eco TV

General overview


Whereas the post-pandemic recovery remains fragile, emerging countries are now facing the consequences of the conflict in Ukraine on foreign trade, capital flows and inflation.

TRANSCRIPT // General overview : May 2022

Whereas the post-pandemic recovery remains fragile, emerging countries are now facing the consequences of the conflict in Ukraine on foreign trade, capital flows and inflation. This is the main issue of our latest Eco Emerging publication. For the time being, the conflict has not generated a financial shock, strictly speaking, neither on interest rates, risk premia nor on exchange rates. The direct effect of the expected sharp contraction of Russian and Ukrainian imports (demand effect) should not be very severe, except of course in the CIS countries and, to a lesser extent, the Central European countries, the Balkans and Turkey.

On the other hand, the indirect effect of rising commodity prices on inflation or on agricultural and industrial productions, will affect all areas and could be particularly severe for the purchasing power of population in low-income countries, especially from Africa. The rise in the price of raw materials is massive and concerns both energy and industrial, agricultural and non-agricultural raw materials. The effect on inflation and activity is general as companies are faced with both rising prices and, if the supplier is Russia or Ukraine, supply constraints.

Despite a gloomier external environment, we do not anticipate, for emerging countries, a general deterioration of external solvency nor even of States’ solvency. Regarding external solvency, most of them have a comfortable mattress of foreign exchange reserves and solvency ratios have not deteriorated compared to the end of 2019 (the only exceptions are Argentina, Egypt, Tunisia and Turkey). As regards States’ solvency, debt ratios have risen sharply in virtually all countries. But the other major solvency ratio of debt interests as a percentage of States’ revenue has generally increased moderately since late 2019. On the other hand, with regard to States’ external liquidity, a big dozen of countries have repayments of international bonds and loans that represent at least 20% of foreign exchange reserves or net financial assets of the state. For the most fragile of them, such as Egypt, Tunisia and Argentina, the possibility of a default will depend on the willingness or the capacity of governments to secure the support of international donors or to rely on bilateral creditors. This is the case of Argentina and Egypt but not yet for Tunisia.

In other words, we do not expect a significant and widespread deterioration of sovereign risk despite the increase in States’ indebtedness. In its latest report on global financial stability, IMF economists conducted an in-depth study of the links between sovereign risk and banking risk (the so-called sovereign-bank nexus) on the basis of the double observation 1/ States’ indebtedness has increased strongly 2/ Banks contributed very largely to the financing of the States. The mechanisms behind the sovereign-bank nexus are multifaceted with feedback effects that are very seriously documented in the GFSR. And it is normal for the main international donor to point out potential risks. But, unless the world economy falls in stagflation, the banking systems in emerging countries should be strong enough to absorb those risks. An example: according to IMF simulations, a haircut of at least 30% in the value of government securities of banks is necessary to breach the 4.5% minimum solvency ratio of banks. Such a devaluation would require, on average, an increase in government bond yields twice as large as the observed increase over the past six months in areas where there has indeed been an increase in yields.

View more videos Eco TV

On the Same Theme

Emerging Countries Team 1/26/2022
The Emerging countries team presents its focus for 2022. All year long you will be able to read, listen and watch the publications of its economists on countries such as China, Brazil, Egypt, India or Russia.
Monetary tightening in emerging countries 11/5/2021
Monetary stance is tightening in Emerging Europe and Latam. The reason: inflation resurgence. This may seem premature at this stage since activity in these countries has just come back to its pre- Covid shock.  Is it justified and what are the consequences ?
Emerging Countries: a still fragile recovery 7/9/2021
The recovery trend is confirmed in EM remains fragile. Household confidence indicators are lagging behind those of business sentiment. Reasons are new waves of contamination, acceleration in inflation and impoverishment caused by the pandemic.
Emerging countries: speed races 4/16/2021
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.
Moratorium or debt cancellation? 4/24/2020
According to Eurodad, without a suspension of external debt payments, the debt-to-GDP ratio of the very low income countries will increase to 14 pp. So far, official supports have taken the form of a suspension of payments. Why not favor debt cancellation?  
Kazakhstan : Tenge free-float turns to a strong depreciation 9/16/2015
Kazakh Tenge lost one third of its value in one month. The net creditor position of the government (about 35% of GDP) does not compensate for the negative effects of the fall in the oil prices and the devaluation of the Chinese Yuan that took place only days before the decision of Kazakh authorities to free float their currency. This decision improves the financial leeway of the government, but its stimulus capacity may be dampened by the rates’ tightening, inevitable to stabilize the exchange market. The devaluation undermines the banking sector which remains highly dollarized. To avoid a deposit run, the National Bank committed to compensate the loss due to the devaluation to the households who will keep their deposits until September 2016.
Exchange rates of Emerging countries 8/26/2015
Owing to the fall in the commodity prices, exchange rates of commodity-exporting emerging countries are caught in downward spiral. Exchange rates of commodity-importing emerging are much less impacted. But, regarding the impact on growth, it will remain a negative-sum game.

ABOUT US Three teams of economists (OECD countries research, emerging economies and country risk, banking economics) make up BNP Paribas Economic Research Department.
This website presents their analyses.
The website contains 1811 articles and 362 videos