Emerging Markets Outlook Q1 15 TEMPLATE · Emerging Markets Economic Outlook Q1 2015 1 Q1 2015...

• Plunge in oil prices will provide boost to most EMs … • … but the impact will vary between countries

Q1

2015

EMERGING MARKETSECONOMIC OUTLOOK

The Good, the Bad and the Ugly: EMs in an era of low oil prices

• Big movements in interest rates seem unlikely … • … but India could surprise by loosening more than most expect

• Asia and Central Europe likely to be the big winners … • … but Russia and Venezuela are set for deep recessions

Cover design by Bobby Gunthorpe. Cover contains visual elements used under licence from: Getty Images & Shutterstock.

Final responsibility for the content of this review rests with Capital Economics Ltd.

© Capital Economics 2015

Disclaimer: While every effort has been made to ensure that the data quoted and used for the research behind this document is reliable, there is no guarantee that it is correct, and Capital Economics Limited and its subsidiaries can accept no liability whatsoever in respect of any errors or omissions. This document is a piece of economic research and is not intended to constitute investment advice, nor to soliciting dealing in securities or investments

.

Emerging Markets Economic Outlook Q1 2015 1

Q1

2015

EMERGING MARKETSECONOMIC OUTLOOK

The Good, the Bad and the Ugly: EMs in an era of low oil prices 9th January 2015

Table of Key Forecasts 2

Overview 4

China 6 Growth to slow further despite more rate cuts

Other Emerging Asia 8 An EM bright spot

Latin America 10 A limp recovery

Emerging Europe 12 Russian crisis to drag regional growth down

Middle East and North Africa 14 Gulf entering an era of softer growth as oil boom ends

Sub-Saharan Africa 16 Slowest regional growth since the late 1990s

Table of Key Indicators 18

About this publication

The Emerging Markets Economic Outlook contains analysis and forecasts for the six emerging

regions we cover: China, Emerging Asia, Latin America, Emerging Europe, the Middle East & North

Africa, and Sub-Saharan Africa. It also contains economic and market forecasts for selected

countries. For full forecasts and detailed analysis of any of the 56 emerging markets that we cover,

please refer to the relevant regional services. The emerging economies covered in these services are

listed in the Key Indicators table on page 18.


Selected Key Forecasts

Chart 1: Real GDP (%y/y) Chart 2: Consumer Prices (%y/y)

Emerging Asia*

Latin America

Emerging Europe

Mid. East & N. Africa

Sub-Saharan Africa

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Emerging Asia*

Latin America

Emerging Europe


Sub-Saharan Africa

2013 2014e 2015f 2016f

Sources – Thomson Datastream, Capital Economics; *Incl. China Sources – Thomson Datastream, Capital Economics; *Incl. China

The following tables contain forecasts for selected economies and regional aggregates. For detailed forecasts of the 56 emerging economies we cover, please refer to our regional services.

TABLE 1: REAL GDP & INFLATION

Share of GDP Inflation(3) % y/y World(2) 2013 2014e 2015f 2016f 2013 2014e 2015f 2016f

Emerging Asia(1) 29.6 6.1 5.9 6.0 5.8 4.0 3.4 2.8 3.0

China 16.5 7.7 7.3 7.0 6.5 2.6 2.0 1.5 2.0

India 6.8 4.7 5.2 5.5 6.0 10.1 7.2 5.5 5.5

South Korea 1.7 3.0 3.5 4.5 4.0 1.3 1.3 1.0 2.5

Latin America 8.5 2.5 1.0 1.5 2.5 8.5 10.5 9.5 8.5

Brazil 2.9 2.3 0.2 0.0 0.5 6.2 6.3 6.0 5.0

Mexico 2.0 1.1 2.0 3.0 4.0 3.8 3.8 3.0 3.0

Argentina (4) 0.9 3.0 -2.0 1.0 2.0 25.0 30.0 35.0 32.5

Emerging Europe 7.3 1.8 1.3 -1.3 2.5 5.0 5.5 9.0 6.0

Russia 3.3 1.3 0.5 -5.0 2.0 6.8 7.5 15.0 8.0

Turkey 1.4 4.0 2.5 2.5 3.0 7.5 8.8 6.8 7.3

Poland 0.9 1.6 3.0 2.8 3.8 0.9 0.0 -0.2 1.3

Mid. East & N. Africa 6.8 3.2 3.5 3.0 3.0 4.3 4.1 4.8 4.5

Saudi Arabia 1.5 2.7 3.6 2.0 2.0 3.5 3.0 3.5 3.8

Egypt 0.9 1.5 3.8 4.0 4.5 9.5 10.0 10.0 8.5

Sub-Saharan Africa 3.1 4.3 4.8 3.8 4.0 7.5 7.8 9.0 8.3

South Africa 0.6 1.9 1.5 2.0 2.5 5.8 6.1 5.0 6.0

Emerging Markets 55.3 4.7 4.3 4.0 4.8 4.6 4.5 5.3 6.3

G4 Countries

US 16.3 1.9 2.3 3.0 2.8 1.5 1.6 -0.1 2.1

Euro-zone 12.8 -0.4 0.8 1.0 1.0 1.4 0.5 -0.5 0.5

Japan 4.5 1.5 0.3 0.1 1.3 0.4 2.7 1.3 1.0

UK 2.3 1.7 2.6 3.0 3.0 2.6 1.5 0.5 1.7

(1) Incl. China. (2) %, 2014, PPP terms. (3) % y/y annual avg. (4) Historical data are official figures, forecasts are for CE proxies.


