'Emerging markets will be vulnerable due to early monetary, fiscal support withdrawal'

Weakening growth in China could have effect on broader emerging market universe, says Institute of International Finance

Aysu Bicer   | 07.10.2021
'Emerging markets will be vulnerable due to early monetary, fiscal support withdrawal' FILE PHOTO


Emerging markets will be vulnerable due to the early withdrawal of monetary and fiscal support, according to a report released by the Institute of International Finance (IIF) on Thursday.

A further weakening of growth in China could have important effects on the broader emerging market (EM) universe, the IIF warned, adding that growth in China is expected to reach 8.3% in 2021.

Prospects for the global economy remain robust as it emerges from the COVID-19 shock, it said.

“However, we believe Delta variant outbreaks are delaying a full recovery in many countries, leading us to downgrade our April forecast for 2021 to 5.8% and to revise upward our outlook for 2022 to 4.8%,” read the report.

The global body also revised downward its 2021 growth forecast for emerging markets to 6.7%.

“While the recovery in the Euro area and the US is supporting stronger growth in EM Europe and Latin America, respectively, supply chain disruptions and weaker momentum in the Chinese economy are weighing on EM Asia,” the IIF said.

It also projected that non-resident flows to emerging markets, excluding China, will reach around $850 billion in 2021.

“Oil exporters in MENA should benefit from the likely relaxation of OPEC+ production limits on the heels of a marked recovery in commodity prices this year,” the report said.

Central banks forced to hike interest rates

While recovery in many EMs is still incomplete, most EM central banks were forced to hike interest rates ahead of the expected monetary tightening in mature markets, the IIF said.

“Brazil, Chile, the Czech Republic, Hungary, Mexico, Peru, Russia, and Ukraine were among those that hiked rates due to concerns over rising price pressures,” read the report.

However, it said inflation in most EMs is expected to peak toward the end of 2021 or in early 2022 “due to favorable base effects, lower commodity prices, and the fading impact of the reopening.”

Countries are at different locations with regard to the tightening or loosening of monetary conditions, according to the IIF. ​​​​​​​

“We see Russia as the country approaching the end of its hiking cycle first. Mexico may follow suit in December,” it added.

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