt sustainability, which has improved thanks to the reprofiling agreement concluded with China in early 2021. Nevertheless, the Angolan economy remains prone to significant vulnerabilities. The authorities should pursue reform efforts by taking advantage of the current situation in order to reduce the country’s economic dependence on the oil cycle.
    The Nigerian economy is experiencing mixed fortunes. Its low level of oil production does not allow it to benefit fully from the rise in oil prices. The current account balance is expected to return to a surplus this year, though the persistence of a rigid exchange rate regime continues to weigh on the economy’s attractiveness and the availability of liquidity in dollars. The commodity price shock is exacerbating already strong inflationary pressures, and the budget deficit will remain high due to the continuation of an energy subsidies policy that has become too expensive. For the time being, this is not jeopardising the strength of the economic recovery. However, the weakening macroeconomic stability leaves the economy vulnerable to further setbacks in the future.
    21 April 2022
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    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.  
    The international economic and financial environment is not helpful for the Indian economy. Although India produces and exports wheat, it will suffer from surging commodity prices. Slowing growth is likely to hamper the government’s announced fiscal consolidation. The government will be forced to increase fertiliser subsidies sharply if it wants to contain the increase in domestic food prices, which make up almost 46% of consumer spending. India will not be able to avoid a significant deterioration in its current account deficit driven by higher oil prices and downward pressure on the rupee, especially if recent portfolio investment outflows continue. The results of the recent regional elections should ensure a degree of political stability at least until the 2024 general election.  
    The economic growth recovery has been unbalanced since the health shock in early 2020 and has rapidly lost steam. It was then interrupted in the first quarter of 2022, due to a very sharp rise in the number of Covid-19 infections and deaths linked to the Omicron variant. The epidemic wave is starting to recede, but Hong Kong will now have to face the effects of a slowing global trade, rising commodity prices and the tightening of US monetary policy. Despite these unfavourable conditions, sovereign solvency remains very robust and the government keeps a strong capacity to continue an expansionary fiscal policy.  
    After a modest growth in 2021, Malaysia’s economy is set to recover more strongly in 2022. It will be supported by firm domestic demand, an expansionary fiscal policy and the reopening of Malaysia’s borders to tourists. The country is an exporter of commodities – mainly oil and palm oil – and should benefit from higher international prices, without being directly affected by the conflict in Ukraine. Thanks to the additional revenue from higher oil prices, the government should be able to take on most of the burden of higher inflation to prevent problems for households whose finances have already been weakened by the 2020 crisis. Another key uncertainty regarding economic growth is how long and how severe Chinese lockdowns will be, since they could drag down Malaysian exports.  
    Brazil ended 2021 on a stronger footing than expected, but the economic picture remains fragile. Activity tends to progress in spurts, curbed by internal brakes (Omicron wave, climatic vagaries, elections) and a more degraded external environment (war in Ukraine, trading partners’ economic slowdown, etc.). Meanwhile, inflationary pressures are building up and raise the specter of continued monetary tightening.  Since the start of the year, the improvement in Brazil’s terms of trade and wide interest rate differentials with developed economies have fueled the rebound of the equity market and spurred a strong appreciation of the real. Such developments highlight a form of dissonance between the real economy and assessments of financial markets.  
    The direct consequences of the war in Ukraine on the Mexican economy should remain limited, because trade links are almost non-existent. However, indirect consequences could have a significant impact on an economy that has already been weakened by the Covid-19 crisis. Higher commodity prices will increase inflation pressure and worsen the current account deficit in Mexico, which has been a net importer of energy since 2015. In addition, supply chain disruption arising from the conflict and new coronavirus variants could drag down exports. The investment outlook is continuing to deteriorate as discussions about reforming the energy sector continue.  
    Poland is well equipped to deal with the economic consequences of the conflict in Ukraine. Its economy had fully absorbed the shock from Covid-19 by the end of 2021. Output was 5% higher than in late 2019, the recovery was well balanced and the unemployment rate had returned to a frictional level. In addition, Poland’s budget deficit fell sharply in 2021 and its public debt/GDP ratio remained well below the Maastricht limit due to a substantial gap between growth and interest rates. The current-account balance is in deficit again, but still comfortably covered by non-debt generating capital flows. The only cloud on the horizon is the acceleration in inflation which has prompted the central bank to tighten monetary policy more aggressively since autumn 2021. Growth will inevitably slow in 2022, but from a high level, and the risk is on the upside given the economy’s resilience.
    Romania’s economy slowed sharply in H2 2021, with rising inflation causing wages to decline in real terms for the first time since 2010. Growth also remained imbalanced and both public- and private-sector debt increased between 2019 and 2021. Monetary tightening started too late in 2021 and has remained very limited since the start of 2022. The external shock caused by the conflict in Ukraine will only make the slowdown worse. Any improvement in the budget deficit will be delayed by the cost of dealing with refugees. It will be the task of monetary policy to ensure financial stability in the current exceptional circumstances.
