The economic recovery in emerging markets (EMs) will remain highly vulnerable to pandemic-related setbacks, given the slow vaccine rollout, financial services company S&P Global Ratings notes in its ‘Emerging Markets Monthly Highlights: Slow Vaccination Keeps Recovery At Risk’ report.
It notes that while it seems as though the worst of the latest Covid-19 wave has passed in most EMs, the likelihood of intermittent lockdowns will remain high for some time.
As such, vaccination progress will remain a key variable of future economic performance.
Most EMs are far from reaching sufficient vaccination levels to ensure an uninterrupted economic recovery, it notes.
Meanwhile, it points out that the recent rise in commodity prices is supportive for most EMs, but that inflation risk is increasing, along with pressure for tighter monetary policy. Rising commodity prices tend to benefit EMs, especially producers of energy (Colombia, Russia and Saudi Arabia) and metals (Brazil, Chile and South Africa).
However, the recent rapid increase in commodity prices is heightening inflationary pressures that could linger for some time. This could prompt some EM central banks to tighten monetary policy earlier rather than later to contain inflation expectations, at a time when economic recovery is fragile and vulnerable to setbacks, the report says.
It indicates that the risk of social unrest in EMs will remain high, undermining policy predictability.
Social unrest in Colombia over a tax proposal underscores a wider issue across several EMs – the pandemic hit the middle- and lower-income households the hardest and income inequality has worsened, the report notes.
It says that fiscal adjustments will be necessary in several EMs to pay for the Covid-19 stimulus bills and, in many cases, those households that were hit the worst during the pandemic may have to pay a high portion of that bill, creating challenging social and political dynamics and, ultimately, increasing policy uncertainty.
Financing conditions remain supportive, the report indicates.
It says that appetite for EM debt remains robust and that the number of issuances is rising.
The report further notes that EM spreads are close to their pre-pandemic levels.
Potential for an abrupt repricing of US monetary policy is a key risk for financing conditions in EMs, it warns.
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