Russia s current account surplus reached $227 bn in 2022. Exports increased by more than 10% Jan-Sept 2022, while, imports contracted by 16% for the year as a whole. After falling by over 35% in spring, Russia s imports recovered. China, Hong Kong, and Turkey have expanded exports to Russia. Replacing Russia s former top trade partners, such as the EU. China accounts for over 36% of Russia s imports and 20% of exports. Despite export controls, Russia increased its import of chips in 2022. With China and Hong Kong supply about 40% of Russia s total chips.

The NBU has financed roughly 30% of the fiscal deficit with monetization. Ukraine s deficit is $4 bn due to higher military and social spending. Fiscal dominance is undermining the monetary transmission mechanism. Cutting spending is neither possible nor prudent during the war with Russia. Small adjustments can be made on the revenue side and monetary framework. Ukraine needs more external financing and a sound macro framework.

Russia stopped publishing some key statistics since February 2022. The authorities say the measure is to protect Russia from sanctions. Hidden data make independent economic analysis challenging. In the near term, it allows the authorities to control the narrative. It also incentivizes institutions to embellish reporting to the center. With time, accurate macro-analysis will become nearly impossible. Russia s observance of the IMF s SDDS appears sufficient for now.

Russia s current account surplus reached $180 bn by end-August. Well on track to hit the forecast of $250-$280 bn surplus in 2022, followed by a current account surplus of about $80 bn in 2023. Russian banks are accumulating FX as the BoR is under sanctions. Due to the risk of further sanctions, Russia is keen to de-dollarize. Despite the creative schemes, progress has been limited so far.

Russia s fiscal accounts continue to benefit from high commodity prices. Debt-to-GDP stands at 17%, and the NWF fund is 8% of GDP in 1H2022. However, 40% of federal budget revenues come from oil and gas. Revenues will fall due to energy wars and the EU oil embargo in 2023. We expect a federal budget deficit of about 2% in 2022 and 3% in 2023.

ASEAN-5 is highly dependent on China for exports. The region is also an important indicator of global activity. External demand remained surprisingly robust in 1H2022. However, we expect some deceleration in 2H2022. China s slowdown remains the key risk for ASEAN-5.

Indonesia has faced less pressure than other ASEAN countries. Favorable terms of trade and fiscal subsidies helped contain energy prices. Bank Indonesia can afford to be patient with hikes as core CPI remains moderate. Policy normalization through term structure and government bond sales, should help ease capital outflow pressures amid global tightening.

Load shedding reached new record highs in recent months, with more to come. High-frequency data already reflect the impact on major sectors of the economy. With electricity problems persisting in July and expected to extend into the fall, overall economic activity likely fell markedly in Q2 and will decline further in Q3. Inflation probably peaked in June, but is expected to remain above 6% over H2, which will keep pressure on the SARB to continue tightening monetary policy.

Emerging markets have seen a "great moderation" of inflation in recent years. We see substantial risks of a synchronized reversal as DM inflation spills over. Central banks in EM started hiking rates earlier than those in DM in this cycle. However, with inflation expectations still less anchored in emerging markets, and the share of commodities in EM consumer price baskets much higher, they will have to continue hiking proportionally more than DM going forward.

Ukraine has received $6.8 bn in assistance since the beginning of the war. However, the monthly fiscal financing gap reached nearly $4.5 bn in May. $23 bn in commitments for the remainder of 2022 might not be sufficient. The NBU has been providing substantial monetary financing to the budget. To stabilize FX and bring real rates to positive territory, it hiked rates to 25%. Without further support, Ukraine may face a BoP crisis in the coming months.

This paper highlights why sanctions on Russia should not be considered static. Rather, they are a "moving target" requiring regular adjustments as their consequences play out and countermeasures are taken. Importantly, we have also yet to reach the top rung of the escalation ladder. Western allies could take additional steps in the coming weeks and months to keep up pressure on the Russian government.

Russia has weathered the de-SWIFTing of key banks better than many expected. Investment in domestic payments and messaging systems since 2014 has paid off. Some concerns are being raised about sanctions circumvention via crypto assets. We believe it to be unlikely that Russia can rely on such channels in the near term. The market appears to be too small relative to the country’s trade and capital flows. U.S. and EU sanctions have also been extended to crypto assets and companies.

An embargo by the EU on Russian crude oil and petroleum products would be impactful. While details are still being discussed, we project meaningful volume reductions in 2022. The final impact over 2022-24 will largely depend on Russia’s ability to redirect exports. Sanctions by the U.S. and EU could make a difference as far as third parties are involved. We estimate Russian exports could be $155 bn lower than the baseline over 2022-24. Uncertainty surrounding this estimate is unusually high due to the number of moving parts.

Russia stopped natural gas exports to Poland and Bulgaria on April 27. Disruptions should be limited for Poland due to high storage levels, with more diversified sources, including LNG imports, also factoring in. We do not expect spillover effects to other European countries’ supplies. However, Russia’s energy policy is prompting them to seek other sources.

An EU embargo on Russian crude oil exports would have a meaningful impact. Oil accounts for one-fourth of Russian exports and around 30% of fiscal revenues. Ultimately, the effect will depend on the country’s capacity to redirect exports. Infrastructure constraints and the threat of secondary sanctions are key challenges. European decision-makers may prefer direct sanctions on the shipping industry. Overall, the EU has a better chance of limiting "seaborne" (vs. pipeline) oil exports.