    The impact on Serbia’s economy caused by the war in Ukraine is likely to remain moderate. However, the war will adversely affect all macroeconomic indicators. Growth forecasts have been downgraded because of sharply higher inflation, trade exposure to Russia and a weaker European economy. Serbia’s central bank has carried out only moderate monetary tightening so far, expecting that the jump in inflation will be short-lived. External accounts are likely to deteriorate because of the wider current account deficit and a possible slowdown in foreign direct investment flows, but the central bank should still be able to defend the dinar stability. This is crucial for Serbia’s macroeconomic stability given that commercial bank balance sheets and government debt are highly exposed to the euro. Current circumstances mean that it will take longer to shore up the publicsector accounts, but the rise in public sector debt should remain moderate.
    At year-end 2021, the South African economy had not returned to pre-Covid levels of activity. The upturn in the price of its main export products provides the country with a welcome boost in the short term. This is illustrated by the latest budget forecasts, which are more optimistic than those published in late 2021. Yet structural vulnerabilities persist and are exacerbated by the health crisis. Although South Africa has few direct trade ties with Ukraine and Russia, it faces, like other emerging economies, soaring inflation that will strain domestic demand. The swelling public-sector wage bill and financial support for state-owned companies continue to be strong headwinds for reducing the fiscal deficit. Even if the government manages to balance the primary deficit by 2023-2024, its debt ratio will continue to rise. This risks creating a crowding-out effect that hampers grThis risks creating a crowding-out effect that hampers growth while the economy was already facing stagnation risk before the two recessionary shocks.  
    Egypt’s economic prospects have  worsened with the outbreak of war in Ukraine and its consequences for commodity prices. The widespread increase in prices will result in a significant drop in consumer purchasing power and will thus stall the main engine of economic activity. The erosion of foreign currency liquidity has accelerated over the last month, with massive outflows of capital and an expected widening of the current account deficit due to the difficulty in reducing imports, a drop in tourist frequentation and the limited effect on exports of the Egyptian pound’s depreciation. This highlights the continued vulnerability of the economy to external shocks and its reliance on external support. The support already in place from the Gulf states, and the expected package from the IMF, will give the country a little time, but foreign investors will remain cautious against a background of deterioration in the public finances.  
    Morocco’s heavy dependency on oil and wheat imports mean that it will suffer consequences from the conflict in Ukraine. However, it will be able to absorb the trade shock thanks to comfortable FX reserves. Moreover, the rise in energy and food subsidies does not compromise the expansionary fiscal policy, and the central bank plans to maintain its accommodative stance despite strong but still under control inflationary pressure. Government support remains crucial at a time when the economy is facing a significant drop in agricultural output, and therefore real GDP growth. In the short term, state solvency and external liquidity are not at risk. However, there is a high level of uncertainty about how large the shock will be and how long it will last.  
    25 January 2022
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    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.
    Economic indicators for the fourth quarter of 2021 confirm that China’s economic growth has been heavily constrained by the crisis in the real estate and construction sectors, the authorities’ zero-Covid strategy and the persisting weakness of household consumption. Export activity remains buoyant. However, it could start flagging in the very short term due to weaker momentum in global demand and the Omicron wave’s repercussions on factory production and the transportation of goods. The Chinese authorities are gradually easing their monetary and fiscal policies to support economic activity. At the same time, they are expected to continue cleaning up the property market, reducing financial risk and tightening regulation.
    Economic growth is still vulnerable to another epidemic wave as less than 50% of the population was fully vaccinated at the end of December 2021. Activity has already been losing momentum since December, and it could be curbed even further by the new epidemic wave that swept the country in January at a time when labour market conditions are still deteriorated. Inflation is another risk factor looming over the recovery. Not only does it reduce household purchasing power, but it could also convince the monetary authorities to raise policy rates. Under this scenario, enterprises that were already reticent to increase investment due to the prevailing climate of uncertainty would further postpone investment projects, even though their financial situation has improved significantly and banks are well positioned to increase credit supply. In the longer term, the halting of agricultural reform and the impact of the crisis on human development are factors that will crimp the country’s growth potential.
    Vietnam weathered the 2020 health crisis without any major waves of infection, without a contraction in GDP and without a notable deterioration in its macroeconomic fundamentals. In 2021, the situation was much more complicated. In Q3, an upsurge in the number of Covid-19 cases and strict lockdown measures brought the economy to a standstill. The epidemic curve deteriorated further in Q4, but the economy picked up again thanks to the increase in vaccinations and the adjustment of the “zero Covid” strategy. In the manufacturing sector, production and exports rebounded, and growth prospects are still solid. In contrast, private consumption and activity in the services sector remain weak. The government still has some manoeuvring room to boost its fiscal support.
