How will emerging markets perform in 2017?

Latin America | External shocks to undermine potential growth in the region

  • A gradual recovery in commodity prices, an improvement in global trade and a more favorable evolution of regional currencies will prompt Latin America to expand 1.9% in 2017, after contracting 0.6% in 2016. Meanwhile, the sub-region of Central America and the Caribbean will accelerate from an expected 3.0% increase in 2016 to a 3.2% expansion in 2017, thus growing faster than the entire continent.
  • Several factors are casting a shadow on Latin America’s 2017 outlook, including expectations of tighter monetary policy in the U.S., which will affect capital flows in the region; a softer-than-expected U.S. economic recovery, together with uncertainty regarding economic policy under the new Trump administration; and potential spillover effects from a disorderly Brexit.
  • Recurrent growth disappointments point to lower potential growth in the region, underscoring the need for structural reforms to boost productivity. The need for a contractionary monetary policy in most parts of the region is no longer evident as inflation is showing signs of falling and is expected to decline further by the end of 2017. Exchange-rate flexibility and still healthy levels of international reserves will continue to serve as a first line of defense against adverse external shocks.
  • The economic recovery in the region in 2017 will largely be driven by Argentina and Brazil, which are expected to emerge from recession. Brazil is projected to expand a timid 1.0% in 2017, following its second year in recession in 2016, while Argentina is expected to reap the benefits of a painful economic adjustment in 2016 and expand 3.2% in 2017. Our panel of experts also projects somewhat higher growth rates in 2017, relative to 2016, for Chile, Colombia, Mexico and Peru, whereas crisis-hit Venezuela is foreseen entering into its fourth consecutive year of recession.

Asia | Growth will benefit from rising global demand and resilient domestic dynamics

  • China’s still resilient economic growth and the ongoing reform momentum in India will prompt the East and South Asia (ESA) region to expand a strong 6.0% in 2017, which will represent a slight deceleration from the expected 6.1% increase in 2016. Meanwhile, in the Association of Southeast Asian Nations (ASEAN), an improvement in the region’s external sector should support quicker growth along with resilient household spending. ASEAN will expand 4.8% in 2017, up from 2016’s 4.6% increase.
  • Inflationary pressures are expected to strengthen across Asia next year as a result of a low base effect, the gradual increase in commodity prices and scheduled subsidy cuts and tax hikes in some economies. While inflation in ESA will increase mildly from 2.4% in 2016 to 2.5% next year, the pick-up in ASEAN will be more pronounced and inflation is expected to rise from 2.3% in 2016 to 3.2% in 2017.
  • While economic growth in the region will benefit from a mild improvement in global demand and resilient domestic dynamics, some clouds are gathering on the horizon. Donald Trump’s victory in the U.S. presidential elections could disrupt the global economy if he implements his proposed protectionist policies. This has the potential to hit growth in the region, given the importance of the external sector for most Asian economies. Also, a more aggressive monetary policy normalization by the U.S. Federal Reserve could heighten volatility in the financial and exchange rate markets in the region.

MENA | Higher oil prices promise to boost growth in 2017

  • The dramatic fall in oil prices observed since mid-2014, coupled with security threats, has put a lot of pressure on most countries in the Middle East and North Africa (MENA) region. September’s tentative agreement to cut oil production among OPEC members has the potential to drive up prices and improve the region’s economic situation. Against this backdrop, growth in MENA will accelerate from 2016’s 2.3% to 2.8% in 2017.
  • The decline in crude prices caused a sharp fall in government revenues and exacerbated macroeconomic imbalances in some of the region’s key players. In an attempt to rein in their large fiscal gaps, some countries in the region will continue to implement painful austerity measures, which should reduce the level of government support needed for some economies.
  • Despite the recent progress in the fight against the Islamic State (ISIL), security threats will remain high in the region. ISIL and other jihadist groups have demonstrated that they can carry out terrorist attacks in any MENA country, which will dampen consumer and business sentiment across the region. Moreover, the “cold war” between Iran and Saudi Arabia poses additional risks in an already difficult geopolitical context.

Eastern Europe | Economic conditions set to improve in 2017

  • The stabilization of commodities prices and the economic recovery in Russia, the region’s largest economy, should support a return to growth in the Commonwealth of Independent States (CIS) region next year. GDP is seen growing 1.5%, after falling 0.3% in 2016. However, geopolitical risks and monetary tightening in the U.S. are casting a shadow on the outlook.
  • In Central & Eastern Europe (CEE), steady domestic demand should fuel a healthy 3.0% growth this year and next. Meanwhile, dynamics in South-Eastern Europe (SEE) will be dominated by escalating political uncertainty and security concerns in Turkey and the ongoing debt saga in Greece. GDP in SEE is seen expanding 2.8% in 2017, slightly above the 2.7% projected for this year.
  • Price pressures in the CIS region should fall steadily throughout 2017, supported by a tightening bias by most central banks in the region, and our panel sees inflation at 5.6% in 2017. For CEE, inflation is expected to rise in 2017 as the effect of low oil prices wanes, with our analysts projecting average inflation of 1.5%. Meanwhile, SEE will see a slight increase in price pressures on the back of rising inflation in Greece and Romania.
  • External risks to the Eastern European economy are high heading into 2017. The surprise outcome of the U.S. presidential election along with tense Brexit negotiations will increase volatility in the financial markets and weigh on currencies and assets across the region. In addition, an expected increase in U.S. interest rates has the potential to tighten global liquidity and spark capital outflows. For Russia, however, Trump’s election is seen as positive and some analysts speculate that he could end sanctions against Russia due to his close ties with the country.

Sub-Saharan Africa | Weak growth urges policy action

  • In 2017, growth in Sub-Saharan Africa (SSA) is projected to improve from this year’s timid expansion on the back of a gradual pickup in global demand and a recovery in commodity prices. However, the region will face downside risks such as the expected monetary policy normalization in the U.S., which has ramifications for emerging markets. General elections in several SSA countries have the potential to generate political turmoil and could fuel political unrest. Economic advancement will also depend on how fast governments implement reforms aimed at promoting growth and reestablishing macroeconomic stability. Moreover, prudent fiscal and monetary policies should tackle sharp increases in inflation and keep public fiscal balances in check. Our panel of analysts expects SSA to grow 3.2% next year, which represents an improvement from the 1.5% increase forecasted for 2016.
  • The FocusEconomics panel foresees Nigeria—the biggest economy in SSA—expanding 1.9% in 2017, thus rebounding from the 1.1% contraction expected for this year. The strength of the recovery, however, will depend on the recovery of oil prices, improvements in liquidity conditions in the economy and the implementation of structural reforms. South Africa—the second biggest economy in the region—will benefit from a recovery in global demand next year, though ongoing political scandals and the dire state of the labor market will weigh on growth. Our panel expects the South African economy to expand a meagre 0.4% this year and 1.2% next year.
  • Central banks in the region will continue to maintain a prudent stance in the trade-off between returning inflation to target and supporting economic activity. The Central Bank of Nigeria will likely ease its monetary policy as the exchange rate market normalizes. Likewise, the South Africa Reserve Bank will opt for accommodative policies next year unless shocks such as a possible downgrade to the country’s credit rating lead to a further weakening of the rand.

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