Russia’s war on Ukraine has caused a strong surge in commodity prices, as well as uncertainty regarding global growth and the outlook for inflation. We have revised down our growth forecast for the ASEAN-5 and South Korea. Rising inflation will prompt central banks to begin policy normalization in ’22. Current account dynamics will be driven by relative exposure to commodities. Risks stem from an uncertain outlook for China and higher energy prices.

Russia’s invasion will have a severe impact on Ukraine’s economy in 2022. We expect output to contract by more than 35%-with risks to the upside. The country’s fiscal gap could reach $3-10 bn/month as revenues collapse. Reserves may also come under heavy pressure should the war be protracted. Ukraine needs macro-financial assistance now-not only for reconstruction. Commodity supply chain disruptions will have worldwide repercussions.

Severe sanctions have focused on Russia’s domestic financial system, with freezes of Bank of Russia assets among the most impactful steps. Emergency liquidity support by the CBR stabilized the banking system. The Ruble has also made up most of its losses due to capital controls, together with large current account surpluses and tight monetary policy. We see a tightening of financial sector sanctions as likely going forward.

Sanctions have hit the Russian economy hard, but more measures are likely coming. At this time, the discussion largely focuses on a potential embargo on energy exports. We show that a stop to natural gas imports would be much more difficult than to oil. This is due to both Europe’s gas supply composition as well as the mode of delivery. For Russia, an embargo would have a dramatic effect on overall activity and exports. The country could lose $250-300 bn in export receipts, depending on price dynamics.

We expect the Russian economy to contract by 15% in 2022 due to the war in Ukraine. Sanctions play an important role but so does "self-sanctioning" of foreign companies. Domestic demand will fall sharply, while a collapse in imports will offset lower exports. Together with a decline of 3% in 2023, this will wipe out fifteen years of economic growth. However, the impact on medium- and long-term prospects is likely to be even more severe. "Brain drain" and low investment will weigh heavily on already-subdued potential growth.

Sanctions on Russia following the invasion of Ukraine will lead to a deep output contraction. Soaring energy prices and supply chain disruptions are beginning to affect Europe’s economy. The resulting weaker foreign demand, including from the Euro area, will weigh on EM Europe. In addition, tighter liquidity conditions are likely to be a drag on domestic demand through ‘22. Over the medium term, EM Europe could benefit as investors are withdrawing FDI from Russia. The outlook is clouded by extraordinary uncertainty as the military conflict is likely to drag on.

Russia’s invasion of Ukraine has triggered a number of severe sanctions. China, an important partner, has maintained a deliberately neutral stance. While Russia-China trade is important, financial links remain minimal. China could mitigate Russia’s loss of access to global payment systems. Furthermore, with 40% of reserves frozen, holdings in China are critical. The Bank of Russia (CBR) may need to get creative with FX interventions.

This paper will systematically look at additional sanctions that have been or could be imposed on Russia in several key areas: global payments systems, access to the U.S. Dollar, sovereign debt, hydrocarbon exports, and export controls. Equally important, it will not only analyze the effects of these latest sanctions on the Russian economy but also the broader implications for international financial markets. For example, one of the biggest impacts on the global economy is likely to be on trade. While details on how the new sanctions affect energy are still emerging, we do know that sanctions on its central bank will make it more difficult for Russia to export energy and other commodities. As a result, we may see commodity prices surge.

Natural gas imports from Russia have fallen sharply, and storage levels are extremely low. Europe’s high dependence on the country creates vulnerabilities and limits policy options. In the short term, Europe would likely be able to manage even in case of a full disruption. But a full replacement of Russian imports does not seem feasible for a number of reasons. Among them are infrastructure constraints and the lack of alternative supplier capacities. Thus, politically and/or economically painful demand-side adjustments would be needed. Nonetheless, Europe should begin to invest in reducing vulnerabilities while there is time.

Russia’s financial system is dominated by state-controlled banks and highly concentrated. The five largest of these banks represent almost two-thirds of total banking system assets. Foreign institutions only account for 6.3% and have reduced their exposure in recent years. Both Russian banks and corporates were forced to deleverage due to sanctions since 2014. Their external liabilities have fallen by more than 40% to $380 bn, with assets at $530 bn. Total Russian FX holdings of $750 bn can cover external debt, thus reducing vulnerabilities.

Disconnection from global payments systems is increasingly proposed as a "nuclear option". In response to sanctions, Russia has developed domestic payments and messaging systems. But limited international connectivity means cross-border transactions remain challenging.

Russia has continued to diversify away from U.S. assets due to sanctions. Most evident is the shift in the currency composition of official reserves. The U.S. Dollar now accounts for 16% of reserves, down from 40% in 2014. Reserves have also been moved away from the United States and Europe. External trade settlements in U.S. Dollar are declining, albeit more slowly. Inflation targeting and credible monetary policy led to lower dollarization.

The Nord Stream 2 pipeline is expected to enter into service in 2022H2. Several rounds of U.S. sanctions have delayed but not stopped the project. And the administration is attempting to mend fences with European allies. But additional measures are likely in case of a Russian invasion of Ukraine. For Europe, sanctions related to natural gas imports are highly problematic. However, a Russian escalation of the Ukraine conflict would force hands. German authorities are considering "all possible measures" against NS2.

