Emerging

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EcoEmerging// 4 quarter 2018  
economic-research.bnpparibas.com  
Editorial  
Malaise  
In the October 2018 World Economic Outlook, the IMF lowered its economic growth forecasts for the majority of the emerging and  
developing countries. Over the past six months, the downside risks to their short-term prospects have worsened, and some have  
even materialised. The IMF sees higher tariff barriers and trade tensions as one of the main threats to economic growth.  
International financing conditions are also expected to deteriorate further. Investors proved to be selective during the recent bout of  
emerging market turmoil. However, the sources of vulnerability are likely to continue to rise and the risks of contagion in case of a  
shock could spread gradually.  
Between the April and October 2018 editions of its World Economic  
Outlook, the International Monetary Fund has revised downwards its  
economic growth forecasts for the vast majority of countries. For the  
emerging and developing economies as a whole, average real GDP  
growth is expected to level off at 4.7% in 2018 and 2019. This is  
relatively solid growth, which is very close to both the 2017 rate and  
the average of the five previous years. But new forecasts are  
significantly lower than in the April outlook, which called for average  
real GDP growth of 4.9% in 2018 and 5.1% in 2019. According to  
the IMF’s new scenario, the period of economic growth acceleration  
registered in 2016-2017 is already over.  
outflows and currency depreciation. Turkey and Argentina are the  
two extremes (they post major external and internal imbalances and  
high foreign-currency debt burdens). Their currencies collapsed  
between March and September. Currencies also fell sharply in  
South Africa and Brazil (hit by deteriorating public finances and  
sluggish economic growth) and in India and Indonesia (where  
current account deficits are widening due to the upturn in oil prices,  
and external financing partly relies on short-term capital). Russia is  
the big exception: the rouble has dropped sharply over the past six  
months due to tighter international sanctions, despite improvements  
in both the current account and fiscal surpluses. Central banks in  
these countries have raised policy rates in recent months, in turn  
constraining domestic demand. In the short term, international  
financing conditions are expected to continue to tighten, and this  
trend could even accelerate abruptly in case of a new shock (such  
as a stronger-than-expected increase in US inflation or a political  
shock).  
Economic growth estimates were lowered for numerous emerging  
and developing countries, illustrating the diversity of risks  
threatening their short-term prospects. There were a few upward  
revisions, mainly for the oil exporting countries, such as Saudi  
Arabia and Russia, which benefit from the stronger-than-expected  
increase in oil prices in 2018 (+31% in the IMF scenario) and their  
relative stability in 2019.  
Seen in this light, the international environment is likely to continue  
to become less favourable (reduction in capital flows and higher  
financing costs, slowdown in external demand and trade volumes,  
high oil prices), resulting in the gradual spread of risks within the  
emerging countries and an increase in their macroeconomic  
vulnerability (higher inflation, wider external deficits, less dynamic  
economic growth and pressures on public finances). Against this  
backdrop, financial volatility and risk aversion are bound to rise, and  
international investors could opt for less discriminating strategies,  
therefore aggravating contagion effects between emerging countries  
in case of a shock.  
The downside risks to growth have worsened over the past six  
months and some have begun to materialise, foremost of which is  
the rise of protectionism. New tariff barriers will drive up the cost of  
trade, dampening China’s export prospects as well as those of  
some of its Asian trading partners (notably Taiwan, South Korea  
and the ASEAN countries) due to the risk of cascading effects  
through the region’s supply chains. World demand growth, and thus  
Asian exports, have already slowed in 2018 following a vigorous  
rebound in 2017: according to CPB, global trade volumes increased  
3.7% year-on-year in January-July 2018 compared to 4.4% in 2017.  
Yet only the most recent figures show a possible impact of US  
protectionist measures (given the acceleration of Chinese  
merchandise shipments to the US last summer and the recent  
slowdown in Taiwanese and South Korean exports). Moreover,  
uncertainty over growing trade tensions between the United States  
and its trading partners could curb private investment and thus  
aggravate the recessionary impact of protectionist measures.  
Eroding confidence is also likely to contribute to the rise in global  
financing costs.  
Global borrowing conditions for corporates and governments in  
emerging countries have deteriorated since Q2 2018. Until now,  
foreign investors have taken a selective approach to portfolio  
investment outflows. Emerging countries with severe external  
imbalances and weak macroeconomic fundamentals (and possibly  
also with high political risks) have been hit hardest by capital  
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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