By Joseph Moss, International Banker
One might assume that emerging markets (EMs) bore the brunt of the challenging, tough economic conditions that prevailed from the monumental monetary tightening that intensified worldwide during 2023. And yet, JPMorgan Chase noted on December 14 that while the eurozone, the United Kingdom, Canada and China disappointed, it was those emerging economies that “ended up surprising positively”, with the likes of India, Mexico and Brazil defying expectations and remaining resilient amid a deteriorating global macroeconomic environment.
With consensus growing that aggressive rate hikes peaked during last year’s final quarter, the big question on everyone’s minds is how long they will remain elevated in 2024 before easing. With several key economies already in deep recessions—and several more teetering on the edge of negative-growth territory—and the debt obligations of many more economies having ballooned last year, EMs will be keener than most to see the backs of these ongoing higher-for-longer monetary regimes in favour of growth-promoting policies.
For that to happen, however, inflation must return to near-target levels, which remains far from being a reality in many cases. As such, most EMs will continue to experience challenging economic environments for at least the year’s first half. Indeed, S&P Global Ratings stated it expects EMs to grow “below trend” in 2024. Whilst the rating firm has acknowledged the resilience of EM nations’ domestic demand to this high-interest-rate environment, it has also suggested this resilience will soften gradually during the coming quarters.
Much of the EM complex consists of export-oriented economies that may experience the toughest headwinds, especially with major trading partners such as the United States and the European Union (EU) expected to register weaker growth this year vis-à-vis 2023. Indeed, S&P noted in late November that with an increasingly cloudy outlook for US consumption on the back of a combination of slowing real income growth in the second half of 2023, continued depletion of post-pandemic savings and resumption of student-loan repayments, the projections for US demand for EM exports will be underwhelming this year.
That said, with analysts mostly forecasting a buoyant 2024 for commodity prices, EM exporters may end up enjoying a bumper year. With the US ceasing last June to boost its oil supply through its Strategic Petroleum Reserve (SPR)—a measure initially taken to counter the price spikes following the outbreak of war in Ukraine in February 2022—prices once again trended higher during the third quarter before easing toward the end of the year. But UBS has predicted prices in 2024 for commodities such as oil and gas, industrial and precious metals, and agricultural produce “to be higher due to supply constraints caused by years of underinvestment as well as demand from decarbonisation and climate change”.
As is always the case, China’s economic performance will be among the key drivers of EMs’ prospects in 2024. It seems probable that ongoing problems in its real-estate sector will hamper the country’s growth trajectory. China’s property sector is almost certain to remain a distinct drag on growth throughout much of 2024, despite the outlook improving during the last quarter following a raft of policies introduced by Beijing to support the troubled sector. S&P Global Ratings has predicted the country’s GDP (gross domestic product) growth to slow from an estimated 5.4 percent in 2023 to 4.6 percent this year, well above the growth rates expected for advanced economies. Fellow rating firm Fitch Ratings also recently noted that slower economic growth, lower rates and the government’s adapting policy response “will add to headwinds faced by several sectors in China, reflected in several deteriorating outlooks, notably for property developers and banks”. A sharper slowdown in China’s growth than assumed would pose “significant risks for China-based issuers in multiple sectors and would have adverse credit ramifications regionally,” Fitch added.
Global trading volumes will continue to suffer as China’s geopolitical relations with the US will likely remain fraught during the coming year. The uncertainty posed by the hugely important upcoming elections in Taiwan on January 13 and the US in November could further weigh on diplomatic and economic relations between the two superpowers. According to UBS, the former will have “significant ramifications for US-China relations and regional security”, while a Republican presidency in the US led by Trump “is likely to lead to higher uncertainty in geopolitics, including US-China relations”.
Nonetheless, those geopolitical tensions may benefit EMs, particularly if policies such as friend-shoring and de-risking take off in 2024. Such structural trends would presumably benefit export-oriented economies within the Chinese and American spheres of influence as supply chains continue to become more localised. As such, one might expect EMs such as Mexico, Chile, Vietnam and central Asian economies to prosper from this growing fragmentation.
Analysts have predicted that India will be a star EM performer in 2024, with Amundi projecting 6-percent growth in GDP for the year, slightly below the 6.5 percent expected for 2023 in full but still buoyant. The French asset-management firm has forecasted domestic demand and business investment playing particularly crucial roles in generating growth, although the government’s efforts to rein in inflation during an election year will likely weigh more on rural-sector incomes.
The two Asian heavyweights, plus several key Southeast Asian economies, will do much to position the Asia-Pacific (APAC) as the leading region for EM-growth generation this year. “We expect real GDP to expand by, or above, 5 percent in India, Indonesia, the Philippines and Vietnam,” according to Fitch’s recent assessment. “However, headwinds from slower Chinese growth, weak global demand and higher interest burdens following the rise in interest rates over 2022-2023 will weigh on many sectors’ performance, and the bulk of our APAC sector outlooks for 2024 remain neutral.”
The picture for Latin America, meanwhile, is decidedly more mixed, with the rating firm foreseeing slowdowns in some countries and mild recoveries in others, while China’s potential slowdown may also prove to be a concern for the region if commodity prices are unduly impacted. Regional growth is expected to slow to 1.6 percent this year from 2.3 percent in 2023, as tepid growth in Brazil, Mexico and Colombia, as well as a recession in Argentina, are counterbalanced by modest recoveries in Chile and Peru.
And with GDP growth in the US likely to decelerate this year, trade and investment volumes for Latin American EMs could be significantly constrained. “The external environment will be more challenging, particularly for countries such as Argentina (CC), Bolivia (B-/Negative), Ecuador (CCC+) and El Salvador (CCC+),” Fitch observed in its January 4 report. “These nations have low sovereign ratings lacking external buffers, low exchange rate flexibility and market access, which may lead to difficult policy trade-offs and heightened vulnerability. Slower US economic growth in 2024 will be an added pressure for Mexico (BBB-/Stable) and Central America where remittances, trade and financial linkages are strong.”
From a market standpoint, meanwhile, JPMorgan stated it expects favourable valuations stemming from a brighter growth outlook, gradually more favourable interest rates and a weakening US dollar, all translating into solid business expansions that should benefit emerging markets in particular. As such, the outlook for EM equities is positive this year amidst progressively improving growth, again with emerging Asia leading the way. According to S&P, meanwhile, activities in most EMs in Asia and Europe are close to bottoming out, but economic recoveries are likely to be slow and exposed to potential setbacks resulting from weak global conditions, including Israel’s war in Gaza, which “could prolong risk aversion toward EM assets and increase volatility in energy prices, although the impact so far has been contained”.
It should, of course, be stressed that the soft landings for the US and European economies being touted this year are far from guaranteed, and as such, several scenarios remain on the table. However, a gradual softening of growth is the most likely current projection among analysts, meaning that EMs will most likely avoid experiencing the fallouts of the deep recessions afflicting their major trading partners. Amundi forecasted EM growth decelerating from 4 percent last year to 3.6 in 2024. “Importantly, the growth premium in favour of Emerging Markets over Developed Markets is projected to continue widening,” the asset-management firm also confirmed, underscoring the distinct appeal EMs will likely hold this year. “Asia is set to register the strongest contribution to world GDP once again.”