Ratings agency S&P Global cut its emerging market forecasts on Monday, predicting a 4.7% slump on average in 2020 due to the coronavirus, and warned that all countries would be left with permanent scars.
The firm said the downward GDP revisions mostly reflected the fact that the pandemic was worsening in many emerging markets and set to cause a larger hit to foreign trade than foreseen in April, when S&P predicted a 1.8% contraction.
“We project the average EM GDP (excluding China) to decline by 4.7% this year and to grow 5.9% in 2021. Risks remain mostly on the downside and tied to pandemic developments,” S&P said in a report.
All emerging economies would suffer lasting contractions from the pandemic. It said the gap relative to the pre-coronavirus GDP path could be as large as 11% of output in India, 6%-7% in most of Latin America and SA, 3%-4% in most of Emerging Europe, and 2% in Malaysia and Indonesia.
Out of a total of nearly 1,800 negative ratings actions — either downgrades or rating “outlook” cuts — taken by S&P between January and June, 420 were in emerging markets.
Latin America’s forecasts saw the biggest cut. The region is now expected to suffer a 7.4% GDP slump in 2020, including a 7% drop in its largest economy, Brazil. The region has seen nearly 70% of its credit ratings hit by the virus, and is also expected to produce one of the weakest recoveries next year.
In Asia, India’s economy is seen contracting 5% this fiscal year, starting April 1, due to difficulties in containing the virus, an anaemic policy response and underlying vulnerabilities, especially across the financial sector.
China, in contrast, is still expected to grow a modest 1.2% this year and a robust 7% next, helped by strong stimulus spending, resilience in electronics manufacturing, and a gradual recovery in service industries.
What did S&P write about Turkey?
- In Russia, new cases have begun to decline, although they remain elevated (which in part reflects very high testing levels). Turkey has made good progress in containing the virus, and while the pace of new daily cases recently picked up slightly, it has now stabilized.
- For emerging markets exposed to the U.S. demand (Mexico), or to European demand (Poland, Turkey), the hit to external demand and exports revenues came later, towards the end of the first quarter.
- While exposure differs, trade flows across EMs globally fell steeply between February and April, driven by the decline in both export volumes and prices (see Chart 4). Exports revenues were hit particularly hard in April, dropping by as much as 60% year-on-year in India and South Africa, more than 50% in Colombia, and 35%-40% in Mexico, Russia, and Turkey. In addition to a collapse in global demand, widespread domestic containment measures prevented some exporters from operating in April.
- Deflationary pressures have dominated across EMs, with core inflation falling almost everywhere, reflecting the severe slump in demand. As demand has begun to recover, core inflation has picked up. However, inflation rates are below target in most EMs, with the notable exception of Turkey, where it has been at double digits and accelerated in June.
- In some cases, worsening investor sentiment–linked to the spread of the pandemic or concerns about the fiscal trajectory–may lead to renewed exchange rate pressures, which can show up in prices. This could prompt some central banks to start raising interest rates. By the end of 2021, we forecast higher policy interest rates across Latin America, in Turkey, and in South Africa. For emerging Asian economies and Russia, we expect policy rates to remain on hold until 2022.
S&P also predicts that as late as 2023, Turkey’s GDP trajectory will hover %4.6 lower than pre-Covid days.
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