Growth to decline in emerging markets in Europe and sub-Saharan Africa

Russia’s economy is expected to contract 1.3 per cent this year amid coronavirus crisis, IIF report says

A woman wearing a face mask walks her dog along the border between Italy and The Vatican during the lockdown following the coronavirus pandemic. AFP / Filippo MONTEFORTE

Growth is expected to decline 1.3 per cent in emerging markets (EM) in Europe and 0.2 per cent in sub-Saharan Africa due to coronavirus pandemic, the Institute of International Finance said.

A number of countries in sub-Saharan Africa, particularly, are likely to be hit by lower demand for oil and other commodities.

“As a result of falling demand around the world, we see commodity prices under substantial pressure in coming months,” the IIF said in a report authored by its deputy chief economist Elina Ribakova, head of CEEMEA research Ugras Ulku and economist Benjamin Hilgenstock.

“For emerging markets, financial channels amplify the already severe global growth and commodity price shocks. With the sudden stop in capital flows, local rates in CEEMEA (Central and Eastern Europe, Middle East and Africa)—as well as the EM universe as a whole—have increased markedly, even though many central banks cut interest rates in March.”

The IIF said earlier this week it expects global GDP to shrink 1.5 per cent this year, from a previous forecast of growth of 2.6 per cent due to the financial turmoil caused by the outbreak of coronavirus as well as a plunge in oil prices by about 60 per cent since the beginning of this year.

The report said Central and Eastern Europe (CEE), due to its dependence on exports to the Euro area, will be heavily affected by a significant contraction in output in the currency union. As a result, the CEE-4—Czech Republic, Hungary, Poland, and Romania— are projected to experience GDP declines ranging from 2.5 per cent to 3 per cent in 2020, it said.

“While economic activity in January-February appears to have been unaffected by Covid-19, the outlook for the rest of the year will be challenging. However, financial sector vulnerability is markedly lower compared to the global financial crisis,” it said.

“In Ukraine, we worry about the possibility of a deeper crisis. Recent news of progress in IMF (International Monetary Fund) programme negotiations are encouraging as market access is likely to be significantly curtailed in coming quarters.”

Russia’s economy is expected to shrink by 1.3 per cent this year, which is less than in previous crises in 2009 and 2015. The flexible rouble, central bank credibility, and significant macroeconomic buffers are expected to help insulate the economy.

“Russia’s fiscal policy response is still modest but will need to be stepped up. The possibility of a deeper Covid-19-induced crisis is high, as Russia’s healthcare system is poorly prepared for a pandemic—especially in the regions and following years of expenditure cuts,” the IIF noted.

In South Africa, the institute predicted a GDP decline of 2.5 per cent for 2020 due to “worsening debt dynamics”.

On Turkey, the multilateral lender said the country is likely to maintain positive growth, "despite an estimated sharp output contraction in the second quarter”.

“Growth momentum in Turkey appears to have gained significant speed in early 2020, with high-frequency indicators such as bank lending pointing to a very strong growth performance in the first quarter.”

Countries in sub-Saharan Africa, reliant on commodity exports and facing high debt rollover needs, are particularly exposed to the effects of a global recession and are expected to see a significant decline in output growth.

“The region’s most important trading partners, including China, are experiencing large Covid-19 outbreaks and commodity prices have fallen sharply. This will affect oil exporters such as Nigeria, Ghana, and Angola the most, while economies more insulated from global markets might do better.”

The Covid-19 health crisis represents the biggest challenge to the global economy since the 2008 financial meltdown with at least $20 trillion (Dh73.4tn) having been wiped off stock markets in the past few months.

Worldwide, there are about 488,000 confirmed cases of coronavirus, also known as Covid-19, with more than 22,000 deaths, according to Johns Hopkins University as of Thursday. Nearly 118,000 people have recovered.