The recent Lira depreciation is much more pronounced than in 2018. Importantly, the CBRT’s monetary policy response has been different. Rate cuts contributed to depreciation, raising financial stability concerns. FX passthrough will affect rising inflation and inflation expectations. Lira returns above inflation should help ease inflationary pressures.

External financing stress should be moderate in the coming months. Support by the IMF and EU, and the 2021 SDR allocation play a role. As do positive terms of trade and successful placement of Eurobonds. The IMF program’s extension to mid-2022 was of critical importance. Key risks are de-anchored inflation expectations and reform reversal. Furthermore, the conflict in Eastern Ukraine could escalate further.

Favorable commodity price dynamics will drive up current account surpluses. Russia will also be among only a few countries without fiscal deficits in 2022. Inflation remains the key concern and we expect the CBR to continue hiking. Geopolitics continue to play a major role with new U.S. sanctions a possibility. However, Russia appears well-prepared to withstand their potential impact.

Nigeria’s exchange rate regime and FX shortages remain among the key issues. The Naira has come under renewed pressure in the parallel market in 2021Q3. We expect the CBN to undertake another step devaluation in the coming months. NDFs indicate that the currency could rise to NGN470/$ by the end of next year.

Non-resident portfolio flows to local markets have recovered Covid-related losses. Looking at country allocations, important shifts have taken place in recent years. Foreign holdings are significantly lower in Brazil, Mexico, Poland, and Turkey, and higher in Egypt, Indonesia, Russia, and South Africa, due to policies and FX. Importantly, pressure on EM to defend their currencies has declined in recent years. However, EM are now more directly exposed via foreign investment in local bonds. And the synchronization of global inflation makes them vulnerable to DM inflation.

Non-resident flows to EM local markets x/ China have now recovered from the Covid shock. Dynamics differ among countries, however, with some still seeing large cumulative outflows. Foreign investors currently hold around $600 bn in local government debt outside of China. Inflows have been relatively weak in recent months and cost of funding has risen across EM. The opening of China’s local market has had a large impact with $250 bn in inflows since ‘18. The country now accounts for close to 40% of total foreign investor positions in local EM debt.

EM local market returns react more to global factors than during past stress episodes. However, they remained stable in 2021, and a "Taper Tantrum 2.0" did not materialize. Nonetheless, EM local markets continue to lag EM credit which has largely recovered. We expect investors to remain cautious toward these assets due to inflation concerns. The so-called "transitory" factors behind global and EM inflation are likely to linger.

EM are traditionally exposed to swings in global risk sentiment and reflation concerns. However, the increase in DM rates has had a muted effect on EM credit so far in 2021. Concerns earlier in the year over a possible "Taper Tantrum" 2.0 proved not justified. This contrasts with past stress episodes when EM spreads reacted substantially more. The muted response is likely due to still supportive policy stances by DM central banks. External vulnerabilities are also lower due to still-favorable current account dynamics.

We have revised our 2021 growth outlook for ASEAN+ from 4.5% to 3.6%. This is mostly due to lockdowns weighing on manufacturing and services. However, ASEAN+ countries have more policy space to respond to shocks. Non-resident capital flows are projected to rebound this year to $228 bn. FDI and portfolio debt are key drivers but 21H2 will likely see a slowdown. Nonetheless, we expect flows above pre-pandemic levels in 2021 and 2022.

We project non-resident flows of $128 bn to CEEMEA countries in 2021. Higher FDI and the IMF’s SDR allocation are the most important drivers. Excluding one-offs, however, flows will remain below pre-pandemic levels. G3 tightening will likely reduce investors’ appetite for EM assets in 21Q4. But further rate hikes in CEEMEA should improve portfolio flows in 2022. Non-resident flows to the region are estimated to reach $98 bn next year.

In this note, we update out view on inflation and monetary policy in emerging markets. Rising inflation, even if partially transitory, has forced the hand of EM central banks. We expect inflationary pressures in many countries to peak in the next six months. Slowing growth, favorable base effects, and lower commodity prices will be the drivers. However, rate hikes were also prompted by expansionary fiscal policy in some cases. Furthermore, tightening global liquidity in 2022 may add pressure on central banks.

Renewed pandemic containment measures weigh on economic activity in Kenya and Uganda. Low vaccination rates due to supply constraints make a stop-and-start recovery more likely. Benign inflation dynamics have allowed the BoU to continue its accommodative policy stance. However, real interest rates are still attractive and foreign capital has flown into the local market. This has supported the UGS, which continues to appreciate in nominal and real effective terms.

Upside inflation surprises prompted rate hike in most CEEMEA countries. We expect inflation to ease across the region, but high uncertainty remains. In Russia, we now see a higher terminal rate and easing to start later in ’22. The SARB can likely afford to stay on hold longer with only one hike in ‘22. We expect gradual cuts in Turkey through 2022 in line with market pricing. Despite above-target inflation, the Ukrainian NBU will likely stay on hold.

ASEAN-5 countries experienced strong, export-driven growth in 2021H1. However, the COVID Delta variant is already affecting business sentiment. With vaccination rates still low, we expect growth to slow markedly in H2. Lockdowns in the ASEAN-5 are also beginning to affect global value chains. We expect monetary and fiscal policies to remain supportive into next year.

