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.
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.