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.

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.

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.

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 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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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 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.

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.

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.

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.

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.

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.

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.

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.

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.