Markets still under threat
RISKS: THEME LIKELY TO CONTINUE AS DEVELOPING ECONOMIES FACE A REALLY TOUGH 2021 Growing optimism that vaccines will help control pandemic.
Some risks aren’t going away any time soon for emerging markets, irrespective of the overwhelming view among investors and strategists that 2021 will be a year of continued recovery. Though the turbulence triggered by the coronavirus outbreak has given way to optimism that vaccines and central bank largess will keep the revival on track, a few themes are likely to keep dominating developing economies that collectively account for about 34%, of global gross domestic product.
1. Vaccine headway
After bringing much of the global economy to a halt in 2020, there’s growing optimism that multiple vaccines will help control the pandemic.
Yet banks such as HSBC Holdings Plc caution against too much enthusiasm as availability and distribution in emerging markets may lag behind their developed peers.
Wealthier countries have secured extensive supply deals to hedge their bets, while many developing ones may have to rely on international groups that have promised to make vaccines affordable.
The logistics of transporting, distributing and administering them require advanced infrastructure and medical expertise that might not be available in every country.
2. Gauging policy turns
Central banks in emerging markets followed their developed peers in cutting interest rates to record lows this year, together easing more than during the 2008 financial crisis. A number even took a page from the developed-market playbook by buying bonds.
Now, as vaccines are rolled out and the risk of inflation rises, some policy makers will come under pressure to reverse course, a theme that will come increasingly to the fore in 2021, according to Jean-Charles Sambor, head of emerging-markets fi xed income at BNP Paribas Asset Management in London.
3. Debt mountain
Unprecedented stimulus in emerging markets drove debt levels to all-time highs. Brazil, for example, is spending the equivalent of 8% of its gross domestic product to counter the impact of the coronavirus.
Moody’s Investors Service predicts Turkey’s debt burden will jump above 40% of GDP in 2020 from 32.5% last year. South Africa just had its credit ratings cut due to a worsening debt trajectory, while Colombia’s widening deficit is putting its investment-grade rating at risk.
Fitch Ratings has the highest balance of net negative outlooks for European emerging markets in more than a decade, while Oxford Economics says rising government debt will slow Latin America’s recovery.
4. Biden’s pivot
Emerging-market assets have been bolstered by Joe Biden’s victory in the US presidential election, but concerns are growing that his administration may be less than positive for many developing nations in the longer run.
Russia’s ruble slumped in the run-up to the US polls as investors feared a harder crackdown under a Biden administration.
Turkey’s Recep Tayyip Erdogan, who Biden has reportedly called an “autocrat,” and Saudi Arabia’s King Salman bin Abdulaziz are also preparing for a much tougher time.
The new president would probably pursue sanctions relief for Iran in the fi rst half of 2021 in exchange for a freeze on nuclear activity, while ratcheting up the rhetoric against countries including Saudi Arabia, Israel and Egypt, according to Eurasia Group.
–