Emerging

Cautiously optimistic

st  
Eco Emerging // 1 quarter 2021  
economic-research.bnpparibas.com  
2
EDITORIAL  
CAUTIOUSLY OPTIMISTIC  
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.  
After a Q3 rebound, emerging countries seem to have avoided another  
downturn in economic growth. A widespread improvement in economic  
and financial indicators can be seen in Q4 2020.  
BUT THERE ARE STILL CLOUDS ON THE HORIZON  
On the whole, emerging countries are benefiting from a combination  
of factors that should support their recovery in the short term (weak  
US dollar, rising commodity prices, lower financing costs than pre-  
crisis levels). But a lot of uncertainty and pitfalls remain.  
THE SKY HAS BECOME CLEARER…  
Purchasing manager indexes (PMIs) for the manufacturing sector  
have continued to improve. In a few countries (China, Brazil and In the short term, logistical constraints and population size raise fears  
Hungary), manufacturing PMIs deteriorated in December albeit from of an unequal race against time between the rollout of vaccination  
high levels (above the 50 threshold). Mexico is the only country campaigns and the spread of the virus (notably in Brazil and Russia),  
whose PMI suggests an ongoing industrial recession. For the majority even though its propagation does not necessarily result in higher  
of countries, year-on-year export trends swung into positive territory mortality rates. The second threat, potentially only in the very short  
again over the summer or early fall. In Asia, where foreign trade has term, is the surge in the number of insolvency cases among the poorest  
been more robust thanks to China’s contribution, the export catching- countries despite support from the international financial institutions  
up movement has already run its course. This movement is intensifying (IFI) and official creditors, via emergency funds and the debt servicing  
in central Europe. In contrast, the recovery in exports still seems to be suspension initiative (DSSI). Even after DSSI was extended into 2021,  
very fragile in Latin America (including for manufactured goods) and in the initiative provides relief for only 20% of the financing needs of  
Africa and the Middle East. Yet the later regions should benefit from eligible countries. Lastly, the banks will have to absorb the rise in  
the ongoing rebound in commodity prices, which is resulting from both non-performing loans. In all three cases, let’s hope the key players  
the consolidation of metal prices and a more clear-cut upturn in oil (governments, IFIs, bilateral official creditors and private creditors and  
prices, which should consolidate with Saudi Arabia’s recent cutback in banks) have the capacity to mobilise and/or show proof of resilience to  
oil production.  
manage these risks.  
The improvement in financial indicators is more spectacular, notably Looking beyond 2021, one of the big uncertainties is the erosion of  
portfolio investment flows, exchange rates and risk premiums. growth potential due to the pandemic. The health crisis could be  
According to the IIF, portfolio investment was still hesitant over the seen as a transitory shock, unlike shocks generated by a structural  
summer months, but soared in the fourth quarter to a record high of decline in the terms of trade (for commodity producing countries) or  
nearly USD 60 bn a month on average (USD 42 bn excluding China), by a financial and/or banking crisis. Yet the pandemic was global, and  
easily erasing the outflows reported earlier in the year. Since the shock not just regional as in previous cases. Even under a scenario in which  
last spring, net investment flows have reached a cumulative total of vaccination campaigns bring the pandemic under control, the World  
USD 250 bn. In comparison, for the same interval following the shocks Bank evaluates the loss of growth potential at 0.6 points of GDP a year  
of the 2008-2009 financial shock and the mini-crash of the Chinese for all of the emerging and developing countries (including China) in the  
stock market in 2015, net investment flows simply returned to their period 2020-2029. Let’s keep in mind that growth potential has already  
point of departure. Bond issues hit an air pocket only once, in March, contracted by 1 point over the past decade. The extra loss of growth  
and by the second half, the pace of issues had surpassed the 2019 potential is mainly due to the smaller contribution of investment.  
level.  
According to the World Bank, the main reasons are uncertainty, risk  
aversion and the decline in corporate earnings. We would like to add  
the record-high level of private sector debt (even excluding China),  
knowing that the causal relation between growth potential and debt  
is a two-way street.  
With a few rare exceptions, exchange rates appreciated against the  
US dollar between end-September and end-December (with a median  
of 4%, vs 2% in Q3). At a time when external accounts were improving,  
emerging currencies also benefited from the weak US dollar. With  
few exceptions, sovereign bond yields in the local currency and risk  
premiums (CDS spreads) have fallen, even though there were fewer  
key rate cuts than in Q3. Pressures have eased, even in the countries  
that have proven to be the most vulnerable to the shock (South Africa,  
Brazil and Turkey, although for the later, at the expense of a reversal  
and tightening of monetary policy).  
Completed on 11 January 2021  
François Faure  
francois.faure@bnpparibas.com  
The bank  
for a changing  
world  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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