    Thailand’s economic growth prospects over the short and medium term are limited. Private consumption and the tourist sector, the main engines of growth, will remain weak for some time. In tourism in particular, it is highly unlikely that the activity levels of 2019 will return before 2024. Moreover, the structural weaknesses of the economy (lack of investment and infrastructure) have been worsened by the pandemic and will hold back the recovery, particularly in exports. This said, although the country’s external vulnerability has increased over the last two years, it remains moderate for the time being.
    Despite the acceleration of the vaccination campaign, the anticipated rebound of growth in H2 2021 did not materialize. Instead, the economy fell into a recession in Q3 while available indicators for Q4 continued to show signs of weakness. Meanwhile, binding aspects of the spending cap have been called into question translating into an increased defiance of the market towards the sovereign. As the general election looms (October), economic prospects are expected to be very mild.  Uncertainties regarding the evolution of the epidemic, the electoral cycle, the fiscal trajectory, the persistence of inflation and the tightening of monetary and financial conditions are all expected to act as potential brakes on the recovery.
    Looking beyond the strong recovery in 2021, the Argentine economy remains fragile. Production in primary and secondary sectors has returned to its pre-pandemic levels. However, the economy remains constrained by high though largely repressed inflation, which is hitting household consumption and services. Since December 2021, a new wave of Covid-19 infections has introduced additional uncertainty. The mid-term elections have weakened the government coalition, which is still negotiating with the IMF. Monetary policy is tightening and the normalisation of budget deficit financing will require a slowdown in expenditures, although a drastic consolidation is unlikely. However, time is running out. Despite the jump in prices for agricultural raw materials, the divergence between the market exchange rate and the official rate has widened. Moreover, the central bank’s forex reserves have only just stabilised due to capital outflows, notably from residents. Above all, very large repayments fall due in March.
    Gabriel Boric won the second-round presidential election in December. He will take up his post in mid-March and will face many challenges during his term. The new government will have to deal with a fragmented legislative assembly and high levels of popular expectation. Economic growth is likely to slow as exceptional support measures are gradually withdrawn. Although vaccination levels are high, activity could be weakened by new waves of infection and the accompanying restrictions. Lastly, consolidating public finances whilst fulfilling promises to reform education, healthcare and pensions would seem to be the biggest difficulty.
    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. As a result, Ukraine still remains dependent on financing from international financial institutions.
    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. Despite ambitious development plans, economic diversification has so far made only marginal progress, due most notably to weak levels of foreign direct investment. Over the medium-term energy will remain a major area for investment.
    12 October 2021
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    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. Still, to end on a positive note, according to IIF estimates, the rise in non-financial private debt has been moderate so far when compared with public debt.
    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. For the authorities, the challenge is to maintain control over these events and to contain their negative impact on confidence in the financial system, on credit conditions for other economic agents and on economic growth.
    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. In the first five months of the fiscal year (April-August 2021), fiscal revenues increased sharply, and the government could lower its target for the fiscal deficit this year, from 6.8% of GDP to 6.2%. The debt-to-GDP ratio should decline, at least this year, reducing the risk of a sovereign downgrade by the rating agencies.    
    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 6.5% and 7% of GDP, and it is likely to hold well above the pre-pandemic level over the next two years. The government announced that it would ask parliament to raise the debt ceiling in October. Even though the central government can easily access financing on the domestic market, it must face up to a structural decline in fiscal revenues and higher interest charges.  
    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. The threat of fiscal slippage ahead of the 2022 Presidential election is yet another downside risk to the inflation outlook.
    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. Considering the relatively optimistic assumptions retained by the government, including financial support for the state-owned oil company Pemex, it seems inevitable that the public finance situation will deteriorate before the end of President AMLO’s term.
    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). None of this undermines the two other driving factors behind Hungary’s growth: a credit cycle financing a recovery in investment in construction (relatively sustainable, given the limited indebtedness of the private sector) and the attractiveness of the industrial base to foreign investment.
    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). There may also be an impact on bank balance sheets as measures relaxing the classification of non-performing loans come to an end - this will need to be monitored. In addition to an expansionist credit policy, reforms that benefit corporates and a substantial infrastructure investment programme are also growth drivers.
    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. As to the external accounts, there is not only the question of the attractiveness of Egyptian debt at a time when the US is expected to begin tightening monetary policy, but also the vulnerability of the current account deficit, which is subjected to the rigidity of imports, higher commodity prices and an uncertain recovery in tourism.
    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. Some government-related entities active in the real estate sector are experiencing difficulties, and government support will remain selective.
    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. Moreover, some economic policy decisions suggest that the authorities are still caught up in emergency management at the risk of putting off much-needed adjustments and even aggravating imbalances (notably monetary).
    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. Yet the diplomatic crisis with international partners is currently delaying its implementation.
    12 July 2021
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    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.
    The Serbian economy was only moderately affected by the consequences of the Covid-19 pandemic in 2020. Activity barely contracted, whilst the central bank maintained an adequate level of foreign-currency liquidity against a background of significant euroisation of the economy. These good performances can be linked to the economy’s attractiveness for international investors, as well as to past fiscal consolidation measures, which meant that the government had more scope to support the economy last year. In the short term, the recovery is likely to be strong, in particular thanks to exports, and inflation should remain under control. Looking further ahead, the ability of the authorities to maintain the economy’s competitiveness will be crucial in reducing currency risk.
