The IIF covers 30-40 emerging and frontier markets, with a particular focus on economic and financing issues. Our reports feature topical analysis of macroeconomic fundamentals, policy developments, political economy dynamics and downside risks.
Real GDP growth in the Caucasus and Central Asia (CCA) remains strong in 2019, recovering from earlier external shocks of a fall in oil prices and sanctions on Russia. Growth should remain strong beyond the near term, although lower commodity prices and slowdown in major partners could pose risks.
Pemex’s planned output increase has precedent, but is in the upper range of what others achieved. Shoring up Pemex involves a near-term fiscal cost, but could ease fiscal pressure in the medium-term. If Pemex disappoints, more fiscal cuts will be needed.
Household debt has fueled China's housing, consumption, and economic growth. Households' large financial and housing assets mitigate the risks of rising leverage. However, household leverage is no longer low relative to income, and can no longer be used to stimulate economic growth.
The GCC countries followed the Fed and cut their key policy rates, given their pegged exchange rates. Lower interest rates will encourage borrowing and stimulate non-oil growth, which has been weak in recent years. We expect non-oil growth to pick up from 2.1% in 2018 to 2.8% in 2019.
Vietnam has further integrated into regional supply chains. It has benefited from US trade diversion away from China, and production reallocation and investment by Chinese firms. The key risk is the US changing its policy stance towards Vietnam.
Geopolitical risks have declined markedly, helping the TRY to remain stable, despite growth concerns prompting the central bank to cut interest rates by 425 bps. Large external financing needs and a worsening fiscal outlook present significant challenges going forward, while further stimulus could hurt external stability following last year’s sharp correction.
Weak growth will weigh on tax revenues, leading to sizable revenue shortfalls, while the frontloading of financial support to Eskom will cause spending overruns. Taken together, the fiscal deficit will far exceed the government’s targets. This increases the risk of a rating downgrade by Moody’s to non-investment grade status.
We estimate that Ukraine’s debt should stabilize at around 55%. The exchange rate depreciating roughly in line with inflation is key, as about two-thirds of Ukraine’s debt is issued in foreign currency. A 2014-style FX shock would bring the debt-to-GDP ratio to 100%. We are more concerned about the financing gap in 2020 than debt.
Labor shortages and fragile investor confidence will constrain output growth. Policies will likely become more accommodative, thanks to a dovish ECB and Fed. The external financing and inflation outlook will remain challenging for some. Slow progress in addressing structural problems will intensify vulnerabilities.