During the first quarter (1Q) of 2021, roughly all emerging markets performed worse than they did in the fourth quarter of 2020 due to the ongoing COVID-19 crisis, as according to Fitch Solutions.
In its recent report on emerging markets' performance amid the pandemic - shared with Ahram Online - Fitch Solutions said that emerging markets are expected to perform better later in 2021.
Capital inflows headed to emerging markets are witnessing an increase – up till May – exceeding $40 billion, while most currencies will weaken going forward, European currencies are expected to strengthen, according to the report.
On commodity prices, the report expects that the demand for key commodities will solidly strengthen and lead to higher prices for many commodities in emerging markets, all meanwhile the global economy recovers during 2021.
“This will boost income across many emerging markets, although it will also increase inflation risks in some countries,” the report explained.
On the other hand, the report predicted that hydrocarbon prices will remain historically weak over the upcoming years as supply picks up and demand growth slows down due to environmental concerns, meanwhile oil prices are set for a large rise in 2021.
“This is a key reason for our below consensus forecasts for several emerging markets," Fitch Solutions said in the report.
Furthermore, the report added that they expect EMs, excluding China, will experience slightly weaker growth than developed markets in 2021, which would be a first for such an underperformance since 1999.
Although the report expected emerging markets growth to exceed the developed markets in 2022 and going forward, it said that the golden age of the emerging markets outperformance – which was already fading – is now almost certainly over.
“With a few exceptions, the convergence of developed markets and emerging markets income will probably slow over the upcoming decade,” read the report.
On the side of policy, the report noted that policymakers in emerging markets are now facing the challenge of tightening the fiscal policy as economies bounce back, especially after significant stimulus adopted in such markets in 2020 in response to the repercussions forced by the pandemic.
According to the report, “in general, we expect that fiscal policy will tighten faster and more aggressively, while monetary policy will remain generally loose and on hold. Given low policy interest rates in the developed markets, we expect that emerging market interest rates will remain low for the foreseeable future”.
In respect of public debt, the report expected it to remain elevated in the emerging markets, especially with the declined GDP in these markets, projecting it to elevate faster in the MENA and Latin America regions.
The report also stressed that the COVID-19 crisis in India poses a serious risk to its economic recovery and threatens to create spill over effects in other emerging markets.
It added that the situation also suggests risks of future serious outbreaks elsewhere in other emerging markets that successfully managed earlier waves.
“Recent problems in Chile and elsewhere indicate that EMs’ exit from the pandemic will be difficult. Slow vaccine rollouts combined with the reliance on less effective vaccines point to continued challenges," said the report.