By Jorgelina do Rosario and Karin Strohecker
LONDON, December 28 (Reuters) – The past 12 months have been tough for emerging markets as more governments default, currencies suffer and double-digit losses in stocks and bonds – although many investors are optimistic that 2023 might bring some relief.
Below are the events, trends and topics that investors expect to shape the outlook for emerging markets next year.
A slower pace of interest rate hikes in the US and other major economies could set the stage for an emerging market rally in 2023, with a weaker dollar and falling inflation providing much-needed relief. .
Developing economies are expected to hold on to their growth differential relative to their developed counterparts, but recession fears in the US as well as Europe are clouding global markets generally, particularly in the first half.
“Economic downturns as well as the aggressive monetary tightening and geopolitical and commodity shocks that induce them will temporarily hurt financial and emerging markets,” said David Folkerts-Landau, group chief economist at Deutsche Bank.
The recovery could be delayed if emerging central banks are not given the opportunity to lower interest rates for most of the year.
China’s reopening from its COVID-19-related lockdowns will be bumpy, but accounting for nearly a fifth of global gross domestic product, the prospect of a strong recovery at a time of slow global growth is enticing.
Analysts expect a strong recovery in consumption and investment in the world’s second-largest economy from mid-2023.
“If you look at China’s savings rate right now, it’s very high,” said Erik Zipf, head of emerging markets equities at DuPont Capital. “We think that’s going to be spent as soon as people feel comfortable going out, that’s going to provide a pretty big tailwind from an economic perspective.”
3/ WAR IN UKRAINE
Russia’s invasion of Ukraine has rattled markets and the global economy – and the progress of the war in 2023 could be no less important, whether it’s a continuation, an escalation or progress towards a resolution.
Globally, the war has transformed energy markets and inflationary pressures, food security and the perception of geopolitical risks – factors often felt more acutely in emerging economies. Emerging Europe has also felt the immediate humanitarian impact – from refugee movements to the brain drain from Russia.
A growing list of countries are over-indebted following COVID-19 and the war in Ukraine: Zambia and Ethiopia are trying to reduce the debt burden as part of the Group of 20 Common Framework. Sri Lanka and Ghana defaulted in 2022.
But a more complex mix of creditors – including the emergence of China as the world’s largest bilateral lender – compared to previous bouts of debt distress has made proceedings slow and complex.
“To get them all to sing the same song in the same key, it’s quite difficult,” said Tim Samples, associate professor of legal studies at Terry College of Business.
The number of countries shut out of capital markets among smaller, riskier economies is at historic highs – though there may be a saving grace.
“There really isn’t a lot of debt coming due next year,” said Carmen Altenkirch, emerging markets sovereign analyst at Aviva Investors. “The country that is probably most at risk is Pakistan.”
5/ BRAZIL UNDER LULA 2.0
President-elect Luiz Inacio Lula da Silva will take office on Jan. 1 as markets are already looking for signals of a fiscal anchor to control spending in Latin America’s biggest economy.
Policy makers have emphasized inflationary risks stemming from da Silva’s 168 billion reais ($31.6 billion) spending proposal to deliver on campaign promises.
“Investors want to know if the debt-to-GDP ratio in Brazil is explosive or under upward pressure, if we’re going to reach 100% debt-to-GDP soon, or if we can stabilize it over the next two or three years.” , Gordian said. Kemen, Head of Emerging Markets Sovereign Strategy (West) at Standard Chartered Bank.
6/ ELECTIONS IN TURKEY
President Tayyip Erdogan could face the biggest political challenge of his two decades in office as Turks head to the polls in the most publicized vote in emerging markets.
The country is grappling with a spike in the cost of living and a plummeting currency, with the lira falling to a record low against the dollar TRYTOM=D3 in recent days. Years of unorthodox monetary policy have seen many investors reduce their exposure to the country’s assets. A change of direction could mark a dramatic turnaround.
“This is potentially the most interesting story of 2023, one way or another,” said David Hauner, Head of Emerging Assets Economics and Strategy, EMEA, Bank of America Global Research. .
In Latin America, Argentina will hold presidential elections in October. Two-time president and vice-president Cristina Fernandez de Kirchner has said she “wouldn’t be a candidate for anything” in the general vote, after an Argentinian court sentenced her to six years in prison in a high-profile case. corruption case.
In Poland, an election slated for the fall could see voters oust the ruling nationalist Law and Justice (PiS) party, which could reshape Warsaw’s strained relationship with Brussels.
($1 = 5.3109 reais)
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(Reporting by Karin Strohecher and Jorgelina do Rosario, additional reporting by Rodrigo Campos; Editing by Emelia Sithole-Matarise)
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