Emerging markets have had a rough year, with more governments going bankrupt, currencies going down, and both stocks and bonds going down by double digits. However, many investors are hopeful that 2023 will bring some relief.
Here are some of the events, trends, and topics that investors think will affect the future of emerging markets in 2019.
1: HIGH RATES, LOW GROWTH
Slowing down the rate of interest rate hikes in the US and other major economies could help emerging markets recover in 2023. A weaker dollar and falling inflation would provide much-needed relief.
People expect developing economies to keep growing faster than developed economies, but fears of a recession in the U.S. and Europe are putting a damper on global markets in general, especially in the first half of the year.
Related: Investors in US stocks worry about a recession as they say goodbye to 2022.
David Folkerts-Landau, group chief economist at Deutsche Bank, said, “The economic downturns and the geopolitical and commodity shocks that cause them will be temporarily painful in financial and emerging markets” (ETR:DBKGn).
If emerging central banks don’t have room to lower interest rates for most of the year, it could slow down the recovery.
Graphic: Emerging markets interest rates (https://www.reuters.com/graphics/GLOBAL-MARKETS/RATES/akpeqqrzrpr/EM18CEN22121.2.gif)
Reopening in China
China’s reopening after the COVID-19 lockdowns will be rough, but since China makes up almost a fifth of the world’s GDP, the idea of a sharp upswing at a time when global growth is slow is appealing.
Analysts think that consumption and investment in the world’s second-largest economy will rise sharply after the middle of 2023.
“China’s savings rate is very high right now,” said Erik Zipf, head of emerging market equities at DuPont Capital (NYSE:DD). “We think that will be spent as soon as people feel safe enough to go out.” “From an economic point of view, that will be a pretty big boost.”
3/ THE UKRAINE WAR
Russia’s invasion of Ukraine shook up markets and the world economy, and how the war goes in 2023 could be just as important, whether it continues, gets worse, or moves closer to an end.
Globally, the war has changed energy markets, inflation pressures, food security, and the way people see geopolitical risks. These changes are often felt more strongly in emerging economies. Emerging Europe has also felt the immediate effects on people, such as the movement of refugees and the brain drain in Russia.
FAO food prices have reached all-time highs (FAO food price index: https://fingfx.thomsonreuters.com/gfx/mkt/zgpobbelavd/FAO%20food%20price%20index.PNG).
4: DEBT REWORKS
In the wake of COVID-19 and the war in Ukraine, more and more countries are having trouble paying their debts. Zambia and Ethiopia are trying to fix their debt loads under the Group of 20 Common Framework. Sri Lanka and Ghana didn’t pay their debts in 2022.
But a more complicated mix of creditors, including the rise of China as the world’s largest bilateral lender, has made the process slower and more complicated than in the past.
Tim Samples, an associate professor of legal studies at the Terry College of Business, said, “It’s not easy to get them all to sing the same song in the same key.”
The number of countries that can’t access capital markets because they are small and risky is at an all-time high, but there might be a way out.
Carmen Altenkirch, an emerging markets sovereign analyst at Aviva (LON:AV) Investors, said, “There aren’t that many debts that are due to be paid off next year.” “Pakistan is likely the country that is most at risk.”
Graphic: Frontier bonds (https://fingfx.thomsonreuters.com/gfx/mkt/akveqqrynvr/Frontier%20bonds.PNG)
5/BRAZIL BELOW LULA 2.0
President-elect Luiz Inacio Lula da Silva will take office on Jan. 1, and markets are already looking for signs of a fiscal anchor to control spending in Latin America’s largest economy.
Policymakers have pointed out that da Silva’s plan to spend 168 billion reais ($31.6 billion) to keep his campaign promises could cause inflation.
Gordian Kemen, head of EM Sovereign Strategy (West) at Standard Chartered Bank, said, “Investors want to know if Brazil’s debt-to-GDP is explosive or going up, if we’re going to hit 100% debt-to-GDP soon, or if we can stabilise it over the next two or three years.”
6: TURKEY ELECTION
President Tayyip Erdogan could face the biggest political challenge of his 20 years in office when Turks vote in the most important election in an emerging market.
The country has had to deal with rising prices and a falling currency. In recent days, the lira hit a record low against the dollar (TRYTOM = D3. Due to years of unorthodox monetary policy, many investors have pulled their money out of the country. A great turnaround could be caused by a change in leadership.
David Hauner, head of EM Cross-Asset Strategy & Economics, EMEA, at Bank of America (NYSE:BAC) Global Research, said, “This could be the most interesting story of 2023.”
7/ VOTE CASTING
There are elections in a number of other countries with new economies. Nigeria, the most populous country in Africa, will choose its next president in February. The current president, Muhammadu Buhari, will not run again because he has already served his maximum number of terms.
In October, the president of Argentina will be chosen in Latin America. After an Argentine court sentenced Cristina Fernandez de Kirchner to six years in jail in a high-profile corruption case, she said she “would not be a candidate for anything” in the general election.
Related: Uniper’s boss tells investors to back the German bailout or risk losing everything.
In Poland, voters could get rid of the country’s ruling nationalist Law and Justice party (PiS) in an election expected in the fall. This could change Warsaw’s tense relationship with Brussels.
($1 = 5.3109 reais)
