By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income Strategy
Van Eck Associates Corporation

Summary

China’s latest growth downgrades might reflect the COVID resurgence. Other EMs are facing major growth headwinds, but some stand to benefit from mayhem.

China Growth Outlook

A key growth headwind of the past two years – COVID – refuses to fade into the sunset, and is staging a comeback in China. The number of cases is up sharply, with Shanghai going into a partial lockdown in the next few days. The COVID wave is one of the reasons why the consensus forecast for China’s 2022 growth started to slip lately, and is currently hanging just above 5% – noticeably lower than the official growth target of about 5.5%. China’s official activity gauges (due in a couple of days) will be closely watched, but it is worth noting that one of the mid-month gauges (Emerging Industries PMI) dropped by several points below the contraction/expansion zone.

Russia/Ukraine War and Supply Chain Disruptions

EM Growth Headwind #2 is a spike in commodity prices and new supply chain disruptions related to the Russia/Ukraine war. This particular factor, however, is more “selective”. Commodity/food importers will suffer, but commodity exporters might do very well – in particular, if there is support from other factors, such as politics. About a year ago, Saudi Arabia was expected to grow at about the same rate as Russia in 2022 (2.5-3%, see chart below), but a combination of rising oil prices and improved relations with Israel propelled the growth forecast to 6.5%.

EM Rate Hikes and Growth

EM Growth Headwind #3 is aggressive policy tightening, and it is especially relevant for EMEA and LATAM. The 2022 consensus growth forecast for LATAM had been downgraded the most – Brazil is now expected to expand by a mere 0.5% in real terms (down from around 2.5% projected about a year ago – see chart below). The approaching presidential elections can also weigh on sentiment going forward – this week’s replacement of Petrobras CEO (Petrobras is Brazil’s state-owned petroleum giant) due to rising fuel prices is a good example of the pre-election shake-up. Stay tuned!

Chart at a Glance: EM Growth – Variety of Outcomes

Chart at a Glance: EM Growth – Variety of Outcomes

Source: Bloomberg LP 

Originally published by VanEck on March 29, 2022.

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PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan’s index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG – JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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