It was never going to be easy for emerging markets (EMs) to deal with the economic fallout of the COVID-19 pandemic. However, the Russia-Ukraine conflict has made the situation more challenging. Rising food and energy inflation and rising trade account deficit have added to the woes of EM at a time when global supply chains are already stretched.
Madhavi Arora, principal economist, Emkay Global Financial Services, said, “EMs were already lagging behind developed economies in GDP growth from Covid as the latter received too much stimulus to tackle the pandemic.” “Now, EMs are more dependent on imports of food and energy related items from developed economies. Therefore, whenever a commodity is upcycled, the way we are seeing now, most Asian economies will see a negative impact on their macros. ” Therefore, Arora cautions that business growth for EMs for the rest of the year will be lower than previously expected.
As such, the impact on EM will vary depending on each country’s risk to the warring nations. However, the pace of business is slowing down. The widely followed Purchasing Managers’ Index (PMI) reflects the variation in business activity between EM and DM.
The Composite Emerging Markets Output Index fell to 46.8 in March, from 51.3 in the previous month. A reading above 50 indicates expansion. The Composite Production Index is the weighted average of the manufacturing and service business activity indices. In comparison, the overall developed market output index rose to 56 in March, from 54.7 in the previous month.
“Higher energy and imported food prices will drive up inflation in more developed and prosperous EMs. For poor EMs who have no commodity base, the picture is more challenging, so they face high inflation, balance of payments and debt servicing problems, said Jeffrey Haley, Senior Market Analyst, Asia Pacific at Broking House. In addition, the lack of energy and food is causing social unrest in some countries.
Simply put, the economic growth gap between EM and developed markets is set to widen and corporate earnings in EM are unlikely to remain immune.
Analysts at Nomura Singapore Ltd reported that the overall 2021 earnings season for Asia ex-Japan pack has disappointed the market’s expectations. They warn of downside risks to the 2022 consensus projections amid slowing global growth, an extreme semiconductor cycle, a major contributor to Asian earnings, and rising commodity prices. Nomura’s report on April 10 said the earnings growth forecast for 2022/2023 is 10% for MSCI Asia East Japan, and lower than the consensus estimate. It also lowered its base case 2022 forecast for the MSCI Asia ex-Japan index by about 11% to 820 versus 925 earlier. So far this year, the MSCI Asia East-Japan Index has declined by 9.44% as against the MSCI World Index and the MSCI DM Index falling 6.79% and 7.07%, respectively.
Meanwhile, in India’s case, some of the larger risks that need investors’ attention are rising import bills on the Indian rupee, slow growth in rural consumption, and faster and higher interest rates by the Reserve Bank of India. increase. India (RBI). RBI has kept the repo rate at 4% in its latest meeting. However, it said its focus has shifted from growth to inflation.
“While the terms of trade for Indian agriculture may improve due to the Russia-Ukraine conflict in the global agricultural chain, on a real basis, rural wage growth is negative,” Arora said. The increase in non-food related inflation is more than the increase in wages for the itemized rural population, she said.
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