Macro Notes provide analysis on key macro and geopolitical developments. They complement the existing IIF product line up, which includes Global Macro Views, Economic Views, in depth country reports and data.
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.