COVID-19: 'Emerging markets recouping but risks abound'

ANKARA

Trade across emerging markets (EM) is starting to recover since last month and the outlook is further supported by improving business surveys and an accommodative monetary stance, according to a recent report by the Institute of International Finance (IIF).

The IIF data indicates the decline in global growth has reached an end and economic activity is set for a significant rebound over the coming months.

According to the financial body’s growth tracker, a 5.3% improvement witnessed in August was the first sign of resurgence since the COVID-19 shock earlier this year.

While EM credit should benefit from improved growth supported by easy monetary policies, risks still abound, the report said.

“The dynamics of US real rates and emerging-market activity numbers will be key for EM’s financial variables outlook,” it said, while identifying fiscal deterioration as well as subdued potential growth and productivity in EM remain as significant longer-term concerns.

“We do not expect the pace of expansion in recent months to continue, as the boost from reopening fades, labor market dislocations constrain consumer spending, and firms retrench on capex [capital expenditure],” the report said.

With the virus outbreak not yet contained, social distancing behavior and ongoing restrictions will drag on activity, it added.

The IIF said emerging markets are experiencing difficulties in handling the pandemic due to their very limited public resources and healthcare capacity, combined with financial turbulence.

“Our tracker shows distinctive dynamics across regions. EM Asia and EM Europe and Africa regions saw their trackers in positive territory,” the report said.

While the Latin America tracker also shows improving figures, it remains in contraction, it added.

The shape of the recovery, the IIF concluded, will be dependent on the capacity of the EM complex to introduce efficient policies to catalyze a lasting recovery.