Emerging Markets Monitor - Oct. 17
EM Resilient on Dollar Strength, Inflation Darkens Global Outlook, Defiant Xi Says: China Will Stand Ground, Nigeria Air Reviving?, Asia Sails Into Headwinds
The Top 5 Stories Shaping Emerging Markets from Global Media - October 17
Emerging Markets Resilient Amid Dollar Rally
Bloomberg
“Citigroup calls it a ‘head scratcher.’ Goldman Sachs terms it ‘striking resilience.’ For Columbia Threadneedle, it’s a ‘reward for proactiveness.’”
“Whichever way one describes it, the relative resilience building up in emerging-market currencies over their advanced-nation peers has money managers sitting up and taking notice.”
“The dollar’s rally to successive records has currencies across the world in a spiral of doom. But a closer look reveals the benchmark gauge for emerging-market exchange rates is posting only half the losses seen in developed countries. And uncharacteristically, this outperformance continues even as commodity prices -- the mainstay of poorer nations -- are tumbling.”
“‘In the last couple of months, prices of commodities have reversed from the levels seen earlier in the year but commodity producers have still performed relatively well compared with the euro zone or Group of 10,’ said Dirk Willer, the head of emerging-market strategy at Citigroup Inc. ‘That’s been a bit of a head scratcher.’”
“Developing nations’ success in weathering some of the volatility tied to Federal Reserve monetary tightening questions the assumption that they will be the epicenter of any market meltdown driven by higher US yields. In reality, much of the pain is being felt in the UK and Europe, while countries like Brazil and Mexico are seeing their currencies lure investors with juicy yields -- the result of some of the world’s most aggressive rate hikes.”
“‘We are seeing in developed markets the same forces that emerging markets have grappled with for the past few decades; inflation pressures and fiscal deficits,’ said Simon Harvey, head of currency analysis at Monex Europe in London. ‘With all the volatility going on, you are forced to search for higher returns and that’s in emerging markets.’”
“A commodity rally this year through June 9 helped MSCI Inc.’s benchmark for developing-nation currencies limit its drop to 2.5%, when the gauge representing developed nations retreated 7.4%. Since then, the raw-material gauge has plunged, but emerging markets have still outperformed the Group of 7 by 2 percentage points. In all, of the 23 developing currencies tracked by Bloomberg, 21 have beaten the British pound, 19 have outperformed the euro and all 23 have done better than the Japanese yen.” Bloomberg reports as posted on Yahoo Finance (no pay wall).
Inflation Clouds Darken Global Outlook
Wall Street Journal
“Policy makers around the world see rising risks that the global economic slowdown could turn into a steeper slump due to strong inflation, high energy costs and climbing interest rates.”
“Another bad U.S. inflation report last week is likely to keep the Federal Reserve lifting interest rates at a rapid clip. That could help spur the U.S. dollar higher, further elevating the cost of imports and debt service for many countries. Key energy producers are crimping supply, feeding price pressures and slowing economic activity, particularly in Europe. New data from China showed consumer spending falling sharply, another sign of cooling economic growth.”
“‘The worst is yet to come,’ said International Monetary Fund Managing Director Kristalina Georgieva at a Thursday briefing, as finance officials gathered in Washington for meetings hosted by the IMF and the World Bank. ‘Across many economies, recession risks are rising.’”
“Economies representing more than a third of global output will contract next year, while the world’s three largest economies—the U.S., the European Union and China—will essentially stall, the IMF forecasts. Overall, the fund projects 2.7% growth in 2023, down from 3.2% this year.”
“‘The situation is worse than during Covid-19,’ Mohamed Maait, the Egyptian finance minister, said Wednesday on a panel hosted by the Center for Global Development.” WSJ reports.
Defiant Xi Says to World: China is Rising and Will Stand its Ground
Bloomberg
“President Xi Jinping had a clear message to those who want to thwart China’s rise: You will fail.”
“In a speech running almost two hours on Sunday, Xi let the world know that China wouldn’t change course even as it faces ‘dangerous storms’ in a more hostile world. Instead, he declared the ‘rejuvenation of the Chinese nation is now on an irreversible historical course’ and more forcefully offered China up as an alternative to the US and its allies.”
“‘China’s international influence, appeal and power to shape the world has significantly increased,’ Xi said in kicking off the Communist Party’s once-in-five-year party congress, at which he’s set to secure a norm-breaking third term in office. ‘Chinese modernization offers humanity a new choice for achieving modernization,’ he added.”
“Xi’s remarks indicate that China is ready to stare down a growing challenge from the US under President Joe Biden, who has moved to hinder Beijing’s ability to access advanced technology and sought to deter any military action against Taiwan -- the biggest flash point between the world’s biggest economies…”
“In addition to failing to make significant breakthroughs on chip technology despite spending tens of billions of dollars, the nation is also facing the slowest economic growth in more than four decades, excluding 2020’s Covid slump. Restrictive pandemic policies have cut off visitors and hurt spending, while youth unemployment is around record highs. A property crisis has also spurred a wave of mortgage boycotts.”
“Xi reiterated that economic development was the party’s ‘top priority,’ even as he twice mentioned the need to ‘balance development with security’ -- a phrase suggesting growth can be sacrificed for goals like self-sufficiency and national defense.” Bloomberg reports.
High-Flying Ethiopian Airlines Swoops In to Revive Nigeria Air Dreams
African Business
“After many failed attempts to launch a profitable airline, the Nigerian government has enlisted Ethiopian Airlines to help its new national carrier take off.”
“The establishment of a national airline was one of President Muhammadu Buhari’s campaign pledges when he first won the presidency in 2015 and he is keen to see the promise implemented before he relinquishes office in May 2023.”
“Nigeria Air was first unveiled at the UK’s Farnborough Air Show in 2018. Within months the project had been suspended as critics raised concerns over its relevance, sustainability and burden on the government budget, with startup costs estimated at over $300m over three years. But now the project is back in the works. In September, Ethiopian Airlines was revealed as the preferred bidder for shares in the new airline.”
“Under a new deal Ethiopian Airlines will own a 49% stake in Nigeria Air, while the Nigerian Sovereign Fund will take 46% and the Nigerian federal government the remaining 5%. With initial capital of $300m, and plans to have 30 aircraft within four years, Nigeria Air will launch a service between Abuja and Lagos and add other routes later.” Shoshana Kedem reports.
Asia Sails Into a Trio of Headwinds, Though it Remains a Bright Spot
IMF Blog
“Asia’s strong economic rebound early this year is losing momentum, with a weaker-than-expected second quarter. We have cut growth forecasts for Asia and the Pacific to 4 percent this year and 4.3 percent next year, which are well below the 5.5 percent average over the last two decades. Despite this, Asia remains a relative bright spot in an increasingly dimming global economy.”
“Waning momentum reflects three formidable headwinds, which may prove to be persistent.”
“A sharp tightening of financial conditions, which is raising government borrowing costs and is likely to become even more constricting, as central banks in major advanced economies continue to raise interest rates to tame the fastest inflation in decades.”
“Rapidly depreciating currencies could further complicate policy challenges.
Russia’s invasion of Ukraine, which is still raging and continues to trigger a sharp slowdown of economic activity in Europe that will further reduce external demand for Asian exports.”“China’s strict zero-COVID policy and the related lockdowns, which, coupled with a deepening turmoil in the real estate sector, has led to an uncharacteristic and sharp slowdown in growth, that in turn is weakening momentum in connected economies.” Krishna Srinivasan and Shanaka J. Peiris write.
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