The 2021Q2 output contraction of 0.8% q/q (sa) surprised to the downside. As a result, we have revised our growth forecast for 2021 from 5.5% to 2.7%. We believe the poor Q2 reading is partially caused by statistical idiosyncrasies. A revision with the September release of GDP details is possible, but not likely. Over the medium term, we expect growth of 3.5-4.0% as reform efforts slow.

We update our estimates of FX pass-through to inflation for EM and FM. Median EM pass-through lies below 0.1 and has only changed marginally. For FM, it is closer to 0.3 and has increased, but results for countries vary. Pass-through is still elevated in Argentina, Russia, Turkey, and Ukraine. Higher ERPT and weak FX in 2021 will keep their central banks cautious.

The European Union and the U.S. recently introduced new sanctions on Belarus. We look at precedents for sovereign debt sanctions to assess the potential impact. Primary market restrictions did not have a strong effect when imposed on Russia. But the Venezuela case shows secondary market restrictions to be consequential. For Belarus, Russian support should help limit external financing stress for now.

We use VAR models to decompose the effect of commodities and FX on EM inflation. Turkey and Russia, for different reasons, appear most exposed to exchange rate shocks. Headline inflation in South Africa and Brazil appear to be driven by energy prices, while price dynamics in Indonesia are more responsive to non-energy commodities. We expect tight stances in Brazil, Mexico, Russia, Turkey to keep expectations anchored.

We continue our series on EM inflation by turning towards country specifics. In this note, we examine inflation dynamics in Russia, South Africa, and Turkey. As demand is a key driver of inflation in Russia, we expect further tightening. In South Africa, we see the pickup as transitory and largely driven by base effects. Turkey stands out with the highest inflationary pressures and little room to ease.

The increase in commodity prices in 2021 is feeding through to EM headline inflation Energy and food account for larger shares of consumer baskets in EM relative to DM. Despite higher import prices, headline inflation in EM has only increased moderately. Inflation expectations also appear anchored due to improving central bank credibility.

As the global economy is recovering from the COVID-19 shock, so are many EM. Alongside, inflation has picked up, prompting many central banks to respond. Still, headline and core inflation remain well-behaved in historical comparison. Higher rates mean some EM could find it increasingly difficult to finance debt.

Ukraine has weathered the COVID-19 shock well compared to previous crises. We assess balance of payments risks in the next 6-9 months as relatively low. Ample reserve assets and the planned $2.7 bn SDR allocation are key factors. However, a new IMF arrangement will be critical for medium-term prospects. Without IFI support, the external financing gap could reach $4.5 bn in 2022. Risks stem primarily from insufficient progress regarding structural reforms.

We apply a Taylor Rule-based approach to policy making in the CEE-4 and find that rising inflationary pressures point to a need for rate hikes in three of the four countries: the Czech Republic, Hungary, and Poland. Closing output gaps also contribute, while lower real rates provide room.

A recent pickup in U.S. inflation has caused concerns among investors about EM. Inflation is above target in some key EMs and central banks are already cautious. At the same time, core inflation is still subdued compared to prior shock episodes. If U.S. yields continue to rise, EM bonds will likely come under further pressure. Among key EM, we are especially concerned about Brazil, South Africa, and Turkey.

The COVID-19-induced collapse in international tourism was unprecedented. Even in an optimistic scenario, tourism revenues will remain subdued in 2021. As a result, the economic recovery in countries such as Thailand will be slower. Furthermore, external pressures are set to rise as imports rebound strongly.

ASEAN countries will bounce back from the COVID-19 shock this year. However, the pace of the recovery varies due to uneven pandemic control. Supply chain disruptions subside, and ASEAN exports are rising sharply. Fiscal and monetary policy stances will likely remain supportive this year.

Pent-up demand should support robust output growth in 2022. The SARB is expected to keep its accommodative policy stance. South Africa’s current account will gradually revert to a deficit. The government is expected to stand firm against labor unions. Fiscal consolidation could narrow risk premia in coming years.

The United States imposed sanctions on the primary OFZ market last week. We believe that the measures’ impact will likely be manageable for Russia. Domestic financial institutions have sufficient capacity to absorb issuance. An improving economy also supports revenues and reduces financing needs. Secondary market sanctions would be far more consequential but are unlikely.

Increased uncertainty triggered outflows from Turkish assets in late March. Non-residents hold much smaller positions compared to the 2013 episode. Sharply higher cost of borrowing will weigh on near-term growth prospects. Short-term external rollover needs are sizable but look manageable for 2021.

Depreciation pressure on the Rand has been weaker and yields risen less than in 2013. However, South Africa’s fiscal position is much weaker than during the taper tantrum. Substantial financing needs leave the country vulnerable to shifts in market sentiment. Furthermore, structural issues will continue to constrain growth in the coming years. This will add to already-heightened foreign investor concerns over debt sustainability.

Emerging markets still face the threat of a full-fledged taper tantrum in 2021. For Ukraine, we do not see indications that foreign investors are pulling back. However, their increased engagement in local markets raises the risk overall. Macroeconomic vulnerabilities are markedly smaller than they were in 2013. The main risk is a stalling-or reversal-of the reform course of the last decade.

