investment insights
Towards a stabilisation of growth dynamics in 2019
In a nutshell:
- Currency-induced tighter monetary policies have slowed emerging growth – but the cycle is still young, and the major economies appear safe from crisis.
- Political issues will remain key in 2019 for Latin America, notably in Mexico, Brazil and Argentina.
- In Asia, Chinese policymakers should be able to manage the slowdown while still strong growth in India might be dampened by uncertainty going into the general elections and fiscal tightening thereafter.
2018 proved particularly challenging for emerging economies. Currency depreciation and nascent domestic price pressures forced a number of central banks to start tightening monetary policy.
That said, we would stress that the weakest links in the emerging space have already broken. Although South Africa currently does show some worrying vulnerabilities, the other main economies appear safe from crisis. Most of the emerging economy cycles are still young. Outside of a few countries that are reaching capacity constraints (India) or overheating (Hungary, the Philippines), interesting upside growth potential remains. Also, improved current account balances and higher foreign exchange reserves significantly limit solvency risk.
Most of the emerging economy cycles are still young. Outside of a few countries that are reaching capacity constraints (India) or overheating (Hungary, the Philippines), interesting upside growth potential remains.
As such, any positive surprise in the global environment would pave the way for an emerging rebound. That is admittedly a steep assumption to make, since it would require a clear resolution of trade disputes, stronger global demand, a weaker USD and oil prices that stabilise around a sweet spot, appealing to both producers and consumers. Our base case is rather a stabilisation of economic growth dynamics (see chart 9).
In Latin America, growth should recover from a low base, albeit remain slow owing to the tightening monetary and fiscal framework. Mexican President AMLO’s governing style could deter foreign investors, while President Bolsonaro may not fully deliver on high investor expectations regarding Brazilian pension reform. In Argentina, October 2019 elections will be a big challenge for President Macri.
Asia is most at risk from trade tensions, but strong fundamentals and fiscal leeway should allow growth to slow without collapsing. In China, policy easing alongside past CNY depreciation should ensure a gradual slowdown, while solvency is not at risk. India should remain the fastest growing Asian country in 2019 although political risk will intensify with general elections scheduled for May.
Finally, Russia should remain stable at a structurally low base although oil prices and US sanctions remains a big unknown, while overheating signs should drive Hungary and Poland to slow down. Turkey will contract amid a balance of payment crisis, and South Africa muddle through after a bout of technical recession in 2018.
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