Opinion: Emerging Markets Are Not All Created Equal

Published March 16th, 2021 - 11:00 GMT
Opinion: Emerging Markets Are Not All Created Equal
Interest rates are low, and look set to remain so for some time. However, they are lower in developed economies than in EMs. (Shutterstock)
Highlights
This applies to analyzing how emerging markets (EMs) as a category will recover from the effect of the COVID-19 pandemic.

The upside of categories is that they enable observers to analyze macroeconomic trends with ease. The downside is that they paint pictures with too broad a brush and bear the inherent risk of comparing apples to pears.

This applies to analyzing how emerging markets (EMs) as a category will recover from the effect of the COVID-19 pandemic.
 

Some will face a real struggle and others, like the Gulf Cooperation Council (GCC) economies, are powering ahead courtesy of higher oil prices, far-sighted pandemic management, the rollout of vaccination programs, and manageable debt levels.

First things first

Last week, the Organisation for Economic Co-operation and Development (OECD) raised its growth forecast for the global economy for this year. It will grow at 5.6 percent in 2021, up from the 4.2 percent that was forecast last year. The new numbers are largely informed by the latest expansive stimulus program in the US worth $1.9 trillion.

While global growth rates matter, because most boats rise with a rising tide, things are not that easy. The OECD predicted that, as a category, growth in EMs will be 3 to 4 percent lower in 2022 compared to 2019.

This is important because EMs took on debt to weather the storm of the pandemic and they were encouraged to do so by the International Monetary Fund and the World Bank, aided by a generous debt service suspension initiative (DSSI) from the two institutions, with the support of the G20. Of the 73 eligible countries, 43 have signed up for the initiative.

While the DSSI provided much-needed relief, it is currently scheduled to expire on June 30. Even if the initiative gets a further extension, the time will come when these countries will have to pay the piper.

Interest rates are low, and look set to remain so for some time. However, they are lower in developed economies than in EMs.

According to the global ratings agency Fitch, developed economies will spend 3.3 percent of government revenue on debt service this year compared to developing economies, which will spend on average 10.4 percent, up 2.4 percent since 2019. In dollar terms both categories will spend $860 billion each, in spite of OECD economies having borrowed roughly three times as much.

The liquidity crunches for some developing economies are baked into these forecasts. Just to look at some G20 numbers, Brazil’s public debt has reached 102 percent of gross domestic product (GDP), and India’s and South Africa’s are 89 percent and 82 percent.

Here again, we cannot compare like-for-like because countries, where the economic growth will outstrip the higher debt burden, will fare much better than those where it will not. Countries like India, Indonesia or Hungary will fare better than others who lack economic promise. It also depends on which sectors will drive the economic recovery. Countries depending on long-haul tourism will have a longer lead time.

As mentioned above, the GCC economies are setting themselves apart from the general EM story.

For one, rising oil prices have brought budgets within the range of balancing.

While GCC countries also took decisive measures in terms of stimulus packages, they remained manageable. Saudi Arabia spent 3.4 percent of its GDP, while the UAE, Bahrain and Oman package amounts ranged between 25 and 30 percent of GDP. The last three may sound substantial but they are, however, still small by international comparison.

Saudi Arabia embarked on a prudent and frugal countercyclical approach, tripling VAT to ensure revenue when oil prices took a nosedive last year. Country ratings and yield differentials made these countries attractive, as evidenced by sovereign bond issuances being snapped up earlier this year, even in Oman and Bahrain, which do not share the standing of the Kingdom or the UAE in the eyes of international investors.

In other words, GCC economies have debt capacity and a conservative macroprudential management which, combined with the dollar peg of their currencies, higher oil prices and successful pandemic management, as well as the rollout of vaccination programs, translates into attractive opportunities for global investors.

Going forward, stable oil prices will be an important gauge for investors while these economies diversify into other sectors.

In the medium term, investors will try to balance risks with returns, which is where the GCC remains an attractive subgroup among emerging market economies.

However, on the global scale, we have to watch the broader EM story because just as a rising tide lifts all boats they tend to dip with low tide. While we should be careful not to compare apples to pears, we must be aware that categories lead to comparisons, whether warranted or not.

Cornelia Meyer
The views/opinions expressed in this article are those of the author and do not necessarily reflect the views and opinions of Al Bawaba Business or its affiliates.


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