The past few years have seen a volatile macroeconomic environment, with a global pandemic, financial instability (the 2020 stock market crash) and political unrest (the impeachment of Donald Trump, Ukraine-Russia conflict) causing unprecedented fluctuation in economic activity. Whilst these global events have taken the majority of frontier nations by surprise, they have had unique and varying effects on emerging markets. In this article, we examine these effects, introduce some other emerging-market specific trends and discuss the future of emerging market economies.
One of the main macroeconomic metrics affected by volatility has been inflation, with pandemic related inflationary pressures adding to existing cyclical inflation. To exacerbate this, food and energy prices have risen as a result of the Ukraine conflict. This has been especially detrimental in emerging market economies, for whom food/energy makes up a large proportion of the overall spending basket. This is illustrated in the following visual, in which it is apparent how significant the consumption of food/energy is in emerging markets.
Source: FactSet, FTSE, HSBC, Russell.
The effects of inflationary pressures have differed on a country-to-country basis. Energy exporters (e.g., Brazil, Saudi Arabia) are benefitting from improved export prices whereas importers (e.g., India) are struggling. What have been the responses to this? There is a fine balance between controlling inflation to keep a lid on prices, and lowering it so much that growth is detrimented. Whilst the response in emerging markets has been pretty universal (interest rate hikes), the paths taken to reach this have varied. Many central banks have adopted aggressive monetary policy, substantially raising rates, whilst others (e.g., Mexico), have raised and shifted rates in tandem with the Fed. Whatever the approach, the effect has been a slowdown in growth; an example of this is Brazil, which has had an average growth of 0.1% since 2020.
On a different note, a key driver of macroeconomic performance in many emerging markets (particularly South-East Asia) is tourism. The pandemic hit these economies hard, as borders were shut and demand for travel was diminished. GDP levels in countries such as Thailand, Malaysia and the Philippines were more than 5% below what they were before COVID, and although travel restrictions have been eased in 2022, growth is unlikely to return to pre-pandemic levels.
Unemployment is also an important measure to look at: Prior to the pandemic, emerging markets were trending towards ‘secular stagnation’ (a general deterioration over time, despite some anomalies), with employment rates taking a hit as a consequence. Moving forward, creating jobs will be a challenge, even with slowing population growth reducing the pool of available workers. So what’s the solution? It’s a simple one: rapid growth - the majority of emerging market economies require a growth rate of over 3% just to maintain a constant employment rate. By focussing on improving the infrastructure of sectors forecasted to have the most medium-term impact, as well as driving equality via greater financial access, more widespread healthcare and higher quality education, emerging markets can keep constant (and perhaps even lower) their unemployment rates. The role of embedded finance is huge here, with solutions such as vehicle financing enabling greater access to working capital for gig-economy workers, and embedded payments helping MSMEs to quickly and easily setup shop.
Although the road ahead for emerging markets is a bumpy one, it’s also one filled with potential - if these nations are able to weather inflationary pressures, tighter monetary policy and growth stagnation, there is huge potential to be unlocked.
Sources:
- https://www.lazardassetmanagement.com/research-insights/outlooks/emerging-markets
- https://www.gfmag.com/global-data/economic-data/countries-lowest-gdp-growth
- https://www2.deloitte.com/us/en/insights/economy/emerging-markets-outlook.html
- https://www.imf.org/external/pubs/ft/fandd/2021/06/employment-growth-emerging-markets-lanau.htm
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