The pace of vaccine rollouts has accelerated in core emerging markets (EMs) in the past few months. However, EMs continue to lag advanced economies–most EMs are well short of the so-called herd immunity level of 70%-80%–and vaccination rates vary widely remain across subregions. Specifically, countries we cover in EM-EMEA (Europe, the Middle East, and Africa) and Latin America are generally ahead of countries in EM-Asia.
Because of their faster progress on the vaccination front, just as virus-related restrictions eased, recoveries across EM-EMEA and Latin America–as measured by inflation-adjusted GDP (or real GDP)–were stronger in the second quarter than we had expected. Exports, especially commodity-related, expanded rapidly, and the services sectors that are usually vulnerable to the pandemic performed better than expected under the circumstances. The early signs for the third quarter are encouraging as mobility measures continue to move up (see chart 2) with low tolerance for renewed restrictions on economic activity.
On the other hand, in EM-Asia, even as economic growth was better than expected in the second quarter, the delta variant’s rise in the third quarter tempered recovery more than we had anticipated. The slow progress of vaccine rollouts in the region combined with low tolerance for virus spread led to renewed restrictions on activity. Only recently has the spread of virus come somewhat under control, and mobility measures have started to normalize.
All this means is that recovery is delayed in EM-Asia, not derailed. In the near term, gains from the reopenings will be stronger in EM-Asia than in other regions, which should help the lagging EM-Asia economies get back to their pre-pandemic real GDP levels by the beginning of next year. Most EM-EMEA economies have returned to their pre-pandemic level of activity as they avoided renewed restrictions in the past three months. The median pre-pandemic real GDP gap for Latin America as of the second quarter is about 2%.
Merchandise trade will continue to support growth in the EMs in the coming quarters (inventory restocking continues in advanced economies after registering a very low inventory-to-sales ratio in the first half of 2021), but it’s set to moderate. The pandemic-induced relative increase in goods spending is expected to shift back to services as activity in people-sensitive sectors normalize, thus boosting trade in services.
EM foreign exchange valuations are currently cheap, and current account positions are generally positive, by historical standards. EM currencies that typically appreciate when commodity prices and terms of trade improve have not strengthened in the same way as they have in past episodes of rising commodity prices.
Inflation continues to rise in many EMs because of higher fuel and food prices, and supply chain disruptions interacting with a stronger economic rebound. Unlike in advanced economies, the food weight in the consumer price basket is higher in the EMs. The U.N. FAO Food Price Index was up 33% in August from the same period last year, with little sign of softening in the near term. At the same time, exporters and factories are struggling with the impact of supply chain disruptions, shortages, shipping delays, and chronic port congestion.
Central banks in Brazil, Russia, Mexico, and Chile have already raised policy rates to tighten financial conditions to rein in inflationary pressures, while more countries in Latin America and EM-EMEA are likely to do so as well, sooner than previously anticipated, to keep inflation expectations anchored. (Turkey is an exception, with a surprise 100-basis-points cut just recently.) In contrast, inflation pressures in EM-Asia remain muted, outside of the Philippines. Inflation in India has eased somewhat since our last publication (on lower food price inflation) but remains near the upper end of the tolerance range at 6%. Except for a few countries (China, Saudi Arabia, and Indonesia), the majority of the countries in EMs are running real interest rates looser than their 10-year averages, by less than 100 basis points at the low end (Thailand and Turkey) to almost 600 basis points (Brazil) (see chart 6). To be sure, monetary stance is tighter than it seems, once adjusted for one-off effects and base-effects influencing current inflation.
To read the full article: https://www.spglobal.com/ratings/en/research/articles/210927-economic-outlook-emerging-markets-q4-2021-vaccination-progress-and-policy-decisions-remain-key-to-growth-12122390