Six themes affecting emerging markets

Aviva Investors has broken down the key themes affecting emerging markets as discussed at the International Monetary Fund’s (IMF) annual meeting.

Carmen Altenkirch and Nafez Zouk, Aviva Investors emerging markets (EM) sovereign analysts, engaged with policymakers and delegates to ascertain the real impact of the pandemic on growth, fiscal metrics and debt burdens in EM.

The six key themes were as follows:

1. Low-income countries were experiencing higher output losses, notably slower vaccine rollouts and generally less policy support. The IMF notes that if differences in vaccine access persist, inequalities in economic outcomes were likely to increase, as low-income countries were exposed to a longer, more structurally damaging impact from the pandemic.
2. IMF bailouts were being used to close the fiscal gap across several countries, including in Ghana, which was causing a delay in policy response. Egypt, once the darling of the IMF, was opting not to renew its Special Drawing Rights (SDRs) so it did not need to meet more stringent reform requirements.
3. Some central bank policymakers stressed that the almost-exclusive focus on supply-side issues, labour shortages, bottlenecks was only one part of the inflation story. Policymakers were seeing signs of a change in demand and price pressures driven by new spending patterns following the pandemic (perhaps explaining sticky inflation in Russia and Mexico).
4. The Phillips curve (the inverse relationship between the unemployment rate and inflation) was alive and kicking in EM, particularly in central and eastern Europe, South Africa and Colombia. Rental inflation was rebounding stronger than expected, causing extra price pressures in some countries, including Colombia and Poland.
5. Many policymakers worried about the likely tightening of global policy next year when financing needs would be still high following the impacts of the pandemic. Supply chain issues and lockdowns in Ghana, Nigeria, Colombia and Malaysia had shown they had not benefited as much as they should have from higher commodity prices. In other countries, fiscal consolidation was expected to be slow, meaning wider fiscal deficits would remain for longer than before the pandemic.
6. Climate change and financing a low-carbon transition would receive a greater focus as many emerging markets around the world had gone through weather-related calamities. Growing investor appetite for sustainability-linked products should increase the flow of capital to countries whose agendas support the climate transition and should incentivise countries to adopt this agenda.

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