Emerging markets under pressure

On the face of it emerging market (EM) economies have come through the pandemic in good shape. Activity in emerging economies held up better than in Europe and North America and the headline numbers suggest that the pandemic has taken a lesser toll than in many rich countries.

Scratch beneath the surface and a different story emerges. Outside China and South-East Asia the pandemic has hit many EMs hard. Data from the Economist show that of the 33 nations with the highest excess deaths rates (deaths above normal levels relative to the size of the population) 30 are emerging economies. Among larger countries Russia, Mexico, Poland, Hungary and South Africa rank as having the highest excess death rates, roughly two to three times those seen in the UK. 

Nor has economic activity held up as well as the headline figures suggest. China’s zero-COVID policy has helped suppress the virus and limit deaths, and its economy was one of the few sizeable economies that expanded in 2020. Elsewhere most EMs economies shrank in 2020 with countries that have higher death rates tending to see the most severe downturns. Mexico and many emerging nations in south and central America and central and eastern Europe saw deep recessions.

EM economies tend to have more fragile public finances and find it harder, and more expensive, to borrow overseas, than richer nations. Social security systems are less developed, making it more difficult to channel help to those most in need. Emerging nations spent at about a quarter of the rate of rich countries to support their economies in 2020–21. Because they were unable to subsidise wages and protect jobs on the scale seen in the West emerging economies have suffered higher unemployment rates. The UN reports that the global ‘extreme poverty rate’ rose for the first time in over 20 years in 2020.

The global economic recovery is continuing, but emerging nations face a long journey back to normality. More than two years into the pandemic vaccination levels outside China and much of South America lag behind those in the West. Africa’s vaccination rate, at 12%, is boosted by South Africa’s relatively high rate of 29%; in most African countries vaccination levels are a fraction of the 72% rate seen in the EU.  

The inflation that is washing over the economies of the West is also hitting many emerging economies. (Asia is the exception, partly because lower case rates have resulted in less severe swings in supply and demand.) For most EMs rising commodity prices, global supply disruptions and higher import prices, triggered by weaker currencies, have stoked inflation.

After the job losses and reduced income of the pandemic many EM consumers now face rising prices and a further squeeze on spending power. Central banks in a number of EM economies, including Russia and Brazil, have had to raise interest rates in an effort to support their currencies and dampen inflation pressures.

With the US Federal Reserve about to start raising US rates EM economies will have little choice but to keep raising rates. A US hiking cycle is also likely to put pressure on EM currencies, fuelling inflation and raising the cost of servicing the large amount of EM debt denominated in dollars.

So it’s likely to get harder for many EMs to borrow overseas. Indeed, with government debt levels for most EMs up sharply since the start of the pandemic, debt reduction, reinforced by the pressure of rising rates, is the order of the day. This leaves EMs with less scope to boost their economies in the event of new COVID outbreaks.

But what about China, the dominant EM nation, and the economy that has powered global growth for much of the last quarter of a century?

The glory days of blistering double-digit Chinese growth are past. China’s zero-COVID policy and ensuing mobility restrictions are weighing on activity. The more transmissible nature of Omicron poses a particular challenge to the zero-COVID policy and to vaccines whose efficacy is less well known than Western equivalents. Long-term factors are also at work. A shrinking workforce is slowing growth while elevated real estate prices and debt levels have created new vulnerabilities.  Meanwhile the government’s “common prosperity” programme designed to spread the benefits of growth more widely has brought new regulations that have wiped billions of dollars off the value of technology, education and entertainment firms.

The baton for the fastest growing emerging country has passed from China to India. Forecasters see India growing by around 9.0% this year and outpacing Chinese growth for each of the next four years. Yet even in India the pandemic has left a legacy of elevated youth and rural unemployment and weakened consumer spending power.  Large though the India’s population and economy are, faster Indian growth here cannot make up for slower growth in China, the world’s second largest economy.

Emerging economies played an outsize role in powering the world economy out of the financial crisis. Between 2008 and 2015 EMs accounted for almost 90% of the growth in nominal global GDP. The pandemic has dealt EMs a harder blow. EM growth will continue to outpace developed market economies, but the gap between growth rates will be narrower than any time this century. The IMF estimates that EMs will account for roughly half of the growth in world GDP between 2019 and 2026 – hugely significant, but far less than in recent years.

The universe of nations that make up emerging markets is large and varied. So, too, are the circumstances of each country. Some EM economies suffered little lasting damage from the pandemic and are primed for good growth. Looking around the world it remains the case that the fastest growth rates are to be found in EMs. But overall, and for most EM economies, the pandemic will cast a long shadow.

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