Emerging markets: Prospects and challenges

Abstract

This article documents recent developments in emerging markets in the context of the COVID-19 pandemic, assesses their prospects and challenges, and discusses appropriate policy settings for the medium term. It argues that EM policymakers' ability to grapple with an incomplete and uneven recovery will be constrained by high public debt and uncertain inflation prospects as well as external risks surrounding capital flows and exchange rate developments. The paper also discusses potential impact of a tightening in global financial conditions and appreciation of the US dollar that could be triggered by a general increase in risk aversion or a reassessment of the likely path of US monetary policy.

Keywords: COVID-19; Emerging markets; Monetary policy.

Fig. 1

2020 GDP Growth Outcome vs Projections In Percent

Fig. 2

EM: 2020 GDP Growth Outcome vs Projections In Percent

Fig. 3

Discretionary Fiscal Response to the COVID-19 Crisis In Percent of GDP; Weighted Average

Fig. 4

Public Debt-to-GDP Ratio in 2021 In Percent Sources: WEO January 2022 and October 2019. Note: The top and bottom edges of the box represent the 75th and 25th percentile, respectively. The dot represents the median.

Fig. 5

COVID Death Rates Per 100,000; 2020 vs 2021

Fig. 6

Vaccination Rates Fully Vaccinated; In Percent of Population Note: Country borders do not necessarily reflect the IMF’s official position

Fig. 7

EM Inflation Medians and Headline Interquartile Range, Percent Sources: IMF CPI, GDS databases. [Note: Only showing 80 % of the sample in December 2021 due to data availability.

Fig. 8

EM Central Bank Moves in 2021 Policy rate, basis points

Fig. 9

Debt to GDP Ratios Among EMs Percent of GDP; Excl. China Note: The estimated ratios of global (94 EM countries) debt to GDP are weighted by each country's GDP in USD

Fig. 10

Cumulative Emerging Market Bond Fund Flows In USD billion, since January 2020

Fig. 11

Emerging Market Bond Yields In Percent

Fig. 12

Reserves Adequacy In Percent of Ems Sources: Assessing Reserves Adequacy Database; WEO January 2022; and staff calculations. Note: Reserves in percent of the weighted sum of four potential BOP drains, specifically short-term debt, broad money, net-exports, and other external liabilities.

Fig. 13

Activity Shortfall Percent Deviation From OCT 2019 WEO Projection Sources: October 2019 and January 2022 WEO.

Fig. 14

Fiscal Support: G-20 General Government cyclically adjusted primary balance Percent of potential in fiscal year GDP Notes: Data not available for SAU. Aggregates are simple averages across G-20 economies. Sources: January 2022 WEO; and IMF staff calculations.

Fig. 15

Corporate Insolvencies: Distribution across EMs Annual change in percent Sources: Euler Hermes, and IMF staff calculation.

Fig. 16

EM NEER in Historical Perspective 0 = 100 start of an depreciation episode, + = Appreciation Sources: Haver, JPM and IMF staff calculations.

Fig. 17

Foreign Exchange Debt of households and Non-Financial Corporations percent of GDP Notes: HH= Households, NFC= non-financial corporate sector, FX – foreign exchange. Sources: Bank for International Settlements and International Financial Statistics.