The risk of a full-fledged taper tantrum in 2021 is still high for emerging markets. EM assets have already reacted strongly to the pickup in developed market rates. We analyze a number of country cases to see how circumstances differ from 2013. Russia’s macro vulnerabilities are significantly smaller during the current episode. The key risk for investors is a loss of access to the OFZ market due to U.S. sanctions.

High-frequency data points to strong capital outflows starting at the beginning of March. Emerging market assets are under pressure from the increase in U.S. long-term real rates. EM credit appears to have held up better so far, while local markets are already hard-hit. Relating the current shock to the taper tantrum suggests that the worst may still lie ahead. EM with large fiscal financing needs and shallow domestic markets are the most exposed.

EM are traditionally exposed to swings in global risk sentiment and reflation concerns. However, the recent increase in DM rates has had a muted effect on EM credit so far. This is in stark contrast to the taper tantrum when EM spreads reacted more strongly. We also acknowledge that the current taper tantrum-like episode is still in an early stage. Most exposed are EM with large funding requirements and shallow domestic markets.

In its 2021 budget, the government cut deficit targets relative to last October’s MTBPS. As a result, it expects public debt to peak at a lower level of 88.9% of GDP in FY25/26. We see risks to underlying revenue and spending projections, in particular the wage bill. In our estimate, larger deficits will cause debt to peak at a higher level of 92.9% of GDP.

Deep domestic financial systems can help insulate emerging markets from shocks. We survey financial market depth and the availability of long-term funding in EM. Brazil, Chile, Korea, Malaysia, and South Africa stand out compared to their peers. Countries reliant on direct policy support and foreign investors are most vulnerable.

Improved market sentiment will allow African sovereigns to return to the market in ‘21. We expect Egypt, Nigeria, Ghana, and South Africa, among others, to issue Eurobonds. However, debt sustainability and liquidity concerns are rising in the context of COVID-19. African countries face Eurobond repayments of close to $100 bn in the coming years. An end to the current low-interest rate environment could make rolling over of debt costly.

We expect Frontier Asia to remain broadly resilient to the COVID-19 shock. Loose monetary and fiscal policies will extend into ‘21 and support growth. However, tourism will continue to weigh on growth and current accounts. Trade tensions and growing debt are the key risks to their economic outlook.

Russia is experiencing the largest protests in years in response to the jailing of Alexei Navalny. Many Russians are frustrated by stagnating incomes, a weak social safety net, and corruption. Years of fiscal consolidation to address sanctions have exacerbated socioeconomic challenges. However, we do not expect protests to change macroeconomic conditions in a fundamental way.

CEEMEA countries recovered faster from the initial COVID-19 shock than expected. This is mainly due to virus containment allowing for a faster reopening of businesses. As a result, we are revising our estimate of the contraction in 2020 from 5.2% to 3.2%. However, a second wave of infections weighed on economic activity in recent months. We expect modest growth of 3.8% in 2021, but much depends on vaccinations efforts.

We project a mild economic contraction in 2020, followed by a gradual recovery this year. This is due to limited lockdown measures, a strong financial system, and reliance on SOEs. The FY2021 NDAA extended Nord Stream 2 sanctions but may not prevent its completion. Geopolitical risks stem from the incoming U.S. administration and the EU’s green agenda.

Foreign investor interest in Sub-Saharan Africa has picked up in recent months. This is partially due to a marked shift to risk-on sentiment in financial markets. Countries from the region are now gradually returning to the Eurobond market. Still, the outlook for deficit financing and flows to local markets remains uncertain.

The EM policy response to the COVID-19 shock represents a break from past crises. EM central banks eased monetary policy providing support to the domestic economy. Higher liquidity allowed governments to issue more debt in domestic bond markets. Still, fiscal support has been smaller than in DM, with most EMs tightening in 2021.

Our outlook for Ukraine has steadily worsened over the last twelve months. Pressure on the NBU and unwinding of anti-corruption reforms are to blame. However, Ukraine will likely manage to muddle through in the coming months. Only when macro-policies become untenable, a return to the IMF will occur.

External and domestic imbalances will require meaningful policy changes. Fiscal consolidation is critical to eliminate monetary financing of deficits. This should reduce inflationary pressures and limit Kwacha depreciation. A multi-year IMF program will likely be needed to implement such changes.

Zambia has launched consent solicitation for a deferral of bond payments. Kwacha depreciation is the main driver of unsustainable debt dynamics. In a no-adjustment scenario, public debt could reach 200% of GDP by 2025. Upcoming general elections in August ’21 contribute to policy uncertainty.

The outlook for tourism remains challenging as COVID-19 infections are rising again. Together with capital flows dynamics, this could require significant BoP adjustments. Import compression should contribute but reserves will likely remain under pressure. Tourism will likely not fully recover in 2021 and external stress on some EMs persist.

Tourism will likely be among the last sectors to recover from the COVID-19 shock. The recovery has been slow and uneven, and further warning signs are emerging. We continue to expect a 60-70% drop in tourism revenues in our baseline scenario. Rising infections in the United States and Europe may require renewed lockdowns. Countries like Mexico, South Africa, Thailand, and Turkey would be most affected.

We expect a stronger recovery in capital flows to Asia relative to other EMs in 2021. FDI remains an important driver, with India and Indonesia as the largest recipients. Relatively robust inflows and c/a adjustments in ‘20 allow for reserve accumulation. A reemergence of COVID-19 and geopolitical factors are the key risks to the outlook.

