EM Outlook – 2014Q2 – Turning the corner

by: Marijke Zewuster , Arjen van Dijkhuizen , Maritza Cabezas

EM Outlook - 2014Q2 - Turning the corner ()
  • Emerging markets have had a modest slowdown in economic activity in the first quarter, but they could be stabilising as a result of countercyclical policies in many emerging markets and prospects of a stronger global economy. The Fed’s tapering has been comfortably digested and there is confidence that China’s authorities will support the economy to avoid an unexpected slowdown. Not everything is resolved though. The dispute between Ukraine and Russia has intensified and prospects for both countries are deteriorating.
  • Emerging Asia, election optimism: Reforms have been introduced in many of the region’s countries in the past year and this is weighing on growth in the leading economies, including China, India and Indonesia. However, there are no signs that the situation is fundamentally deteriorating. Meanwhile, Asia’s two largest democracies, India and Indonesia, will be holding elections. There is optimism surrounding the leading candidates. Risks to the outlook have shifted to a slowdown in China. Our GDP forecast remains steady at around 6.1% in both 2014 and 2015. 
  • Emerging Europe, headwinds turn eastward: Turmoil in Ukraine and Russian involvement are dominating the scene in emerging Europe. While we have cut our Russian growth forecasts, regional prospects remain divergent, with growth in Central Europe accelerating thanks to the eurozone’s recovery. Still, we expect overall regional growth, driven down by Russia, to remain subdued in 2014 (at 1.6%) and gain momentum in 2015. Risks to the outlook are stronger-than-expected capital outflows and disorderly deleveraging. 
  • Latin America, creditworthiness on hold: The region’s creditworthiness has improved greatly on balance in the past years, but since 2013 the three largest credit rating agencies have issued more sovereign downgrades than upgrades. Going forward, we foresee few major shifts in the region’s credit ratings: concerns about increased structural imbalances and a less favourable outlook for commodity exports are counterbalanced by a brighter outlook for global growth.