By Jorgelina do Rosario and Karin Strohecker
LONDON (Reuters) – It has been a rough 12 months for emerging markets which have seen more governments stumble into default, currencies suffer and double-digit losses in stocks and bonds alike – though many investors are optimistic that 2023 could bring some relief.
Below are the events, trends and topics investors expect to shape the outlook for emerging markets next 12 months.
1/ HIGH RATES, LOW GROWTH
A slowing pace of rate of interest hikes in the US and other major economies could set the stage for an emerging markets recovery in 2023, with a softer dollar and falling inflation providing much sought relief.
Developing economies are expected to cling to their growth differential over developed peers, but recession fears in the US in addition to Europe are casting a pall over global markets generally – especially in the primary half of the 12 months.
“The economic downturns together with the aggressive monetary tightening and geopolitical and commodity shocks that induce them can be temporarily painful in financial and emerging markets,” said David Folkerts-Landau, group chief economist at Deutsche Bank.
Recovery could possibly be delayed if emerging central banks lack room to lower rates of interest for many a part of the 12 months.
GRAPHIC: Emerging markets rates of interest (https://www.reuters.com/graphics/GLOBAL-MARKETS/RATES/akpeqqrzrpr/EM18CEN22121.2.gif )
China’s reopening following its COVID-19 lockdowns can be bumpy, but making up nearly a fifth of worldwide gross domestic product the prospect of a pointy upswing at a time of slow global growth is enticing.
Analysts expect a pointy pick-up in consumption and investment on the earth’s second-largest economy from mid-2023 onwards.
“In case you have a look at the savings rate for China right away, it’s extremely elevated,” said Erik Zipf, head of emerging market equities at DuPont Capital. “We expect that is going to get spent as soon as people feel comfortable to exit, that is going to supply a fairly large tailwind from an economic perspective.”
Russia’s invasion of Ukraine roiled markets and the world economy – and the way the war progresses in 2023 could possibly be no less necessary, whether that might be a continuation, escalation or progress towards finding a resolution.
Globally, the war has transformed energy markets and inflation pressures, food security and geopolitical risk perception – aspects which might be often more keenly felt in emerging economies. Emerging Europe has also felt the immediate humanitarian impact – from refugee movements to Russia’s brain drain.
GRAPHIC: FAO food prices hit historic highs (https://fingfx.thomsonreuters.com/gfx/mkt/zgpobbelavd/FAO%20food%20price%20index.PNG)
A growing list of nations are in debt distress within the wake of COVID-19 and the war in Ukraine: Zambia and Ethiopia try to overhaul debt burdens under the Group of 20 Common Framework. Sri Lanka and Ghana defaulted in 2022.
But a more complex mixture of creditors – including the emergence of China because the world’s top bilateral lender – in comparison with previous episodes of debt distress have made proceedings slow and sophisticated.
“To get all of them singing the identical song in the identical secret’s quite difficult”, said Tim Samples, associate professor of Legal Studies on the Terry College of Business.
The number of nations locked out of capital markets amongst smaller, riskier economies is at historic highs – though there is likely to be a saving grace.
“There’s not actually a variety of debt maturing next 12 months,” said Carmen Altenkirch, emerging markets sovereign analyst at Aviva Investors. “The country that is probably most in danger is Pakistan.”
GRAPHIC: Frontier bonds (https://fingfx.thomsonreuters.com/gfx/mkt/akveqqrynvr/Frontier%20bonds.PNG)
President-elect Luiz Inacio Lula da Silva will take office on Jan. 1 with markets already searching for signals of a fiscal anchor to manage spending in Latin America’s largest economy.
Policymakers have highlighted inflationary risks arising from da Silva’s 168 billion reais ($31.6 billion) spending proposal to fulfill campaign guarantees.
“Investors need to know if the debt-to-GDP in Brazil is explosive or under upward pressure, whether we’re hitting 100% debt to GDP anytime soon, or we are able to stabilize it over the subsequent two or three years,” said Gordian Kemen, head of EM Sovereign Strategy (West) at Standard Chartered Bank.
President Tayyip Erdogan could face the largest political challenge of his 20 years in power as Turks head to the ballot box in essentially the most high-profile vote in emerging markets.
The country has grappled with surging living costs and a plunging currency, with the lira falling to a record low against the dollar TRYTOM=D3 in recent days. Years of unorthodox monetary policy have seen many investors cut exposure to the country’s assets. A change in leadership could mark a stellar turnaround.
“That is potentially essentially the most interesting story of 2023, a technique or one other,” said David Hauner, head of EM Cross-Asset Strategy & Economics, EMEA, Bank of America Global Research.
Various other emerging market countries face elections. Voters in Africa’s most populous nation Nigeria select their next president in February, with incumbent Muhammadu Buhari not collaborating attributable to term limits.
In Latin America, Argentina will hold presidential elections in October. Two-time president and Vice President Cristina Fernandez de Kirchner said she “wouldn’t be a candidate for anything” in the final vote, after an Argentine court sentenced her to 6 years in jail in a high-profile corruption case.
In Poland, an election expected in autumn might see voters ousting the country’s ruling nationalist Law and Justice party (PiS), which could reshape Warsaw’s tense relations with Brussels.
(Reporting by Karin Strohecher and Jorgelina do Rosario, additional reporting by Rodrigo Campos; Editing by Emelia Sithole-Matarise)
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