The COVID-19 crisis hit emerging markets (EMs) in different ways.
Although public health and economic conditions are varied across the EM world, the overall setting is steadily improving with the pace of vaccine rollouts accelerating. But coverage still lags advanced nations. We expect GDP in many of these countries to recover strongly in 2022 and take the lead in the global recovery.
Pandemic-induced supply-side constraints will continue to weigh on the performance of export-dependent Asian economies. China’s slowdown is another area of concern for not just Asian economies like Taiwan, Singapore, the Philippines and Vietnam, but other resource-rich nations such as Chile and Brazil. All of these countries are tightly connected to Beijing in global supply chains.
"The pandemic has slowed the pace of economic convergence between the advanced and emerging worlds."
Higher commodity prices are a boon for some emerging markets and a curse for others. The recent pick up in commodity prices should bode well for the commodity-dependent Latin American economies. But inflation continues to rise in most of the emerging world because of higher prices for essentials and demand-supply mismatches on the back of economic reopenings. Energy and food account for a larger share of the consumer price basket in the EMs than in the developed world, and the prices for these essentials are touching multi-year highs. Exporters and factories are struggling with scarce inputs, shipping delays, and chronic port congestion.
Threatened by surging prices and high exchange rate pass-through, a growing number of EMs are tightening monetary policy, risking their embryonic recoveries. Central banks in Brazil, Russia, Mexico, and Chile have already raised policy rates to rein in inflationary pressures, while more countries are likely to follow suit next year.
Performance in emerging markets is directly connected to the effectiveness of policymakers in containing the virus and in providing fiscal and monetary stimulus. Broadly speaking, these dynamics are generating the widest gaps among EMs.
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Fiscal positions in most emerging markets have weakened significantly during the pandemic. It will be challenging for EM governments to rebuild fiscal space without hampering the recovery. Higher-risk borrowers might take comfort in the exceptionally low global interest rate environment; however, sustained inflation could force major EM central banks to tighten aggressively next year, pushing debt-dependent nations into distress. A debt crisis would be catastrophic and could trigger political instability, asset price volatility and diminished growth.
Continued recovery looks likely, but is not assured for EMs. A worsening pandemic and tightening financial conditions at home or abroad would inflict another hit on developing economies at a time they can ill afford it.
