Emerging market economies recovering at uneven pace, S&P says

Average GDP in emerging markets, excluding China, to decline 6.4% in 2020 and grow 6.2% in 2021, according to S&P forecasts

A security guard rests on a bench in front of a row of closed shops in New Delhi. AFP

Emerging market economies are recovering from the blow dealt by the Covid-19 pandemic at varying speeds amid easing movement restrictions, an upturn in global demand and favourable financial conditions, S&P Global Ratings said.

The ratings agency cut its growth forecast for emerging markets (excluding China), predicting a 6.4 per cent slump in 2020, 1.7 percentage points lower from its June estimate, but a return to growth of 6.2 per cent in 2021, S&P said in a report.

"This masks significant divergences between economies," it said. "The speed of the recovery varies across EMs, shaped by pandemic-related developments, along with other factors such as the pace of the rebound in major trading partners and the effectiveness of policy support."

S&P revised its 2020 GDP growth forecast upwards for Brazil, China, Russia, Poland, and Turkey for the first time this year. It cut its forecast in most other emerging markets – its forecast for India has been lowered to a contraction of 9 per cent, from a 5 per cent shrinkage previously.

Improvement in indicators such as industrial manufacturing and retail sales are contributing to the ongoing recoveries in emerging markets, though these vary widely by country, S&P said.

Many emerging markets suffered a severe decline in industrial production in March to April, but have since bounced back. In annual terms, in July industrial output exceeded last year's levels in Turkey, Malaysia and Poland, but it was still 11 per cent to 12 per cent below 2019 levels in India, Mexico, and South Africa.

Manufacturing Purchasing Managers' Indexes (PMIs) also show varying trends across emerging markets. Brazil posted a strong performance, reporting the strongest pace of expansion globally, across developed and emerging markets, in both July and August. On the other end of the spectrum, Mexico's PMIs remain at depressed levels of 41.3 in August. The rest of the emerging economies are in between but are mostly expanding.

S&P said it expects monetary policy to "remain loose" in key emerging markets this year and next.

The ratings agency warned that the risks to the outlook for emerging markets are "still skewed to the downside" and are related mostly to pandemic and policy developments.

"Geopolitical risks have risen particularly in EMEA. Earlier-than-expected deployment of a vaccine is a modest upside risk to our projections," it said.

In a separate report, the International Institute of Finance (IIF) also said that a "recovery is underway" in emerging markets based on expectations of improving trade volumes in the third quarter, according to its September 29 report.

Although emerging markets witnessed a much more severe outflow of funds from investors at the pandemic's height in March, they haven't faced large current accounts deficits because the level of imports dropped in most marktes during the pandemic and the trade tensions that have beset markets in the past couple of years meant current account deficits were already declining before the pandemic hit.

"Since many EMs entered the Covid-19 shock with relatively moderate current account deficits, we are going to see several sizeable surpluses this year," the IIF report said.

"For EMs, Covid-19 is mostly a growth crisis with fiscal implications and less of an external funding crunch."