We expect a slow and uneven recovery in non-resident capital flows globally. CEEMEA should fare somewhat better with a broad pickup in ‘20H2 and ‘21. The recovery will likely be driven by stronger FDI and portfolio capital flows. A possible COVID-19 resurgence and geopolitical risks weigh on the outlook. If sentiment worsens, Turkey, South Africa, and Ukraine will be most exposed.

CEE-4 economies have outperformed growth in the Euro area in recent years. Growth has been driven largely by private consumption and capital formation. But the Euro area’s weakness could be a drag on the medium-term outlook. Structural changes in sectors such as car manufacturing represent a challenge.

The CEE-4 will likely experience relatively moderate GDP contractions. Fiscal and monetary stimulus measures support private consumption. Despite rising COVID-19 cases, major lockdowns are unlikely to occur. Medium-term growth prospects remain promising across the region.

Many EM central banks started QE-like programs at the height of the COVID-19 crisis. This coincided with questions arising with respect to the financing of widening deficits. However, actual government bond purchases remain limited so far, including in Asia. Domestic investors appear to have stepped in to buy up additional sovereign issuance.

Investors are concerned about the possibility of additional sanctions on Russia. German officials have threatened action against Nord Stream 2 in recent weeks. This would have important geopolitical, but likely limited economic, implications. Additional sanctions by the U.S. could depend on the 2020 presidential election. However, the Russian economy is substantially less vulnerable compared to 2014.

Widening fiscal deficits could create financing challenges going forward. As the economy recovers, domestic investors may provide less funding. If fiscal consolidation is not realized, "prescribed assets" are one option. South Africa could also approach the IMF for a Stand-by-Arrangement.

Demonstrations and strikes continue following the disputed election. The most likely near-term scenario is a prolonged political stalemate. We consider a number of scenarios to assess external financing stress. In the absence of further escalation, reserve losses would be manageable.

Widespread demonstrations and strikes followed the presidential election on August 9. Political uncertainty, together with the COVID-19 shock, weigh on the economic outlook. Belarus’ economy is highly dependent on Russia’s energy subsidy and domestic SOEs. The disputed election results mean that international financial support is very unlikely.

We analyze external adjustments in EM Asia following the COVID-19 shock. Cross-border flows are shifting considerably in many countries in the region. The global recession weighs on exports and weak domestic demand on imports. Other sources of FX inflows have come under significant pressure as well in H1. This includes both international tourism revenues and workers’ remittances.

We update our analysis of EM inflation dynamics in light of the COVID-19 crisis. Core inflation is a better gauge of domestic balances than the headline number. In many emerging markets, core inflation slowed in Q2 compared to early-2020. This, together with higher credibility, allowed many central banks to ease policy. While inflation risks appear moderate, fiscal dominance could change the picture.

In the context of COVID-19, international tourism has come to a near halt. This will have a significant impact on activity in many emerging markets. Even under optimistic assumptions, tourism may decline by 60% in 2020. Any recovery will be highly uneven, with Asia and Europe in better positions. High uncertainty is surrounding the outlook given the state of the pandemic.

The COVID-19 response will improve medium-term growth prospects for the CEE-4. Stronger government finances provided countries with room for stimulus measures. The ECB’s response has also allowed authorities to cut rates and start bond purchases. Finally, the EU’s proposed recovery fund would improve growth prospects markedly.

The Supplementary Budget Review shows higher deficits and quickly rising debt. Nonetheless, foreign investors returned in May and yields have fallen sharply. A credible consolidation strategy is needed in October to sustain investor interest. Plans hinge on cuts to non-interest spending that will be difficult to implement.

EM are experiencing an unprecedented and synchronized growth slowdown in ‘20. Restrictions remain in place in many countries, as the health crisis is far from over. The fiscal response has been uneven in EM, with some running out of policy space. Most EM central banks cut rates aggressively, and QE has become part of the toolkit. Asset price recovery and a modest return of capital flows should provide support.

We downgrade our forecast and now expect an output contraction of 3.2%. The collapse in tourism has had the most immediate impact on the region. Shutdowns weakened domestic demand and exports declined markedly. Monetary and fiscal countermeasures will only partially offset this effect.

Ukraine has secured a $5 bn, 18-month Stand-By Arrangement with the IMF. This stopgap will help finance fiscal spending and external debt repayments. Improved market conditions will allow Ukraine to build up reserves further. We project an output contraction of 6.9% despite aggressive interest rate cuts. Further structural reform efforts are critical for robust growth going forward.

Non-resident flows to emerging and frontier markets will contract sharply in 2020. Remittances have become an important, countercyclical, source of inflows for EM. In 2020, however, they will likely be much lower due to the global nature of shocks. High-frequency data show that the deceleration had already begun in the 1st quarter. Central America and the Caribbean, the Philippines, and Egypt are most exposed.

We now expect an even deeper output contraction of 5.7% in the CEEMEA region. Effects of the COVID-19 shock are increasingly visible in the data for March-April. We downgrade growth in South Africa, the Czech Republic, Ukraine, and Russia. The fall in activity prompted authorities to implement fiscal stimulus measures. Together with cyclical revenue weakness, additional spending will widen deficits. CEEMEA central banks cut rates and some began government bond purchases.

