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.
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.
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 downgrade our forecast and now expect an output contraction of 3.2%. The collapse in tourism has had the most immediate impact on the region. Shutdowns weakened domestic demand and exports declined markedly. Monetary and fiscal countermeasures will only partially offset this effect.
Ukraine has secured a $5 bn, 18-month Stand-By Arrangement with the IMF. This stopgap will help finance fiscal spending and external debt repayments. Improved market conditions will allow Ukraine to build up reserves further. We project an output contraction of 6.9% despite aggressive interest rate cuts. Further structural reform efforts are critical for robust growth going forward.
Non-resident flows to emerging and frontier markets will contract sharply in 2020. Remittances have become an important, countercyclical, source of inflows for EM. In 2020, however, they will likely be much lower due to the global nature of shocks. High-frequency data show that the deceleration had already begun in the 1st quarter. Central America and the Caribbean, the Philippines, and Egypt are most exposed.
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.