Emerging markets feeling the brunt of Ukraine war, Chinese lockdown

13th May 2022 By: Marleny Arnoldi - Deputy Editor Online

Were it not for Russia’s invasion of Ukraine in February, China’s slowdown in economic activity would have been the key economic story of this year, says industry insight firm Fitch Solutions.

The Ukraine war remains fast-moving, in terms of the situation on the ground and market implications.

This while a combination of tough Covid-19 policies, weak external demand and lingering problems in the construction sector will dampen growth in China to 4.5% this year.

For the world’s second-largest economy, this is a sharp slowdown and one that will have major implications for both developed and emerging markets, says Fitch Solutions economist John Ashbourne.

Many mainland Chinese cities have been locked down as authorities work to curb the spread of Covid-19.

China had become the biggest market for many industries over the years, but as businesses slow down, and consumers demand fewer goods, it impacts on many supplying companies and countries’ exports globally. China’s exports to other countries are also being hampered.

Ashbourne does, however, expect China to experience an “orderly and soft landing” and still perform well by emerging market standards.

Fitch Solutions explains that although Chinese imports are weakening, commodity prices are staying strong.

South Africa is somewhat exposed to the Chinese production system, when it demands fewer imports, but to a far lesser extent than fellow African countries such as Angola and Zambia, which export heavily to China.

The firm predicts that growth will slow down across the board in most emerging markets, as a result of delayed Covid-19 recovery, challenges in the global supply chain and the impacts of the Ukraine war and China’s economic slowdown.

Some emerging markets will outperform this year. Fitch Solutions cites Guyana as an example, noting that oil production in that country is likely to double, which will boost gross domestic product by 46%.

Other oil producers are also experiencing increases in production and gains in the value of exports.

A few net importers will also perform well this year, notably in sub-Saharan African and Asian emerging markets. However, the overall performance of emerging markets in sub-Saharan Africa will be mixed, as South Africa and Nigeria weighs negatively on the region’s performance.

Ashbourne anticipates that India will, by a large margin, remain the fastest growing large emerging market economy in the world.

Most emerging markets in Europe will likely experience tepid growth, but Russia and Ukraine will experience painful recessions.

Fitch Solutions also forecasts that Latin American economies will struggle, owing to aggressive policy tightening and slower US growth.

Ashbourne explains that emerging markets’ central banks launched a hiking cycle early in 2021, after loosening policy substantially in pandemic-stricken 2020. This helped policymakers control inflationary trends and get ahead of the US Federal Reserve. Now, however, they have had to go further than they had anticipated.

Fitch Solutions expects the rate hikes to continue over the remainder of the year, with Russia and Turkey as key exceptions.

The US Federal Reserve launched its own hiking cycle in April, and further hiked interest rates by 50 basis points in May.

Ashbourne forecasts that the US key rate will end 2023 at 2%.

In most emerging markets, inflation will peak in the second or third quarter, but will remain above target.

Inflation will likely average the highest in Nigeria, at 17.2%, followed by Ghana at 16.5% and Estonia at 13.5%.

In conclusion, Fitch Solutions says there are multiple ways in which the Ukraine war can unfold, but believes it likely that the conflict will continue into the second half of the year, before easing to a stalemate by year-end.

Nonetheless, sanctions will continue into 2023 and supply chain problems will continue to bite.