Russia’s assets are stabilizing, and investors are showing renewed interest. The "Fortress Russia" strategy has reduced macroeconomic vulnerabilities. We expect both the fiscal and monetary policy responses to remain modest. As the economy is set to reopen, COVID-19 infections continue to spread.

Pressure on SSA assets has intensified due to COVID-19 related shocks. In this note, we analyze the composition of external flows to the region. SSA has become more globally integrated and reliant on portfolio flows. This makes the region more exposed to swings in investor sentiment.

COVID-19 presents a challenge to BoPs in the Sub-Saharan Africa region. Lower commodity prices will sharply reduce exports in many countries. Dependence on tourism and remittances will also have a negative effect. C/A deficit financing is going to be challenging due to risk-off sentiment. Multilateral funding can cover some gaps, but solvency is an issue as well.

COVID-19 is exacerbating existing vulnerabilities in Sub-Saharan Africa. The global recession and drop in commodity prices hit the region hard. We present a framework to summarize SSA’s exposure to different risks. Multilaterals need to play an important role in the region going forward.

Growth across Sub-Saharan Africa is expected to slow down markedly. This is a result of lower global demand and falling commodity prices. Lower growth will inhibit advances in living standards across the region. We are concerned that COVID-19 outbreaks in SSA could be disastrous. Multilateral support, including from the IMF, is needed going forward.

Emerging markets are being hit by a combination of macro shocks. The key challenge is to avoid medium-term growth being impacted. A way to accomplish this is to use available monetary and fiscal space. Flexible exchange rates can and should act as automatic stabilizers. As COVID-19 continues to spread, we worry that more will be needed.

The COVID-19 shock has led to a pronounced sudden stop in EM. Out short-term portfolio tracker shows record outflows in 2020Q1. We expect a modest recovery in capital flows in the 2nd half of 2020. Nevertheless, capital flows to EM will be much weaker than in 2019. Given uneven EM policy space, multilateral support will be needed.

We believe multilateral support will be critical for South Africa going forward. Moody’s rating downgrade will likely trigger further capital outflows in 2020Q2. This will continue the pressure on the ZAR, which we have flagged as overvalued. Economic contraction and higher funding costs will likely make debt unsustainable.

We now expect a recession in CEEMEA as a result of COVID-19. CEE will be affected by Euro area contraction but has policy space. ussia’s buffers and flexible Ruble should reduce impact on growth. Lower growth will markedly worsen debt dynamics in South Africa. Recession concerns could trigger further policy easing in Turkey.

Russia is more insulated from external shocks than other EMs but not immune. We expect the economy to contract in ‘20, down from our previous forecast of 2%. Its flexible exchange rate puts Russia at a distinct advantage compared to 2014. Most importantly, authorities have ample policy space to address challenges.

A coordinated policy response to COVID-19 would be the first best but is not imminent. Some key emerging markets have sufficient fiscal policy space and should react quickly. The Fed’s cut gives EMs monetary flexibility, including Mexico, Russia, and South Africa.

South Africa’s 2020 budget was well-received by financial markets. The proposed adjustment is largely driven by cuts to the wage bill. Savings are just enough to offset weaker revenue due to weak growth. Thus, public debt is still set to increase to 70% of GDP by FY22/23. Key risks remain low growth, union resistance, and struggling SOEs.

Real convergence in Sub-Saharan Africa has been weak despite robust growth. We believe that low total factor productivity growth is partially responsible. Furthermore, relatively weak investment is weighing on economic activity. As population growth slows, both will be key for standard-of-living gains.

Economic sanctions are a form of government market intervention and can have significant unintended and uncertain consequences-particularly if they are placed on an economy highly integrated into the global economy and the international financial system. In this respect, the measures taken by the United States and its allies against Russia beginning in 2014 represented a paradigm shift.

Sanctions on a highly-integrated economy such as Russia are still unprecedented. Unforeseen and unintended consequences could significantly shake up markets. The impact is likely most significant for asset managers and banking institutions. But further consequences for the underlying market infrastructure are possible.

The debate on U.S. sanctions on sovereign debt is expected to continue in '20. Low macroeconomic vulnerabilities will likely limit the impact on Russia. U.S. investors would lose out given investments in Russian domestic debt. Unintended consequences could also significantly shake up global markets.

South Africa and Mexico face significant fiscal risks from struggling SOEs. Both Eskom and Pemex are receiving sizable support from governments. Such risks prompt SARB and BANXICO to keep real rates above EM peers. A downgrade of sovereign credit ratings could lead to large portfolio outflows. However, risks to debt sustainability are higher in South Africa than Mexico.

Government debt in Sub-Saharan Africa has risen markedly in recent years. This is partly due to issuance of Eurobonds in a low interest rate environment. Debt amortization will peak in 2024-25, while financing needs remain high. As a result, these countries will need to attract significant non-resident capital. Tightening of global financial conditions could increase debt costs substantially.

Sub-Saharan Africa continues to display stronger growth than other EMs. However, this has not resulted in meaningful real convergence for most. Continued high, though declining, population growth is partly responsible. Higher productivity growth is necessary to improve living standards quicker. Rising indebtedness represents the key risk to the medium-term outlook.

Looser DM monetary policy and the US-China truce drove flows to EM. 2019 saw an important rebound in portfolio flows compared to 2018. Foreign currency and local debt attracted the bulk of non-resident flows. Going forward, foreign investors will likely focus on idiosyncratic stories.

