LONDON, Dec 28 (Reuters) – It has been a tough 12 months for emerging markets that have seen more governments fail, currencies suffer and double-digit losses in stocks and bonds – although many investors are optimistic that 2023 could bring some relief.
Below are the events, trends and themes that investors expect to shape the outlook for emerging markets next year.
1/ HIGH RATES, LOW GROWTH
A slower pace of interest rate hikes in the United States and other major economies could set the stage for a rebound in emerging markets in 2023, with a softer dollar and falling inflation providing much-needed relief.
Emerging economies are expected to hold onto the growth gap with developed ones, but fears of a recession in the United States, as well as in Europe, are weighing on global markets in general – especially in the first half of the year.
“The economic downturn together with aggressive monetary tightening and the geopolitical and commodity shocks that come with it will be temporarily painful for financial and emerging markets,” said David Folkerts-Landau, chief group economist at Deutsche Bank.
The recovery could be delayed if emerging market central banks lack room to cut interest rates for much of the year.
2/ RE-OPENING OF CHINA
China’s reopening after the COVID-19 lockdown will be difficult, but accounting for nearly a fifth of global gross domestic product, the prospect of a sharp rise at a time of sluggish global growth is tantalizing.
Analysts expect a sharp increase in consumption and investment in the world’s second-largest economy from mid-2023 onwards.
“If you look at the savings rate for China right now, it’s very elevated,” said Eric Zipf, head of emerging market equities at DuPont Capital. “We think that will be spent as soon as people feel comfortable going out, which will provide a pretty big tailwind from an economic perspective.”
3/ WAR IN UKRAINE
Russia’s invasion of Ukraine has shaken markets and the world economy – and no less important is how the war will progress in 2023, whether it will be a continuation, escalation or progress towards a solution.
Globally, the war transformed energy markets and inflationary pressures, food security and geopolitical risk perceptions – factors that are often felt more acutely in developing economies. Emerging Europe has also felt the immediate humanitarian impact – from the movement of refugees to the brain drain from Russia.
4/ DEBT REPAIR
A growing list of countries in deep trouble after COVID-19 and the war in Ukraine: Zambia and Ethiopia are trying to reassess their debt burden under the Group of 20 Common Framework. Sri Lanka and Ghana are out of 2022.
But a more complex mix of creditors – including the emergence of China as the world’s largest bilateral lender – compared to previous debt episodes has made proceedings slow and complex.
“It’s quite challenging to get them all to sing the same song in the same key,” said Tim Semples, associate professor of legal studies in the Terry College of Business.
The number of countries locked out of capital markets among smaller, riskier economies is at historic highs – although there could be a way out.
“There really isn’t a lot of debt maturing next year,” said Carmen Altenkirch, sovereign emerging markets analyst at Aviva Investors. “The country that is probably the most vulnerable is Pakistan.”
5/ BRAZIL UNDER THE PIPE 2.0
President-elect Luiz Inacio Lula da Silva will take office on January 1, and markets are already looking for signs of a fiscal anchor to rein in spending in Latin America’s largest economy.
Policymakers have highlighted inflationary risks stemming from da Silva’s 168 billion reais ($31.6 billion) spending proposal to fulfill campaign promises.
“Investors want to know whether Brazil’s debt-to-GDP is explosive or under pressure, whether we will soon reach 100% debt-to-GDP or whether we can stabilize it in the next two or three years,” said Gordian Kemen, head of EM sovereign strategies (West) at Standard Chartered Bank.
6/ ELECTIONS IN TURKEY
President Tayyip Erdogan could face the biggest political challenge of his two decades in power as Turks head to the polls in the most popular vote in emerging markets.
The country has grappled with rising living costs and a falling currency, with the lira falling to a record low against the dollar in recent days. Years of unorthodox monetary policy have led many investors to reduce exposure to the country’s assets. A change in leadership could mark a stellar turnaround.
“This is potentially the most interesting story of 2023, one way or another,” said David Hauner, head of EM Cross-Asset Strategy & Economics, EMEA, Bank of America Global Research.
A number of other emerging market countries are facing elections. Voters in Africa’s most populous nation, Nigeria, are electing their next president in February, with incumbent President Muhammadu Buhari not participating due to term limits.
In Latin America, Argentina will hold presidential elections in October. Two-time president and vice president Cristina Fernandez de Kirchner said she “will not be a candidate for anything” in the general election, after an Argentine court sentenced her to six years in prison in a high-profile corruption case.
In Poland, in elections expected in the fall, voters could oust the ruling nationalist party Law and Justice (PiS), which could reshape Warsaw’s strained relations with Brussels.
(1 dollar = 5.3109 reais)
Reporting by Karin Strohecher and Jorgelin do Rosario, additional reporting by Rodrigo Campos; Editing by Emelia Sithole-Matarise
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