By Jorgelina do Rosario and Karin Strohecker
LONDON (Reuters) – It’s been a tough 12 months for emerging markets, with more governments defaulting, currencies suffering and double-digit losses in stocks and bonds alike – although many investors are optimistic that 2023 could bring some relief.
Listed below are the events, trends and themes that investors expect to shape the outlook for emerging markets over the next year.
1/ HIGH RATES, LOW GROWTH
A slowdown in rate hikes in the United States and other major economies could set the stage for a recovery in emerging markets in 2023, with a weaker dollar and falling inflation bringing much-needed relief.
Emerging markets are expected to maintain their growth differential with developed markets, but recession fears in the United States and Europe are casting a shadow over global markets in general – particularly in the first half of the year.
“The economic downturn, together with aggressive monetary tightening and the geopolitical and commodity shocks they are triggering, will be temporarily painful for financial and emerging markets,” said David Folkerts-Landau, Group Chief Economist at Deutsche Bank.
The recovery could be delayed if emerging market central banks have no room to cut interest rates for most of the year.
GR`HIC: Interest Rates in Emerging Markets (https://www.reuters.com/graphics/GLOBAL-MARKETS/RATES/akpeqqrzrpr/EM18CEN22121.2.gif )
2/ CHINA REOPENING
China’s reopening from COVID-19 lockdowns will be bumpy, but as it accounts for nearly a fifth of global gross domestic product, the prospect of a strong rebound at a time of slow global growth is enticing.
Analysts are expecting a significant revival in consumption and investment in the world’s second-largest economy from mid-2023.
“If you look at the savings rate for China right now, it’s very high,” said Erik Zipf, head of emerging market equities at DuPont Capital. “We think that’s going to be spent as soon as people are comfortable going out, that’s going to give quite a bit of tailwind from an economic standpoint.”
The story goes on
3/ WAR IN UKRAINE
Russia’s invasion of Ukraine has roiled markets and the global economy – and the course of the war in 2023 couldn’t be less important, be it continuation, escalation or progress in finding a solution.
Globally, the war has transformed energy markets and inflationary pressures, food security and perceptions of geopolitical risk – factors that are often felt more strongly in emerging markets. Emerging Europe has also felt the immediate humanitarian impact – from refugee movements to Russia’s brain drain.
GR`H: FAO food prices hit historic highs (https://fingfx.thomsonreuters.com/gfx/mkt/zgpobbelavd/FAO%20food%20price%20index.PNG)
4/ DEBT REVISIONS
A growing list of countries face a debt crisis in the wake of COVID-19 and the war in Ukraine: Zambia and Ethiopia seek to improve debt burdens under the Group-20 Common Framework. Sri Lanka and Ghana defaulted in 2022.
But a more complex mix of creditors – including China’s rise to become the world’s top bilateral lender – compared to previous episodes of the debt crisis has made procedures slow and complex.
“Getting them all to sing the same song in the same key is quite a challenge,” said Tim Samples, associate professor of law at Terry College of Business.
The number of countries locked out of capital markets among smaller, riskier economies has hit historic highs – although there could be a bailout.
“There really isn’t a lot of debt maturing next year,” said Carmen Altenkirch, emerging market debt analyst at Aviva Investors. “Probably the country most at risk is Pakistan.”
GR`H: Frontier Bonds (https://fingfx.thomsonreuters.com/gfx/mkt/akveqqrynvr/Frontier%20bonds.PNG)
5/ BRAZIL UNDER LULA 2.0
President-elect Luiz Inacio Lula da Silva will take office on January 1, with markets already looking for signals of a fiscal anchor to control spending in Latin America’s largest economy.
Policymakers have highlighted inflationary risks stemming from da Silva’s proposed 168 billion reais ($31.6 billion) in spending to meet 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 ratio soon or if we can stabilize it in the next two or three years,” said Gordian Kemen, Head of EM 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 power when Turks go to the polls in the most prominent vote in emerging markets.
The country is grappling with rising living costs and a falling currency, with the lira falling to record lows against the dollar in recent days. Years of unorthodox monetary policy have led many investors to reduce their exposure to the country’s assets. A change in leadership could spell a stellar trend reversal.
“In one way or another, this is possibly the most compelling story of 2023,” said David Hauner, head of EM Cross-Asset Strategy & Economics, EMEA, Bank of America Global Research.
7/ VOTE
Elections are coming up in a number of other emerging markets. Voters in Africa’s most populous country, Nigeria, will choose their next president in February, with incumbent Muhammadu Buhari absent due to term restrictions.
In Latin America, presidential elections will be held in Argentina in October. Two-time president and vice president Cristina Fernandez de Kirchner said she would “run for nothing” in the general vote after an Argentine court sentenced her to six years in prison in a high-profile corruption case.
In Poland, an election expected in the autumn could see voters oust the country’s ruling nationalist Law and Justice (PiS) party, which could reshape Warsaw’s strained relations with Brussels.
($1 = 5.3109 reais)
(Reporting by Karin Strohecher and additional reporting by Rodrigo Campos; Editing by Emelia Sithole-Matarise)
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