    The Brazilian economy has been surprisingly resilient given the challenging sanitary situation it faced in Q1. A more supportive external environment, a stronger recovery in services and a rebound in confidence, should help support the short-term outlook – especially as the epidemic slows down with improving vaccination coverage. Accelerating inflation continues to be a concern and could lead to a more vigorous tightening of monetary policy at the end of the summer. While the currency and portfolio investments stand to benefit from more aggressive rate hikes, the latter also risk slowing down the recovery and adversely affecting public finances. So far though, the sovereign has recorded better fiscal metrics than expected, which have translated into lower risk premiums.
    The economy should rebound strongly in 2021 thanks to a successful vaccination campaign, improved prospects for global growth and higher copper prices. According to the monthly economic index, in early Q2, real GDP returned to the pre-pandemic level of December 2019. Looking beyond 2021, economic growth prospects could be marred by persistent political tensions plaguing the country. Debates over the presidential election on the one hand and the process of drawing up a new constitution on the other will probably disrupt the implementation of economic policy as well as private sector investment decisions by both resident and non-resident investors.
    The Saudi economy took a double hit in 2020: the consequences of the Covid-19 pandemic amplified the recessionary impact of falling oil prices and production. In addition to the economic consequences, these two exogenous shocks have had negative consequences for the reform process, and particularly for the dynamism of the private sector. The recovery expected in 2021 will be timid, due to a further slowdown in oil activity. Budget deficits are likely to persist over the medium term, resulting in an increase in government debt. Macroeconomic imbalances remain moderate, but the continued dependence on oil in the context of economic transition remains a significant source of vulnerability.
    After declining 1.9% in 2020, Nigeria’s GDP is unlikely to rebound but mildly in 2021 due to persistent and significant macroeconomic imbalances. Despite the first signs of stabilization, inflation is still very high, and several adjustments to the naira have failed to correct the dysfunctions in the foreign exchange market. Although the rebound in oil prices should help reduce somewhat the squeeze on external liquidity, it will surely take more than that to restore the confidence of investors. Without reforms and with no fiscal manoeuvring room, the economy will continue to be vulnerable to external shocks.
    South Africa has been severely hit by the Covid-19 crisis, after already several years of very low economic growth and social and political tensions. Real GDP collapsed by 7% in 2020 and public finances have deteriorated significantly. However, South Africa has also benefitted from a strong improvement in its external accounts. The boom in export receipts has supported the rebound in activity and fiscal revenue over the past year. This better-than-expected macroeconomic performance has reassured investors and facilitated the coverage of the government’s financing needs. However, in the medium term, challenges remain unchanged: large and difficult reforms remain necessary to elevate the country’s growth potential and improve public debt sustainability.
    15 April 2021
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    In their spring outlook, the IMF economists expect to see a multi-speed (and incomplete) recovery of the global economy in 2021. Indeed, speed is the key word for 2021 because the emerging countries are racing against time on several fronts. In our eyes, the greatest short-term risks are linked to the race between the rollout of vaccinations and the spread of the pandemic, and between higher food prices and the partial catching-up of revenues for low-income households. If this divergence persists, we could see a rise in social risks, which may have a much more destabilisation capacity than financial risks.
    At the end of the annual “Two Sessions”, China’s major political event, Beijing announced its economic targets for 2021 as well as the priorities of its new five-year plan. By setting this year’s real GDP growth target at simply “more than 6%”, which is lower than forecasts, the authorities are signalling that the economic recovery following the Covid-19 crisis is no longer the main focus of concern. In the short term, they will continue to cautiously tighten monetary policy and gradually scale back fiscal support measures. Above all, the authorities have affirmed their medium-term development strategy, which aims to boost innovation and drastically expand China’s technological independence.
    The economic recovery could be weakened by a second wave of Covid-19 and a fresh surge in inflation. With the government seeking to step up the pace of reforms to support growth over the medium term and improve the business environment, the number of protests against the moves is mounting, with protestors’ ire directed particularly at the privatisations that the government is counting on to cut its budget deficit. In the banking sector, banks currently are able to deal with the expected rise in credit risk. Nevertheless, in order to support a resumption of lending growth, a new injection of capital into state-owned banks has already been planned, alongside the creation of a defeasance structure.
    Having contracted by 2.1% in 2020, the Indonesian economy is likely to see only a modest recovery in 2021. Domestic demand is struggling to recover. Consumer sentiment remains weak and any resurgence in the pandemic could undermine the recovery, at a time when a very low percentage of the population has been vaccinated. Moreover, despite the highly expansionary monetary policy, bank lending has continued on its downward trend. The financial position of Indonesian companies prior to the Covid-19 crisis was more fragile than those of ASEAN peers, and they are likely to seek to consolidate their positions rather than invest in an uncertain future. The banking sector remains solid and well-placed to deal with an expected increase in credit risk. 
