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.

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.