We forecast a modest activity upturn in 2021 from a deep recession this year. Mexico, Argentina, and Peru are set to suffer the largest output contractions regionwide. A weak global backdrop, pre-existing challenges, and eroded policy buffers could complicate the recovery.

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.

Gross external financing needs of DSSI-eligible countries are set to remain high at over $260bn (12.5% of GDP) in 2021; General government debt in DSSI-eligible countries is projected to peak at 56% of GDP in 2021—up from 50% in 2019

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.

We forecast a deep contraction in 2020, followed by a modest recovery in 2021. The biggest economies, with their large buffers and low debt, are best prepared for the difficult environment. Broadly, the region needs to implement major reforms to improve competitiveness and curtail corruption.