    After a severe recession in 2020, economic growth will rebound moderately in 2021-2022. The main growth engines – private consumption and the tourism industry – were weakened by the abrupt shutdown of economic activity as of Q2 2020, and the dynamics of the recovery will continue to depend on the evolution of the health situation. As in 2020, the authorities will take advantage of the comfortable manoeuvring room built up prior to the crisis to provide economic support. In the medium to long term, political tensions, exacerbated by the economic crisis, will continue to strain Thailand’s long-term growth potential.
    The health crisis continues to worsen – undermining the economy to a point of entertaining a recessionary risk in the first half of 2021. In this context, confidence has plummeted and financial markets have retreated. The vaccination campaign – after facing significant logistical challenges – has finally begun to accelerate since mid-March and with the concomitant introduction of new restrictive measures, the hope is that the epidemic curve will reach an inflection point over the next two months. Faced with rising inflation and inflation expectations, the Central Bank launched its monetary tightening cycle, which – against a backdrop of slowing economic activity and a high sovereign interest burden – has exacerbated budgetary pressures and risks. Although weakened by the crisis, financial soundness indicators of the banking sector remain very favourable.
    Thanks to a strong Q4 rebound, the contraction in real GDP was limited to 8.2% in 2020, the public deficit did not swell as much as expected, and 2021 growth prospects were given a boost. Yet the recovery is still fragile: private consumption and investment have both taken a lasting hit from the 2020 crisis, and the export sector will not benefit fully from the expected rebound in US growth. The crisis also exacerbated concerns about the vulnerability of public finances and the decline in investment, which will undermine medium to long-term growth prospects.
    The November 2020 announcement that monetary policy would move in a new direction had tamed financial tensions. However, as the Central Bank Governor was removed in March 2021, uncertainty came back. Exchange rate depreciation pressures have reappeared and interest rates and risk premiums have risen. Growth support will be the top policy priority, but at the price of maintaining significant macroeconomic imbalances. Credit risk is not reflected into the non-performing loan ratio but the forbearance period which is allowing the postponement of their reporting will end at mid-2021. The observed corporate investment recovery is welcomed, as a precondition to improve potential growth, but other conditions such as productivity growth are still missing.
    The Qatari economy began 2021 under relatively favourable conditions: thought the regional embargo ended, the Covid-19 pandemic is still active. Despite the fall in oil prices in 2020, the fiscal and current account deficits remained limited. Over the medium term, the development of new gas export capacity should further strengthen an already solid macroeconomic position. The main source of vulnerability remains banks’ external indebtedness, which is very high and continues to grow as the economy’s expansion accelerates. However, government support is guaranteed, and the external position of the banks should be restored as a result of the expected slowdown in lending and increase in deposits.
    The country weathered the difficulties of 2020 relatively well, notwithstanding the recession that Covid-19 produced and the drying up of private capital inflows. Thanks to the improvement in the terms of trade, the current account surplus was sufficient to balance the existing gap. Over recent years, Ukraine has been able to improve its fiscal management, which helped to secure the support of international financial institutions. The challenge for the months ahead lies in a resumption of capital inflows and in the planned reforms to encourage investment and increase potential growth. It will be important to keep an eye on reforms in the banking sector, which relate both to the consolidation of the sector and to the improvement of the prudential and supervisory framework.
    The Egyptian economy proved to be resilient last year. Economic growth remained positive thanks to fiscal support, and the main macroeconomic metrics did not deteriorate significantly thanks notably to international support. The good fiscal performance was noteworthy, and will help maintain the attractiveness of Egyptian debt. This said, it would be wise to remain cautious. On the one hand, the rate of vaccination is slow and the pandemic is still active; on the other hand, the external accounts remain vulnerable, and the improvement in the external energy balance seen in 2020 may not continue in the short term.
    So far, the economy has posted a fairly good resilience to the pandemic shock. Although economic growth slowed sharply in 2020, it nonetheless remained in positive territory. Above all, the economy is expected to rebound strongly this year, buoyed by domestic demand and easing political tensions after a busy electoral calendar. The country’s debt situation is also not as alarming compared to the other African countries. Even so, the sharp deterioration in public finances in 2020 calls for fiscal consolidation, which could prove to be difficult without a sustainable increase in fiscal revenue. This could weigh on the growth prospects of an economy that is increasingly dependent on public investment. 
    Although Kenya was spared a recession in 2020, the Covid-19 shock exacerbated the country’s economic vulnerabilities. The risk of excessive public debt is especially high, and despite financial support provided by multilateral and bilateral creditors, budget management will remain a big challenge in the short and medium terms. The level and structure of the debt expose the government to solvency risk. Fortunately, reforms are expected to reduce this risk, and the IMF financing programme recently granted to the Kenyan authorities should support these efforts and help reassure non-resident investors.
