Entries for 'EM Europe'

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.

The Caucasus and Central Asia (CCA) region was hit hard by COVID-19, with energy exporters also enduring the oil price collapse. Exchange rate flexibility, support from the IMF, and low risk of sovereign debt distress will help most CCA countries remain stable through 2021 absent further outbreaks. 

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.

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.

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.

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.

COVID-19 is projected to bring about a 4.7% output contraction in 2020. This is partly the result of the looming deep recession in the Euro area. Virus containment measures will also lead to weaker domestic demand. Markedly wider fiscal deficits could intensify debt sustainability concerns.

The OPEC+ bloc agreed to cut oil production by a record 9.7mbd. Assuming full compliance, we expect Brent crude to average $40/bbl in 2020. Cuts will last through April 2022, at lower levels. Major non-OPEC+ producers will cut by up to 3.5mbd. Inventories should peak in Q2 and then drop in H2. 

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.

Authorities aim at boosting capital spending through the credit channel. Turkey’s external vulnerabilities have been somewhat reduced in 2019. Credit growth buffered the economy from weaker growth last year. Global recession risks pose significant challenges for growth in 2020. 

Romania’s fiscal picture continued to deteriorate significantly in 2019. Corrective measures are needed, including a delay of pension increases. Early elections could provide a new government with the needed mandate. In the absence of fiscal consolidation, the loss of investment grade looms.

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.

Large amortization payments will leave Turkey exposed to rollover risk in 2020. The composition of amortization payments should alleviate some of the concerns. Net foreign borrowing will continue to be an important determinant of growth. Residents could withdraw from assets abroad if they fail to roll over maturing debt.

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.

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.

Bank lending remains the main policy tool to boost growth. Macroeconomic imbalances seem manageable at this time. Further stimulus, however, could intensify demand pressures.