Credit Suisse:  Emerging markets: Is there a new normal?

Fundamental divergences between emerging and developing economies, and across emerging markets, should start to surface as the discussion of policy normalization arises in coming quarters.

Financing for fiscal and external sectors should be available amid low funding costs and abundant liquidity, but macro fundamentals will matter if negative surprises appear globally or domestically.

EMs will likely lag DMs in the rollout of vaccines, deepening the divergence in the capacity of each group of countries to recover from the economic shock of the pandemic.


We expect emerging market (EM) economies under our coverage to grow at an average annual rate of 5.8% in 2021, after contracting an estimated 0.3% in 2020. The impact of the pandemic was quite diverse among regions.  Emerging Asia managed to post real GDP growth of 1.9% in 2020 and should accelerate to 6.7% in 2021 (a wider sample of countries suggests a contraction of 0.4% for the region). Meanwhile, we estimate a real GDP contraction of 7.2% in 2020 for Latin America, and a 3.3% contraction for EEMEA. This year, LatAm should rebound by 4.0% and EEMEA by 3.2%.  But growth numbers are not the story. There are rich economic themes to explore in EM this year, as we navigate into the next phase of the pandemic.


Perhaps the most relevant thing to bear in mind this year, regardless of how obvious it may sound, is that EMs are not DMs. EMs do not have the ability to run stimulus measures for too long; their domestic markets are less deep, their labor markets are less flexible, and their infrastructure is less developed.

Furthermore, DMs have greater resources and infrastructure to undertake their vaccine campaigns relative to EMs, and may reach herd immunity sooner.

Hence, policy normalization may be forced to occur earlier in EMs than in DMs, regardless of the fact that the recovery of DMs, in terms of income, employment, output, and welfare levels relative to 2019, will likely be faster than in many EMs.


Perhaps, the new normal is a world in which higher debt ratios will be tolerated, neutral rates remain lower for longer, and large fiscal deficits can be funded. If it is not, however, then the need to differentiate between EMs will be more important than ever, and we must keep these questions present in case any of these risks, or a sudden change in expectations, materializes.



This new equilibrium in EMs does not look stable to us


Depressed economic activity, large fiscal deficits, increasing debt levels, low interest rates, and narrow external imbalances cannot coexist for long. Activity will eventually pick up, external balances may shift, interest rates may need to increase, fiscal deficits will be more difficult to fund, and debt sustainability concerns could surface in different countries. To be clear, this is not our baseline scenario for 2021: our forecasts tell a story of a moderate pickup in growth, stable interest rates, orderly fiscal consolidation, and healthy external balances. But in 2020, we faced a shock of unprecedented magnitude and witnessed unprecedented policy reactions. We must keep an open mind to how things could evolve in 2021 and beyond that challenge conventional wisdom.

In practical terms, the key question in EMs should be whether the fiscal sector and the balance of payments are transitioning to sustainable equilibriums, how fast, and if there is enough financing as these transitions materialize. The initial conditions of some EMs will surely be daunting, but financing should be available, at least in 2021.


(t)he size of gross government debt in EM rose substantially in 2020, to 58% of GDP from 50% of GDP in 2019. As a comparison, in the 2009 crisis, public debt in EMs rose by 7.4% of GDP. The median size of public debt in the countries we cover jumped to 59% of GDP in 2020 from 47% of GDP in 2019. We project public debt to continue increasing, reaching 62% of GDP in 2021 and 65% of GDP in 2022, while fiscal deficits shrink.

We think markets may, at some point, demand greater fiscal discipline in some EMs, particularly as public debt ratios have reached very high levels. Countries like Brazil and Argentina now border or have breached a public debt ratio of 100% of GDP, South Africa and Hungary are at 80% of GDP, and Colombia, Ecuador, and Poland oscillate between 60% and 70% of GDP, for example.


At present, fiscal dynamics look manageable across the board, but the trend is clearly deteriorating in many countries. Several countries are already seeing the cost of servicing debt increase as a share of their revenues, for example.  South Africa stands out as the place where this deterioration is more meaningful, and it should serve as a blueprint of risks for other EMs. Brazil stands out too, given a large and increasing debt to GDP ratio, coupled with concerns regarding the future of the fiscal sector. Both countries must implement important reforms to provide investors with credibility that there will be a fiscal anchor in coming years, which would prevent a further deterioration in debt dynamics. Countries like Colombia will also need to provide assurances to investors that their fiscal accounts can remain sustainable. In Colombia’s case, the country risks losing its investment grade rating if it does not provide appropriate fiscal anchors in coming months.



How about Turkey?


Turkey, despite having relatively low debt to GDP levels, has seen its gross government debt to GDP ratio and its cost of servicing debt increase as foreign-currency-denominated and shortterm debt placements have increased.

Meanwhile, external accounts have largely adjusted in EMs by virtue of substantial improvements in trade balances, many of these characterized by strong declines in imports. In some cases, lower income account outflows have been the main drivers of the improvement. This divergence likely underscores different degrees of damage to domestic demand. South Africa, Chile, Philippines, Czech Republic, and Poland have had the largest positive adjustments in their current account deficits, while Turkey remains an outlier in terms of its deterioration.


Turkey, Brazil, and Russia, on the other hand, stand out as the currencies that have recovered the least from the Covid shock. In every case, important idiosyncratic factors are present. Turkey faced a rapid deterioration of its balance of payments evidenced by a swelling current account deficit and international reserve drain, given overly expansionary monetary and credit policies in 2Q 2020. A newly appointed economic team and an incipient reversal in some of these policies have helped the lira regain some strength in recent weeks and could stabilize balance of payments dynamics. In the case of Brazil, record low nominal interest rates, coupled with record high public debt levels, may not yet be a combination that markets are comfortable with, at least until the government convinces investors that there is a fiscal anchor to its monetary policy scheme, which is necessary for debt sustainability to be ensured over the medium term. In Russia, rapid growth in domestic monetary aggregates and tax treaty initiatives from the government were a combination that was unfavorable for the rouble.



Excerpt from Credit Suisse report titled “2021 Economic Outlook: Sunrise in a fractured world”



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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and and has contributed to the financial daily Referans and the liberal daily Radikal.