Our outlook for Ukraine has steadily worsened over the last twelve months. Pressure on the NBU and unwinding of anti-corruption reforms are to blame. However, Ukraine will likely manage to muddle through in the coming months. Only when macro-policies become untenable, a return to the IMF will occur.

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.

The outlook for tourism remains challenging as COVID-19 infections are rising again. Together with capital flows dynamics, this could require significant BoP adjustments. Import compression should contribute but reserves will likely remain under pressure. Tourism will likely not fully recover in 2021 and external stress on some EMs persist.

Tourism will likely be among the last sectors to recover from the COVID-19 shock. The recovery has been slow and uneven, and further warning signs are emerging. We continue to expect a 60-70% drop in tourism revenues in our baseline scenario. Rising infections in the United States and Europe may require renewed lockdowns. Countries like Mexico, South Africa, Thailand, and Turkey would be most affected.

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.

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.

CEE-4 economies have outperformed growth in the Euro area in recent years. Growth has been driven largely by private consumption and capital formation. But the Euro area’s weakness could be a drag on the medium-term outlook. Structural changes in sectors such as car manufacturing represent a challenge.

The CEE-4 will likely experience relatively moderate GDP contractions. Fiscal and monetary stimulus measures support private consumption. Despite rising COVID-19 cases, major lockdowns are unlikely to occur. Medium-term growth prospects remain promising across the region.

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.