It has been a challenging year for investors in emerging markets – equities have lagged their developed market counterparts, EM debt has delivered a mixed performance. Covid outbreaks have hampered the economic recovery, while questions have arisen over China’s role as the engine of growth for EM exporters.
Listen to the podcast with emerging markets economist Marina Chernyak on the recent developments and the outlook for 2022 or read the article below:
On the pandemic, while many emerging markets were initially behind in terms of vaccination rates when compared to developed market, many have made significant progress in recent months. This has allowed economies with initially adopted zero-Covid tolerance policies to start shifting towards a ‘living with Covid’ stance, relaxing the curbs on domestic travel and cross-border mobility.
In a country such as South Korea, with vaccination rates now comparable to those in Europe or the US, this has cleared the way for a firmer recovery in domestic demand. In Thailand, accelerated vaccination has allowed borders to be reopened to tourists, with hopes of reviving the flows of often all-important ‘tourist dollars’.
On the flipside, vaccination rates in India, Indonesia and the Philippines, for example, are still low. This is partly due to the mere size of their populations, complicated by logistical issues resulting from their geographies given the large number of islands that make up Indonesia and the Philippines.
China is the elephant in the room
The ‘elephant in the room’ is of course China, which has seen persistent virus outbreaks triggering clampdown-style restrictions under its zero-Covid policy that have resulted in a choppy recovery of consumer spending as well as sporadic factory closures that weigh on activity and consumer confidence.
Its tough anti-corona stance has broader implications, for example, for economies exporting to China, but also for the revenues that Chinese tourists bring into countries such as Thailand.
Of course, the uptick in Covid infections in Asia over the summer closed more than just Chinese industrial capacity. It affected wider Asia with factory shutdowns in Malaysia and Vietnam.
However, in countries such as Taiwan and South Korea – important global hubs for chip-making – we have not seen much of an effect. Exports have held up and more recently inventories appear to be growing again in a sign that production, for example, of semiconductors has continued and the global supply bottlenecks could be peaking.
The squeeze in chips – not an EM issue
Staying with global goods shortages – they have been attracting a lot of media coverage in recent weeks – there have admittedly been one-off production issues in emerging Asia. However, we believe the much talked-about shortfalls are due mainly to problems in the ‘receiving countries’ – large importers such as the US, where strong port unionisation, container chassis and other logistical bottlenecks, especially on the US west coast, are keeping goods from reaching their final destinations.
This is compounded by the global shortage of container ships at the time when strong global demand for goods – driven by a pandemic-induced shift in spending away from services – is meeting supply issues.
Recent manufacturing business surveys are showing that backlogs and delivery times have been normalising in large goods-exporting EM countries, but they have not seen much of an improvement in the US and the eurozone. It appears that for EM countries, the worst is over. The bottleneck problems are now more on the side of developed markets.
Rising inflation – EM central banks get tough
Overall, I believe it is important to keep a sense of perspective on the supply bottleneck saga and to carefully assess the causes and what this means for EM economies.
For instance, supply disruptions in sectors such as tech goods and car chips as well as pent-up demand are being reflected in rising price pressures globally, but perhaps more keenly so in the emerging markets.
Inflation in many EM has been ticking up and is becoming more broad-based, with high energy prices – which typically, together with food, have a greater weight in EM inflation baskets – being an additional driver.
What has been surprising the market is the reaction of EM central banks: Quite a few have already moved to tighten monetary policy in larger steps, with central banks in Latin America and eastern Europe in the lead. Asian central banks have lagged, which at this point reflects the limited inflation pressures there. We expect to see more of the same dynamic playing out in the months ahead.
Do not tar all emerging markets with the same brush
The disparate policy reaction to inflation among EM countries and regions underscores the need for investors to take a close look at idiosyncratic drivers in each market, instead of applying a top-down approach.
For example, in EM Asia, we expect economies such as Thailand, Vietnam and India to recover relatively quickly in 2022, provided there is not another paralysing spike in Covid infections. In eastern Europe, Poland, Hungary, Romania and the Czech Republic could well return to pre-pandemic growth rates.
These two groups could see their GDP grow by between 4.5% and 5.5% on average, well ahead even of the robust growth in the US expected for next year. On the other hand, economies such as Brazil, Chile, and Mexico could struggle to return to the relatively soft growth rates seen in pre-pandemic times.