S&P Global lowers 2023 growth forecast for emerging markets

BENGALURU: S&P Global Ratings lowered its 2023 growth forecast for emerging economies on Tuesday, citing persistent pressures from the Russia-Ukraine conflict, a lingering COVID-19 pandemic and tight monetary policy conditions, according to Reuters.

The ratings agency now projects real gross domestic product growth of 3.8 percent next year, down from its previous forecast of a 4.1 percent expansion.

“The downward revision to growth comes from all EMs (emerging markets) excluding China and Saudi Arabia, with most economies poised to expand below their longer-run trend rates,” it said, adding that forecasts for 2024 and 2025 remain broadly unchanged, averaging at 4.3 percent.

While inflation in emerging markets have passed the peak or are peaking soon on the back of declining food and fuel inflation, it is still poised to remain above central banks’ targets in many economies, forcing monetary policies to stay restrictive, the agency warned.

“But the deceleration in inflation--coupled with a worsening growth outlook--could bring policy easing onto the agenda in several EMs, especially in Latin America, by the middle of next year,” S&P said.

Meanwhile Bloomberg reported that November has given a glimpse of the outperformance that emerging markets can deliver in the post-stimulus world as the maturing phase of Federal Reserve tightening focuses investors’ minds on the opportunities beyond.

Stocks, currencies and local bonds in developing nations rallied this month by the most since March 2016, a period that heralded the biggest gains since the commodity boom of the early 2000s. That helped the benchmark gauge for emerging-market equities to surpass the S&P 500 Index by the most since the global financial crisis, while dollar-denominated bonds advanced the most since then.

Assets in poorer nations have underperformed their US peers for most of the past 14 years as they received little more than a trickle of the vast Fed stimulus, most of which went on to bolster the US markets. The dollar’s relentless march from one record high to another kept a lid on risk appetite even as debt crises in smaller countries, China’s economic troubles and the Covid pandemic sparked frequent meltdowns in emerging economies.

That narrative began to shift this month. The world’s top money managers including Morgan Stanley predicted a peak in the dollar and a paradigm change that will benefit emerging markets. With early rate hikes and a selloff that began a year before it reached rich nations, developing nations had already priced in the Fed hiking cycle and were too cheap to ignore. When the risk-on shift came after signs of moderating US inflation, they rapidly began trimming the losses suffered earlier this year.

“We see grounds for a recovery in emerging markets,” Morgan Stanley strategists including Andrew Sheets wrote in their 2023 global strategy outlook. “First, we expect to see the conditions for the dollar to weaken, which is always a helpful starting point. Global growth recovers from its low point in the first quarter through to the end of the year, led by emerging economies.”