According to Moody’s Investor Service, emerging economies will experience hurdles in handling their economic recovery, but Asia will perform better than other regions in this regards.
“The pandemic was tougher on emerging Asia markets than it was on advanced economies… the recession was tougher in emerging markets than it was on advanced economies,” Atsi Sheth, managing director of credit service and research at Moody’s, said.
With vaccination rates still low and the omicron Covid-19 variant spreading globally, demand in many emerging nations has yet to return to pre-pandemic levels, she added. Demand is also being harmed by global monetary policy tightening, according to Sheth.
The Federal Reserve announced this week that it will end its loose monetary policy and drastically reduce bond purchases. In order to counteract rising inflation, it also expects three rate hikes next year. In addition, the Bank of England raised interest rates for the first time since the outbreak, raising the main interest rate to 0.25 per cent from a historic low of 0.1 per cent on Thursday.
“So yes, managing the recovery is going to be really tough for emerging markets, but there’s going to be a lot of variation,” she noted. “For instance, in Asia, you’re actually seeing the region doing relatively better than some other regions.”
While there is continued strong demand in Asia, and certain supply-side constraints are improving, Sheth warns that there are difficulties that pose hazards.
One source of concern is China’s slowing economy, which is a result of the country’s present property sector woes. Sheth, on the other hand, believes Chinese authorities have the policy instruments they need to manage the downturn in a “measured” manner.
“What is assumed is that this slowdown will not have any characteristics of a financial crisis,” she added. “What’s happening in the property sector will be ring-fenced and it won’t lead to contagion across the financial sector.”
China Evergrande Group, as well as other Chinese developers like as Kaisa and Sinic Holdings, have been struggling to repay their loans in recent months, bringing financial misery to the fore.
Inflation would be another concern for Asian countries, according to Sheth. This is especially true for some central banks, who may be limited in their ability to assist the economy if the omicron form poses a threat to growth.
“This inflation that we’re seeing in many emerging markets is largely either food driven due to natural drought in some cases or energy driven… not something that monetary policy can address,” said Sheth.
That’s why, she continued, central banks are becoming increasingly “data dependent in the manner they indicate their next policy move and respond.”
(Adapted from CNBC.com)