    18 January 2021
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    As the new year gets underway, emerging countries are benefiting from a combination of favourable factors for a recovery (catching-up movements in foreign trade, a weak dollar, rising commodity prices, and domestic financing costs that are lower than pre-crisis levels). Yet lots of uncertainty and threats remain: the rollout of vaccination campaigns, the risk of a surge in insolvency cases among the poorest countries, despite financial support from international institutions and official creditors, and a rise in non-performing loans in banking systems as of 2021. The main risk in the medium term is the combination of a probable loss of growth potential due to the pandemic and the private sector’s record-high debt burden.
    Economic growth reached 2.3% in 2020. Activity has rebounded rapidly since March and the recovery has gradually spread from industry to services. Infrastructure and real estate projects continue to drive investment, but it is also beginning to strengthen in the manufacturing sector, encouraged by solid export performance. Private consumption is still lagging, but yet has picked up vigorously since the summer. Whereas fiscal policy should continue to be growth-supportive in the short term, the monetary authorities are expected to adjust their priorities. Credit conditions should be tightened slowly, especially via the introduction of new prudential rules. Corporate defaults are likely to increase alongside efforts to clean up the financial sector
    The economy has rebounded strongly since July, driven by the recovery in industry, which then spread to the services sector starting in October. Although the recovery still seems to be fragile, the central bank has raised its growth forecast for fiscal year 2020/2021 to -7.5%. Fiscal year 2021/2022 is expected to see a major automatic rebound in growth. Lacking the means to support growth through a fiscal stimulus package, the government has set out to create a more propitious environment for investment that would enable medium-term growth to return to a pace of about 7%. The latest reforms are working in this direction. Yet passing reform measures does not guarantee that they will be implemented, much less that they will be successful.  
    Malaysia is one of the emerging Asian countries hit hardest by the Covid-19 crisis. Although a recovery is underway, it is bound to be hampered by new lockdowns in Q4 2020 and January 2021. Public finances have deteriorated sharply, but the government does not seem inclined to pursue fiscal consolidation. It is giving priority to the economic recovery and support for the most fragile households. The public debt ratio will continue to deteriorate, and in December, the rating agency Fitch downgraded Malaysia’s sovereign rating. Yet refinancing risks are moderate: the debt structure is not very risky and the country has a large domestic bond market. Malaysia will continue to report a current account surplus and has a solid banking sector.
    The Covid-19 epidemic was well controlled last year and lockdown was swiftly eased. Productive activity has rebounded vigorously since May, notably driven by a solid recovery in exports. Fiscal support measures have been moderate, primarily based on the accelerated implementation of already-planned investment projects. In the end, economic growth and macroeconomic balances were only moderately and temporarily affected in 2020. However, there remains a weak link in the economy: banks are insufficiently capitalised while corporates, especially state-owned enterprises, are excessively indebted. Some of these institutions could be severely weakened when monetary support measures come to an end in 2021.
    An active economic policy has helped attenuate the magnitude of the recessionary shock in 2020. The recovery in Q3 was vigorous and was prolonged into Q4. However, the economy showed signs of slowing down towards year-end. Brazil’s external vulnerability did not deteriorate despite high volatility of both portfolio and direct investments as well as a sharp depreciation of the real in 2020. In 2021, the economy will benefit from the recovery in commodity prices and the maintenance of accommodative measures on the monetary side. However, the resurgence of the Covid-19 epidemic coupled with delays in rolling out vaccinations as well as uncertainty regarding the fiscal consolidation process and the lack of progress on reforms are likely to be sources of stress in financial markets and potential destabilising forces for the recovery.
    Peru is one of the Latin American countries to have suffered most from the Covid-19 crisis. After a sharp contraction in Q2 2020, the recovery that began in Q3 has continued. This said, economic activity is unlikely to regain its pre-crisis level before the end of 2022. The economic contraction and the massive stimulus programme introduced by the government have hit public finances, but the deterioration is likely to remain manageable, for the short term at least. However, the deterioration of the political climate seen over the past few years is affecting the medium-term outlook.
    Fiscal support and the resilience of exports helped limit the economic recession in 2020. A strong recovery is likely in 2021, thanks primarily to a rapid vaccination campaign. The shekel has strengthened on the back of a growing current account surplus and massive capital inflows. The situation for public finances is more uncertain. In addition to the structural deterioration of recent years, the lack of a budget law against a background of repeated government instability is not helpful for budget consolidation. Although solid solvency indicators eliminate any short-term risk, a lack of reforms could weigh on potential growth over the medium to long term.
    The scenario of a partial and still fragile economic recovery is confirmed against a backdrop of a spreading pandemic at end-2020. Household consumption is the only component that managed to contribute to growth, but it could run out of steam with the upsurge in inflation. The recovery is expected to broaden in 2021, thanks to the expected resumption of production in the extractive industries, higher oil prices and the improvement in business confidence in the manufacturing sector. Yet monetary and fiscal supports will be relatively small. Public finances have been fairly resilient, and foreign reserves have consolidated despite capital outflows, since the rouble served as the adjustment variable. According to the Central Bank of Russia (CBR), the banks have sufficient reserves to cover the entire amount of restructured loans.
