As far as growth is concerned, on the domestic demand side, several governments are trying to limit the erosion of household purchasing power from the spiking cost of living, by extending measures introduced during the pandemic or enacting new ones, such as price caps, higher subsidies, lower excise taxes and several other non-monetary measures. Generally, this is softening domestic demand at only a slow pace. Having said that, for commodity importers the impact is even more negative and not negligible on the fiscal accounts, in absence of any mitigation from higher revenues, dividends and royalties as it happens for commodity exports. Since the beginning of the year, budget balance targets for 2022 have been on a deteriorating path for many Ems, with the exception of Gulf countries, several Latam America countries, South Africa and few countries in Asia, such as Malaysia and Indonesia, where we do expect more stable economic conditions rather than a proper improvement. The complexity and heterogeneity of the universe appears even more striking when we look at countries that should actually benefit from the current environment but do not. In Nigeria, the obsolete production system as well as the amount of oil disappearing from the official accounts is making it hard to benefit from relatively high oil prices while, on the contrary, its fiscal position is suffering from the high costs of fuel subsidies.
The withdrawal of policy stimulus put into place after the pandemic outbreak on the fiscal side as well as the normalisation of monetary policy that began in early 2021 (even earlier in China, in the second half of 2020) is going to weigh incrementally on economic activity and domestic demand. Significantly high inflation has allowed real policy rates to stay supportive for long even in the middle of the current monetary policy tightening cycle. Only few EM countries are closer to positive real rates (China, Brazil, and Mexico, to name some). The inflation uptrend has been stronger than expected and mostly driven by volatile global factors, such as energy and food; moreover, the absence of demand pressure, due to longer mobility restrictions together with effective subsidies policy, has differentiated the inflation picture in Asia in comparison with Latam and CEEMEA. Looking at the next six months, on the back of a more benign trend in oil and commodities prices (in comparison with the peaks seen in the first half of the year), as well as a wider supply bottlenecks adjustment (already visible in declining freight costs on some routes), inflation dynamics should stabilise and then moderate. In our expectations, the first and boldest hikers will get there earlier than other EMs. Brazil has already reached this turning point between April and May.
Contrary to what normally happens, emerging markets embarked on the transition of monetary policy away from their extraordinary dovish conditions much earlier than developed markets. The wave of monetary policy normalisation has continued unabated until today and is still not done. In particular, regarding the external drivers of EM monetary policy, while the Federal Reserve had turned more hawkish relatively late, since then, the hawkish bias has increased in tone and actions that have been undertaken. With that to consider, EMs have more than domestic drivers to look at and increasingly tight global financial conditions have made EM monetary policy authorities more prudent. Some CBs have abandoned a premature narrative of neutral or easier MP stance while others have finally started to hike, absent any Inflation pressure so far.
However, considering our EM inflation outlook, as well as the house outlook vis-à-vis Fed hiking (with a terminal rate of around 3.75% by early 2023), US yields and the USD, the EM monetary policy turning point, starting form few countries, has been only slightly pushed forward from the end of 2022 to early 2023.
Coming back to the growth dynamics from an external angle, it’s worth highlighting that, in the aftermath of the conflict in Ukraine, global growth expectations have been revised down sharply and, almost simultaneously, we have seen a resurgence of local lockdowns in China. All of a sudden, global demand has become an orphan of its most important contributors – European growth will flirt with zero/negative rates; US GDP has been significantly revised down; and China is expected to perform less robustly than the official growth target set in late 2021 (around 3.5% YoY vs 5.5% YoY). Across the EM, some partial relief will come from the commodity boom for the commodity exporters, alleviating/offsetting the demand deceleration. Indeed, recent trade balance figures are highlighting clear positive dynamics between commodity exporters while negative for the commodity importers; only across Asia the different Trade Balance trends between Indonesia and Philippines highlight that. Unfortunately, more protectionist measures aiming at directing raw material production to the domestic market instead of exporting it are partly limiting the benefit of commodity high prices.