The analysis of emerging markets is traditionally part of my lectures and generally not changing very much from year to year. However, this year (and beyond?) is different. A kind of limited global downturn was already in the cards last fall for the forthcoming quarters. But the Russian war makes the outlook for the global economy both worse and more uncertain about both depth and length of the downturn. The world is indeed confronted with the abominable black swan.
The spillover to emerging markets
Also emerging markets all over the world are affected badly by the ongoing terrible war development in the heart of Europe. There are clear spillover effects on the less advanced countries as well. Of course, the Ukraine and Russia itself are hit the most. But there are many other countries in the emerging world that are now meeting worsening conditions that are directly or indirectly linked to the Russian war.
When considering the already existing economic troubles before the eruption of the war Russian war, the timing for the commenced war in February could not be less favorable for emerging countries. But emerging countries are not equally hit by all the deteriorating political and economic developments. In very general terms, one may say that less advanced countries far away with, for example, energy and food resources tend to be better off than countries with corresponding shortages. Altogether, more details should be examined.
Reliable calculations are currently not possible
I feel pretty sure about the conclusion that accurate point forecasts for individual emerging countries and emerging regions currently are not possible – at least not without precise assumptions about uncertain parameters like the supposed depth and length of the war, energy and other commodity prices and – not to forget – transports and delivery times.
However, when a major event like a big war in Europe happens with a military superpower involved, our models do not work anymore because of the lacking historical experience in a comparable war. Using another one or two different assumption baskets about depth and length of the war, a number of different scenarios could be developed. But still, we are not talking about a forecast. Instead, it is about scenarios.
Thus, further studies on war developments with impact on emerging markets would be beneficial. More can be found.
Influence on emerging markets due to the war
Initially, it would be useful to single out a number of different negative global developments that already had shown up globally in 2021. Here we find
- rising global inflation, interest rate hikes not far away,
- rapidly rising energy prices,
- insufficient supply of chips, other IT components, metals plus transport bottlenecks,
- since last fall worsening GDP forecasts for the beginning of 2022.
What we now can see as a further consequence of the war, are currently worsening trends for several of the negative developments from last year
—> more inflation (coming from energy, agricultural products, metals, intermediate IT-goods, transport bottlenecks)
—> further and/or faster global/American interest rate hikes than anticipated some months ago (means higher costs for emerging countries borrowing in foreign / American currency)
—> higher American interest rates may mean a stronger dollar (which would lead to higher costs for many emerging markets since most foreign credits by emerging countries have been taken up in dollars)
—> clear weakening GDP growth both in advanced and emerging countries.
—> slowing FDI from Western companies in emerging countries as a result of increasing general uncertainty and risk aversion.
Conclusion 1: The foreign debt situation will remain an increasingly important indicator for emerging countries (https://databank.worldbank.org/source/quarterly-external-debt-statistics-gdds). Check it out!
Major producers of oil, gas, agricultural products etc., are, of course, better off than less developed countries that need to import a lot of these commodities. Commodity production at home and imports from abroad are other important factors that should be considered when emerging countries are analyzed, particularly now during the Russian war (https://www.worldbank.org/en/research/commodity-markets).
Conclusion 2: Also commodities play an important role for the development of many emerging countries, particularly during the Russian war.
Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board
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