Emerging Markets Daily - May 3
Fitch Cuts China '22 Forecast, Global Stagflation Shock Looms, India Insurance Giant IPO, China Slowdown Hits EM's, Germany to Exit Russian Oil by Late Summer
The Top 5 Stories Shaping Emerging Markets from Global Media - May 2-3
Fitch Trims China Growth Forecast Amid Lockdowns
Bloomberg
“Fitch Ratings cut its forecast for China’s 2022 gross domestic product growth due to Covid-19 lockdowns that have hobbled the economy.”
“The agency trimmed its growth estimate to 4.3% from 4.8%, according to a statement from the agency on Tuesday. China’s economic activity contracted sharply in April as restrictions put in place to stem the spread of the virus closed factories, curbed mobility and snarled supply chains.”
“While Fitch expects disruptions to ease this month, the agency cited persistent risks including the possibility of China’s restrictions failing to quickly control new outbreaks, or a potential delay in the easing of current curbs. China is expected to strictly follow its Covid Zero strategy until 2023, Fitch said.”
“Banks from UBS Group AG and Barclays Plc to Standard Chartered Plc and Bank of America Corp have cut their forecasts for China’s full-year economic growth in recent weeks as the nation maintains its tough virus restrictions to try and stamp out the resurgence. Economists polled by Bloomberg last month once again lowered their growth forecast for 2022 to 4.9%.”
“Fitch expects additional policy support in the coming quarters, including an acceleration of infrastructure investment and further cuts to policy interest rates and the reserve requirement ratio.” Bloomberg reports.
The Global Stagflation Shock of 2022: How Bad Can it Get?
Financial Times
“Only last year, many economists were expecting 2022 to be a period of strong economic rebound. Businesses would return to full operation post-Covid. Consumers would be free to splash their accumulated savings on all the holidays and activities they had not been able to do during the pandemic. It would be a new ‘roaring twenties’” some said, in reference to the decade of consumerism that followed the 1918-21 influenza.”
“Fast forward a few months and the more commonly cited parallel is the 1970s, when the Arab oil embargo helped create a prolonged period of economic hardship. Inflation surged to double-digit rates even as economies around the world stagnated — a painful mix of high prices and low growth known as ‘stagflation’.”
“Now, stagflation is again on the cards. After the double shock of Covid-19 and the Russian invasion of Ukraine, inflation rates have exceeded expectations, surging to the highest levels in decades in many countries, while economic growth forecasts are rapidly deteriorating.”
“The prospect of stagflation’s return strikes fear into policymakers because there are few monetary tools to address it. Raising interest rates may help reduce inflation, but increased borrowing costs would further depress growth. Keeping monetary policies loose, meanwhile, risks pushing prices higher.”
“Most analysts and economists, including the IMF, do not expect a rerun of the bad old days of the 1970s — a decade of economic blight that caused pain to households and businesses alike. Inflation is not yet as high as it was back then; more central banks are independent; and fiscal support is shielding the most vulnerable.” The FT reports.
India Insurance Giant IPO to Kick off on Wednesday
Arab News
“The initial public offering of Life Insurance Corporation, India’s biggest insurer, has got off to a strong start, with 59.3 million shares that were set aside for anchor investors being subscribed at 949 rupees apiece, according to an exchange filing on Tuesday.”
“The Indian government has said it expects to raise up to $2.74 billion, just a third of its original target, from selling a 3.5 percent stake in LIC in the country’s biggest initial public offering.”
“Anchor investors are high-profile institutional investors that are allotted shares before the subscription opens for retail and other investors, and have to commit to holding their shares for a certain period after listing.”
“LIC’s offering is set to open for other investors on May 4 and will close on May 9. The indicative price range has been set at 902 to 949 rupees per share, with 56 billion rupees ($732 million) of shares set aside for anchor investors.”
“Norwegian wealth fund Norges Bank Investment Management and the Government of Singapore are among the subscribers to the anchor book, the filing showed.” Arab News reports.
China Lockdowns and Slowing Growth Ripples Across Emerging Markets
Fortune
“Fresh Covid outbreaks—and the government’s stringent policy to contain them—are spooking global investors who fear shutdowns in China will echo across the world by lowering demand and disrupting supply chains. That’s pushing them to sell not just China’s currency, bonds and stocks but the assets of any developing nation which relies heavily on trade with the second-biggest economy.”
“The result is the sharpest slide in emerging markets in two years, not unlike the meltdown in 2015 when China’s woes led to a rout in their bonds and currencies, besides wiping out $2 trillion from equity values. Since then, the country’s influence on the global economy has only grown: It’s now the largest buyer of commodities, meaning its slump may impact exporters of raw materials and their markets more than ever.”
“‘Given China’s importance in global supply chains and importance to global growth prospects, further disappointments in the nation’s growth may lead to more contagion risk,’ Johnny Chen and Clifford Lau, money managers at William Blair Investment Management in Singapore, wrote in an email. ‘We see countries with high trade linkages to China as being the most vulnerable.’”
“As armies of white-suited enforcers descended on Shanghai and Beijing in late April to oversee the mandatory testing of millions, the offshore yuan sank to the worst monthly loss in at least 12 years. The MSCI Emerging Markets Currency Index, with almost a 30% weight for the Chinese currency, tumbled in tandem. The yuan’s 30-day correlation to the index rose to the strongest level since September, underscoring the currency’s influence in the emerging-market selloff. After Shanghai reported its first deaths since the latest outbreak, panic selling spread to bonds and equities.”
“Beijing’s 2022 growth target of 5.5% is now in question, prompting analysts from Standard Chartered Plc to HSBC Holdings Plc to predict currency losses over the next three months. That, in turn, could lower growth rates in countries like South Africa and Brazil, just when they’re also buffeted by higher U.S. yields, an inflationary spiral and the war in Ukraine.” Fortune/Bloomberg reports.
Germany Says Quitting Russian Oil By Late Summer is ‘Realistic’
Hellenic Shipping News
“Germany says it’s making progress on weaning itself off Russian fossil fuels and expects to be fully independent of Russian crude oil imports by late summer.”
“Economy and Climate Minister Robert Habeck said Sunday that Europe’s largest economy has reduced the share of Russian energy imports to 12% for oil, 8% for coal and 35% for natural gas. Germany has been under strong pressure from Ukraine and other nations in Europe to cut energy imports from Russia that are worth billions of euros, which help fill Russian President Vladimir Putin’s war chest.”
“‘All these steps that we are taking require an enormous joint effort from all actors and they also mean costs that are felt by both the economy and consumers,’ Habeck said in a statement. ‘But they are necessary if we no longer want to be blackmailed by Russia.’”
“The announcement comes as the whole European Union considers an embargo on Russian oil following a decision to ban Russian coal imports starting in August. The bloc pays Russia $850 million a day for oil and natural gas and Germany is one of its top importers of Russian energy.” Hellenic Shipping News reports.
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