EM Outlook – 2014Q1 – Coping with volatility

by: Marijke Zewuster , Arjen van Dijkhuizen , Maritza Cabezas

EM Outlook - 2014Q1 - Coping with volatility ()
  • Emerging markets are going through a turbulent phase, as global financial markets adjust to an expected ‘normalisation’ of monetary conditions in developed economies. We have cut several growth forecasts, but expect some acceleration of EM growth this year, driven by higher exports to advanced economies. However, our outlook remains subject to downside risks, such as a further reversal in capital flows, deleveraging, a lack of structural reforms, political turmoil and disappointing growth in the developed economies and China. While we do not expect a large-scale crisis, EMs will continue to be faced with regular bouts of volatility. Those with weak fundamentals or policies and those facing political turmoil will be the most vulnerable to spikes in risk aversion.
  • Emerging Asia, reforms, politics and tapering: 2014 has started with increasing concerns that emerging Asia could be cooling down. The larger economies are correcting their imbalances over the coming period, while elections in several countries have increased the political rumblings. In China, recent efforts to control rapid credit growth and reduce the risk of shadow banking have caused market unrest. On the external front, although Asia is now better prepared for the journey towards neutral monetary policy, volatility cannot be ruled out.
  • Emerging Europe, shelter from the storm: Despite recent market turmoil, we expect some acceleration of growth this year (to 2.4%, from 1.5% in 2013), led by exports to the recovering eurozone. Still, divergence between sub-regions and countries remains high. Downward risks relate to a further deterioration of external financing conditions, political unrest (e.g. Turkey, Ukraine) and a weaker than expected eurozone recovery.
  • Latin America, can the region control the tide of events? We expect Latin American growth to accelerate from 2.4% in 2013 to 3% in 2014, but huge uncertainties prevail. If exports turn out lower or commodity prices fall faster than expected, growth will be hurt. Latin America does not chart the course, but moves up and down on the waves of the world economy. Still, economic fundamentals determine which countries are strong enough to keep their ship steady, even in stormier waters, and which must let the tide of events dictate their fate.