    The second wave of Covid-19 that swept Poland in Q4 2020 was more severe than the first wave in Q2 2020. In contrast, economic growth was not hit nearly as hard thanks to the resilience of industrial output and demand (exports and household consumption). The authorities’ stimulus measures combined with industry’s competitiveness – which was not undermined much by the pandemic – bolstered growth, and the trade surplus increased. Against the background, a somewhat weak zloty is more a choice than a by-product of deteriorated fundamentals. The European budget agreement, as Poland is one of the main beneficiaries of the Recovery Plan, should provide additional support for growth.
    Economic growth experienced several short-lived boom-bust wild swings in 2020, amplified by trade openness and the severity of the second wave of Covid-19 in the fall. However, the recovery in the 3rd quarter proved strong. Industrial production and exports both performed well, boosted by a stable exchange rate (and substantial foreign currency reserves). In addition, thanks to very modest debt levels, the government was able to offer rapid and substantial support to the economy.
    Ethiopia is expected to report its lowest growth rate since 2003. Although the population has been relatively spared by the brunt of the Covid-19 pandemic, the cyclical economic environment has deteriorated sharply. The country has been hard hit by both a domestic shock and a decline in external revenues, which is squeezing its structurally low foreign reserves. Support from multilateral creditors will limit liquidity risk in the short term, but the current situation largely underscores the need for reforms. At the same time, political risk is rising with the emergence of socio-political tensions that pose significant challenges for Ethiopia’s political and economic stability.
    With real GDP contracting by 8.5% in 2020, Tunisia was one of the region’s most severely hit economies. The prospects of a recovery are highly uncertain. The economy is threatened by the resurgence of the pandemic, but the government no longer has the manoeuvring room that it had in 2020. The budget deficit and public debt have soared to alarming levels, which calls for a difficult consolidation of public finances. Although FX reserves have been stable, the country’s external vulnerability is growing. The pandemic’s shock has aggravated a structural deterioration in fundamentals. This could have lasting consequences.
    05 October 2020
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    The recovery in economic activity that began at the end of the spring continued through the summer, with China leading the way, and oil and metals prices have picked up. But doubts are emerging as the pace of the recovery seems to be slowing, as reflected by exports recent loss of momentum. Above all, there are currently worries regarding the persistence of the pandemic and the risk of lockdown extensions or even new lockdowns in several countries. There are, however, some factors of support: continued easing of monetary policies, market tolerance of rising budget deficits and a reduction in the debt of the most vulnerable countries by official lenders. However, the leverage of those factors should not be overstated.
    The economy continues to recover. Initially driven by a rebound in industrial production and investment, the recovery broadened over the summer months. Exports have rebounded and activity has also picked up in the services sector. Yet it continues to be strained by the timid rebound in household consumption, which is far from returning to normal levels. The unemployment rate began to fall right again after the end of lockdown measures, but this decline has been accompanied by an increase in precarious jobs and large disparities, with the unskilled and young college graduates being particularly hard hit.
    Once again, South Korea seems to be withstanding the crisis better than developed nations generally. The effective management of the health crisis and the government’s massive stimulus package paved the way to a shallower recession than in other countries in the first half of 2020. However, the new social distancing measures introduced at the end of August and the persistent weakness of exports will hold back growth over the coming months. In the short to medium term, macroeconomic fundamentals are likely to remain very solid: government deficit and debt levels remain modest, inflation is under control and external vulnerability is very low.
    Between April and June 2020, India’s economy contracted by nearly 24% compared to the same period last year. This unprecedented contraction can be attributed to the collapse of domestic demand. Although the economy has rebounded since June, it is still fragile and well below pre-crisis levels, prior to the outbreak of the Covid-19 pandemic. The central bank and government did not have much support capacity, but even this has been eroded by higher prices and a drop-off in fiscal revenue. Public debt is expected to swell to nearly 89% of GDP, and will strain the country’s future development projects, especially given that government spending contributed to nearly 30% of growth last year.
    For the first time since the 1998 crisis, Indonesia is expected to enter recession in 2020. In Q2 2020, the economy contracted by more than 5%, and the recovery should be slow. Domestic demand is struggling to pick up, and Jakarta has just been put under a partial lockdown again. Fiscal support has been slow in coming: planned fiscal spending still hasn’t materialised in the first seven months of the year. Even so, the deficit is under control and the central bank is acting as the lender of last resort. In H2 2020, the government hopes to consolidate the recovery via a massive support package for low-income households. Even though inflation is under tight control, the poverty rate could reach 11.6% according to the World Bank (vs 9.2% in 2019).
