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.
Exchange rate flexibility has eased the adjustment to COVID-19 in most large countries. However, “fear of floating” is still high across Central America and the Caribbean. While local market financing is increasing, countries have largely had to borrow in hard currency to help withstand the shock.
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.
Growth will slow down sharply to 0.9% in 2020 as a result of the global recession. Lower oil prices will help offset a decline in exports and collapse of tourism revenues. Support from multilaterals should keep reserve losses manageable at around $1.5 bn. The main downside risk for external financing is a sharp rise of oil prices in 2020H2. Furthermore, a steeper decline in non-resident FDI would be a source of concern.
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.
Unprecedented fiscal measures have been enacted to withstand COVID-19. However, stimulus in Colombia appears limited by regional standards. Suspension of the fiscal rule in 2020-21 will enable additional income support. Permanent fiscal deterioration amid a likely frail recovery is a major risk.
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.
The recent rise in oil prices is supported by the cut in global oil production and partial recovery in demand. We still expect Brent oil prices to average $40/b in 2020 and $45/b in 2020. Downside risks include poor OPEC+ compliance with the cuts and a continued global economic slowdown
Lower oil prices, dwindling production, and COVID-19 have undercut hopes for growth in 2020, and turned external and fiscal surpluses to deficits. The medium-term outlook depends primarily on oil price and production recovery, and the continued implementation of structural reforms.