Ukraine’s new agreement with the IMF is critical for external financing, even though recent flows into domestic bonds have alleviated pressure. The agreement signals confidence in ongoing reform efforts to markets, and will lead to renewed investor interest in local government bonds.

The release of the 2019 MTBPS was a wake-up call for politicians, just like in 2017. The 2020 budget in February, union negotiations, and Eskom resolution are key. Moody’s is likely to downgrade South Africa’s rating to sub-IG sometime in 2020. A deep domestic market and low short-term and FX debt mitigate our concerns. But with deteriorating debt dynamics, South Africa is exposed to external shocks.

EU structural funds have boosted growth in Eastern Europe, allowing for strong income convergence with the rest of the EU. Cuts in the 2021-27 EU budget will lead to smaller contributions, but a sudden slowdown is unlikely, and convergence will continue.

Russian authorities announced a policy pivot towards growth. National projects exceed 3% of GDP per year over 2019-24. Apart from national projects, policies will likely remain tight. We therefore expect only a modest pickup in Russia’s growth.

Weak growth has led to deteriorating debt dynamics in recent years. Falling business and consumer confidence do not point to a recovery. External imbalances remain despite weak activity and depreciation. Interest payments to non-residents have risen sharply due to high debt. The Rand is vulnerable to shifts in market sentiment and portfolio flows.

Markets were disappointed by the 2019 MTBPS announcement. Revisions to growth, deficit, and debt were worse than expected. This follows an Eskom plan lacking details on debt restructuring. Moody’s changed the outlook to negative but kept the IG rating. Key market concern is no longer the rating, but debt sustainability.

Growth in the Euro area slowed considerably in 2018 and 2019H1. CEE countries are highly integrated into European value chains. We already see evidence of a slowdown in industrial production. However, domestic demand continues to support robust growth. In case of further shocks, policy space is not universally available.

Investors finished the IMF/WB meetings on a less negative note. Concerns remain, but fewer worried about the risk of a recession. Monetary easing and a US-China trade deal would be supportive. Barring surprises from the Dollar, modest flows to EM are likely. The IMF's integrated policy framework remains a key topic for EM.

We expect a pickup in portfolio flows to emerging markets in 2020. 2019 saw a healthy recovery so far, despite slowing global growth. Central banks’ pivot towards monetary easing supports debt flows. Local markets appear to have attracted large inflows in 2019H1. This was true for established EMs as well as some frontier markets.

Investor interest in government bonds has picked up in recent months in the hope of a change in government and implementation of reforms. Macroeconomic imbalances, however, have risen to concerning levels, and a renewed EU Excessive Deficit Procedure is clearly on the horizon.

South Africa’s debt could reach as high as 95% of GDP in a pessimistic scenario. Low growth, high interest payments, and a decade of mismanagement are at fault. SOEs are a drain on public finances, and Eskom alone could add 6pp to debt. Mitigating factors are SARB independence, limited FX debt, and long maturities. Moody’s may put SA on negative watch but keep the IG rating for a little longer.

Nord Stream 2 and TurkStream will change gas transit in Europe, allowing Russian gas to reach Western Europe while bypassing Ukraine. Transit through Ukrainian pipelines could decrease as much as 80%, widening the current account deficit and increasing financing needs. Sanctions on both pipeline projects are being discussed in Congress.

Nigeria is increasingly reliant on expensive "hot money" flows. Non-residents are flocking to central bank auctions of CBN bills. Nigeria leads the region in Eurobond issuance, at a high cost. With non-oil revenue below 4% of GDP, risk of crowding out is high. Weak oil production and low prices weigh on the current account.

Portfolio flows to Russia are weakly correlated with global flows, likely due to sanctions. Despite the risk of further sanctions, government debt remains attractive to investors, as Russia stands out among EM due to exceptionally low macroeconomic vulnerabilities. In the long run, sanctions can lead to less prudent policies and reduce growth prospects. We expect discussions of Russia sanctions in the US Congress to pick up again in the fall.

Low breakeven oil price for the current account provides buffer against shocks. Introduction of the fiscal rule in 2017 has led to significant reserve accumulation. Debt repayments spiked after the 2014 sanctions but are now less of a concern. However, private sector capital outflows have picked up and may accelerate. Portfolio inflows have returned but are sensitive to sanctions announcements.

The US and EU have introduced numerous financial sanctions on Russia. The first episode of multilateral sanctions in 2014 had the biggest impact. Limiting investor access to the Ruble market (OFZ) is unlikely to be as severe. Existing sanctions will weigh on investment, productivity, and growth.

We estimate that Ukraine’s debt should stabilize at around 55%. The exchange rate depreciating roughly in line with inflation is key, as about two-thirds of Ukraine’s debt is issued in foreign currency. A 2014-style FX shock would bring the debt-to-GDP ratio to 100%. We are more concerned about the financing gap in 2020 than debt.

We have estimated Ukraine’s financing gap at $2 bn (1.5% of GDP). A key ingredient is a stable current account despite growth recovery. This is due to a favorable shift in the current account toward the EU. Domestic politics aside, a key risk is the growth slowdown in Europe.

We do a balance of payments forecast to assess the funding gap for Ukraine. Ukraine needs a follow-up IMF program of $2 bn under benign assumptions. Political impasse is a key risk due to parliamentary elections in October.