    The epidemic remains in full swing, but has shown some signs of deceleration. The recovery in Q3 has been stronger than expected. However, the picture varies considerably from one sector to the next. The central bank has paused its monetary easing cycle for the first time since mid-2019. At the same time, it has adopted a more active communication stance through the embracement of forward guidance. The emergency aid programme – which will push the budget deficit to a record high – has meanwhile helped President Bolsonaro witness a resurgence in popularity.  Negotiations over the 2021 budget are likely to crystallise tensions across the executive and Congress. Difficult choices lie ahead as the authorities will need to arbitrate between supporting the most vulnerable and resuming the process of fiscal consolidation. The currency, over and above its weakness, continues to suffer from considerable volatility. The return of foreign investors to Brazilian markets remains timid overall.
    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.  
    22 July 2020
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    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.
    13 April 2020
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    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.
    Romania’s economy has become gradually unbalanced in recent years, ending 2019 with significant twin deficits, i.e. both a fiscal deficit and a current account deficit. An accommodative fiscal policy has stimulated growth and should continue to do so. Even so, Romania will not avoid a contagion effect due to the COVID-19 pandemic’s economic fallout. The country is bound to slip into recession even though growth has already dwindled. Though foreign currency liquidity is still sufficient, its relatively low level could constrain monetary policy: a stable exchange rate is key for an economy that still has a significant amount of euro-denominated debt, albeit much less than before.
    The COVID-19 crisis will have a huge impact on an economy that was already weakened slightly by the slowdown in global trade in 2019. Yet Indonesia’s macroeconomic fundamentals are strong: its public finances are solid, the banking sector is robust and both companies and households have very little debt. The country has sufficient foreign reserves to cover its short-term financing needs. Yet the rupiah is bound to remain under fierce downward pressure: the current account deficit is only partially financed by foreign direct investment, and capital outflows have reached unprecedented levels since 31 January.
    The coronavirus crisis has hit a fast-growing economy, which expanded by more than 6% year-on-year in H2 2019 and looked set to continue at the same pace in 2020. The pandemic and the very strict lockdown imposed by the Duterte government will cause all the engines of growth to seize up: production will stop in the country’s economic centre, the fall in domestic demand will be exacerbated by reductions in remittances from workers abroad and losses in the informal economy, tourism will collapse and exports of goods and services will follow suit. This is a substantial shock, but the strong macroeconomic fundamentals and the modest level of government debt give the authorities scope to introduce support measures.
    The Covid-19 pandemic strikes an economy that has already been weakened by several quarters of decline in merchandise exports, tourism, private consumption and investment. Since February, the government has launched a major fiscal stimulus plan representing about 10% of GDP. The plan includes direct support measures in favour of corporates and households. Additional structural measures will be needed going forward, in order to fuel a sustainable rebound in private demand and bolster medium-term economic growth prospects. Thanks to abundant fiscal reserves and minimal debt, the government has comfortable manoeuvring room to pursue an expansionist policy for several years to come.
    The impact of the COVID-19 pandemic on the Egyptian economy will be significant and will result in a sharp economic growth slowdown this year. Growth is nevertheless likely to remain positive. In the short term, the expected deterioration in public finances is sustainable, and the government can deal with a temporary downturn in international investors’ appetite for Egyptian debt. Foreign currency liquidity across the whole banking system has improved significantly in recent months, supporting the pound in the currency market. As a result, the financing of the current account deficit, repayment of foreign debt and the ability to cover massive capital outflows are all guaranteed for the short term.
    As the most diversified economy of the Gulf countries and a major oil producer, the United Arab Emirates faces a double shock: the economic fallout of the COVID-19 pandemic and plummeting oil prices. The current situation risks accelerating the real estate market crisis in Dubai, which has been developing for several years, eroding the financial health of companies in the construction and services sectors. As credit risk rises, it will place a negative strain on banks. Although public finances seem healthy enough to handle the decline in oil revenues, public debt is bound to rise. The UAE’s solid external position guarantees the dirham’s peg to the US dollar.
    The Moroccan economy will see significant consequences from the coronavirus pandemic. Tourism has been at a standstill since March and will remain so until May at the earliest. The automotive sector and remittances from the Moroccan diaspora will also be hit by the crisis in Europe. However, and provided that the situation improves in the second half of the year, Morocco should be able to avoid recession. Macroeconomic fundamentals are solid and the country will benefit from a substantial fall in oil imports. Moreover, the authorities have reacted swiftly to dampen the shock.  
    Kenya’s real GDP growth was subdued last year and it will come under stress in 2020 due to coronavirus outbreak effects. The lower GDP growth will further constrain the fiscal policy space whereas the country’s forex receipts are also weakened by adverse climatic conditions. While political rivalries continue to complicate the implementation of fiscal policy, failure to reduce budget deficits will challenge the sovereign’s debt solvency in the medium term. Meanwhile, monetary policy easing and emergency measures in the banking sector could hamper banking sector prospects, which had started to improve following the recent removal of the interest-rate cap law.  
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