Daily Update: Still-Growing Pains for Emerging Markets

Today is?Wednesday, June 28, 2023, and here’s your?curated selection of essential intelligence on financial markets and the global economy?from?S&P Global. Subscribe?to be notified of each new?Daily?Update.?

The COVID-19 pandemic is no longer a global public health emergency, according to the World Health Organization, but its economic aftershock is still being felt in emerging markets.

Since the onset of the pandemic, emerging market economies have struggled to rebuild amid the Russia-Ukraine conflict and its impact on global supply chains, alongside increasing food and energy prices, challenging credit conditions and questions about the vulnerability of their banks and companies to financial stress.

S&P Global Ratings recently revised its?expectations for GDP growth?across emerging markets downward to an average of 4.1% for 2023, from 4.3% in March.

“We continue to expect emerging market countries in Europe, the Middle East and Africa, and Latin America to grow well below long-term trends the next 12 months,” S&P Global Ratings analysts wrote June 26. “External conditions will be tough. We see [emerging markets] gradually returning to their potential growth rates later in 2024 and 2025 as inflationary pressures recede and central banks begin to ease.”

Earlier in 2023, S&P Global Ratings warned that the balance of emerging market risks?remains on the downside. Threats to emerging economies from decelerating global trade and geopolitical tensions were expected to remain, while the risks of tighter financing conditions, stubborn inflation and rising labor costs were expected to increase. At the same time, the risk of climate change and rising adaptation costs — a secular trend that affects emerging and developed economies — was forecast to worsen.

While emerging markets have faced pressure from the outset of the COVID-19 pandemic, the impact of this?pressure on credit quality?has evolved over time. From March 2020 to February 2022, Latin America had the highest number of negative rating actions, while banks and utility companies were most heavily affected by rating downgrades. From February 2022 to January 2023, Greater China saw the highest number of negative rating actions, with real estate and nonbank financial institutions hit the hardest.

Much of the concern for emerging market economies centers around the US Federal Reserve. At its most recent meeting from June 13 to June 14, the Federal Open Market Committee decided to maintain the federal funds rate at 5%-5.25%, but the central bank’s focus on curbing inflation is expected to result in tighter financing conditions for emerging markets.

An April report by S&P Global Ratings, “Where And How External Funding Stress Might Hit Emerging Market Banks,” analyzes two ways these conditions could create?adverse effects for banks?in emerging market economies.

First, there are direct channel effects, where banks with a significant amount of net external debt find it difficult to roll over their funding. This could potentially deplete the liquidity buffers banks need to hold. Second, there are indirect effects, where banking systems in certain countries are highly exposed to a nonbank entity, such as a corporation or government, with significant exposure to external debt.

Assessing five potentially vulnerable economies — Egypt, Indonesia, Qatar, Tunisia and Turkey — S&P Global Ratings found that Turkey’s banking system was most exposed to direct channel impacts and that Tunisia was most vulnerable to indirect effects, via the Tunisian government.?

But it’s not all doom and gloom. While S&P Global Ratings expects economic growth to slow across most emerging markets in 2023, India is showing resilience, while China and Thailand are expected to buck the trend. Other emerging markets might even see opportunities from shifts in global supply chains.

Nearshoring, or the idea of moving production closer in proximity to demand, has become a popular theme in recent years as companies look to address supply chain risks highlighted by COVID-19 and geopolitical tensions. If companies choose to move production from China to countries such as Mexico or Hungary, the impact on GDP growth could be substantial.

“In a hypothetical scenario in which 1% of total manufacturing output from China is shifted to Mexico gradually over the next five years, we estimate annual real GDP growth for Mexico would average roughly 2.6%, compared with our 2.0% baseline,” analysts said in the June 26 report.

The risks and opportunities for emerging markets will be discussed at S&P Global Ratings’?Global Emerging Markets Conference, which takes place July 11 in London and features a keynote address by S&P Global Ratings Global Chief Economist Paul Gruenwald.

Today is?Wednesday, June 28, 2023, and here is today’s essential intelligence.

Written by Mark Pengelly.

Economy

Economic Outlook Emerging Markets Q3 2023: A Slowdown Ahead After Beating Expectations

Despite better-than-expected growth in the first quarter, S&P Global Ratings continues to forecast a sharp slowdown in 2023 for most emerging markets (EMs), excluding China, following strong growth in 2022. Headline EM inflation has dropped, but in emerging EMEA and Latin America (excluding Brazil), it remains above central banks' targets. Its forecsts annual average inflation in emerging Asia (excluding the Philippines) to come within central banks' targets in 2023, but for most other EMs, returning to their central bank targets by the end of 2024 will be a bumpy ride.

—Read the report from?S&P Global Ratings

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Capital Markets

Credit Conditions North America Q3 2023: Risks Vs. Resilience

Credit conditions for borrowers in North America are caught in a push-and-pull between unyielding risks and economic resilience. Generally, conditions look set to remain tight for the foreseeable future. Benchmark interest rates are unlikely to fall any time soon, price pressures persist (eroding consumer purchasing power) and lenders are becoming more selective.

—Read the report from?S&P Global Ratings

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Global Trade

Russian Insurrection Ends But Attempted Coup Damages OPEC+ Producer

Russian President Vladimir Putin June 24 faced down an attempted military insurrection by mercenary warlord Evgeny Prigozhin but the attempted coup has raised questions over the Kremlin's grip on the OPEC+ producer and major crude exporter. After a tense day that saw Prigozhin's Wagner mercenary force march towards Moscow after seizing control of Rostov-on-Don a deal was reached to de-escalate the dispute, which had threatened to tip Russia into a civil war. Prigozhin ordered his forces to return to their bases after talks with Belarusian President Alexander Lukashenko acting as an intermediary for Putin.

—Read the article from?S&P Global Commodity Insights

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Sustainability

Trafigura Seeks More Regulatory Support For Green Marine Fuels

Trafigura has been willing to make early-stage investments in green fuels to promote maritime decarbonization, but regulators need to strengthen emissions rules so a low-carbon transition can be financially viable, Global Head of Fuel Decarbonisation Rasmus Bach Nielsen said. Aside from being a major trader, Trafigura has set a target of investing in 3 GW green hydrogen projects by the end of its financial year 2029-30 (October-September) while exploring ways to power its large shipping fleet with low-carbon fuels.

—Read the article from?S&P Global Commodity Insights

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Energy & Commodities

OPEC Says Asia's Growth To Drive 2023 Global Oil Demand, Aramco Optimistic

Asia's economic growth will drive the global oil demand in 2023 despite recessionary risks and economic headwinds, major OPEC+ players at the inaugural Energy Asia conference in Kuala Lumpur said June 26. "Asia is a dominant economic force today on the global scene for oil demand and our forecast — almost entirely — is the demand growth this year 2023 will be coming from Asia, from China, from India, from Malaysia, Vietnam and many other Asian countries," OPEC Secretary General Haitham Al Ghais told S&P Global Commodity Insights on the sidelines of the conference.

—Read the article from?S&P Global Commodity Insights

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Technology & Media

Mainland China Telcos, Pay TV Operators Benefit From Ties With Streamers

Mainland China pay TV operators and telcos have entered 58 agreements in various formats with over-the-top streaming players as of March 2023, according to an S&P Global Market Intelligence survey. Some partnerships benefited the pay TV operators more than the OTT players due to regulatory restrictions, while others fostered the growth of all partners. S&P Global Market Intelligence divided the partnerships into five major categories based on the agreement format. Specifically, pay TV operators and telcos can provide OTT streamers (1) billing services; (2) subscription promotions via bundled packages or discounted products; (3) unlimited data or customized data services; (4) set-top box integration; and (5) mobile or streaming stick offers. The "Other" category includes the companies' strategic investments in each other and other infrastructure-sharing partnerships.

—Read the article from?S&P Global Market Intelligence

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