TABLE 2: SELECTED CENTRAL BANK POLICY RATES (%)

Policy Rate

End

2014 Latest

(8th Jan.)Last Change

Next Change

Forecasts End End 2015 2016

Emerging Asia

China 12m B’mark Dep. 2.75 2.75 Down 25bp (Nov 14) Down 25bp (Q1 15) 2.20 2.20

India Repo Rate 8.00 8.00 Up 25bp (Jan 14) Down 25bp (Q1 15) 7.00 7.00

Korea Base Rate 2.00 2.00 Down 25bp (Oct 14) Up 25bp (1H 15) 2.25 2.50

Latin America Brazil Selic Rate 11.75 11.75 Up 50bp (Dec 14) Up 50bp (Q1 15) 12.25 10.00

Mexico O/N Repo Rate 3.00 3.00 Down 50bp (Jun 14) Down 50bp (1H 15) 2.50 3.50

Emerging Europe Russia 7-day Repo Rate 17.00 17.00 Up 650bp (Dec 14) Down 200bp (Q4 15) 15.00 12.50

Turkey O/N Lending 11.25 11.25 Down 75bp (Aug 14) None on horizon 11.25 11.25

7-day Repo Rate 8.25 8.25 Down 50bp (Jul 14) None on horizon 8.25 8.25

Poland Repo Rate 2.00 2.00 Down 50bp (Oct14) Up 25bp (1H 16) 2.00 2.25

Mid. East & Africa Egypt O/N Deposit Rate 9.25 9.25 Up 100bp (Jul 14) Down 25bp (1H 16) 9.25 8.25

South Africa Repo Rate 5.75 5.75 Up 25bp (Jul 14) Up 25bp (Mar 14) 6.75 7.50

Japan Overnight Rate 0-0.10 0-0.10 Down 20bp (Dec 08) None on horizon 0-0.10 0-0.10

US Fed Funds Target 0-0.25 0-0.25 Down 75bp (Dec 08) Up 25bp (Mar 15) 1-1.25 2.75-3

Euro-zone Refinancing Rate 0.05 0.05 Down 10bp (Sep 14) None on horizon 0.05 0.05

TABLE 3: SELECTED FX RATES PER USD1 & STOCK MARKETS

Forecasts Forecasts

Currency End Latest End End Stock Market End Latest End End 2014 (8th Jan) 2015 2016 2014 (8th Jan) 2015 2016

Emerging Asia

China CNY 6.21 6.22 6.10 6.00 SH Comp. 3,235 3,293 3,000 3,000

India INR 63.1 62.5 65.0 65.0 Sensex 30 27,500 27,275 31,000 33,000

Korea KRW 1,094 1,097 1,100 1,100 KOSPI 1,916 1,904 2,250 2,500

Latin America

Brazil BRL 2.66 2.68 2.85 2.85 Bovespa 50,007 50,050 54,000 56,500

Mexico MXN 13.00 14.60 14.00 14.00 Bolsa 43,146 42,469 48,000 53,500

Emerging Europe

Russia RUB 60.0 60.1 55.0 55.0 MICEX 1,397 1,547 1,500 1,550

Turkey TRY 2.33 2.30 2.35 2.35 ISE 100 85,721 87,690 89,000 93,000

Poland(2) PLN 4.28 4.28 4.10 3.90 WIG Index 51,416 52,377 60,000 66,000

Mid. East & Africa

Saudi Arabia SAR 3.75 3.75 3.75 3.75 TADAWUL 8,333 8,285 8,500 9,000

Egypt EGP 7.15 7.15 7.50 8.00 EGX30 8,927 8,946 9,600 9,700

South Africa ZAR 11.55 11.59 12.50 13.00 JALSH 49,771 49,595 52,500 56,000

Japan JPY 119.7 119.6 140.0 140.0 Nikkei 225 17,451 17,167 20,000 21,000

US USD - - - - S&P 500 2,059 2,058 2,100 2,200

Euro-zone EUR 1.21 1.18 1.15 1.10 DAX 30 9,805 9,834 10,000 10,250

(1) Local currency per USD, except EUR which is USD per euro. (2) PLN per euro


The sharp fall in oil prices will provide a

welcome boost to growth in the majority of

emerging economies in 2015, but at the cost of

slower growth in much of the Middle East and

deepening crises in a handful of EMs, notably

Russia and Venezuela. The net result is likely

to be that aggregate EM growth is broadly

unchanged from last year.

The big winners from low oil prices will be

those EMs that are large importers of energy.

This covers much of the emerging world,

including most economies in Asia and Central

Europe, but also Turkey, South Africa and

Brazil. (See Chart 1.) These economies will see

an improvement in their terms of trade as a

result of falling oil prices, which in turn will

provide support to domestic demand. For

Turkey, South Africa and, in particular, India,

lower oil prices will also help to ease concern

over large current account deficits.

The pain from lower oil prices will be

concentrated in EMs that are large energy

exporters. (See Chart 2.) Most of these are well

placed to withstand a fall in oil revenues. The

Gulf economies ran large surpluses and

accumulated foreign assets when oil prices

were high, which will help to cushion the

blow now prices have fallen back. In Mexico,

lower oil prices will be counterbalanced by a

continued recovery in the US and should not

prevent growth picking up in 2015.

There are exceptions though. The economic

consequences for Russia of the collapse in the

ruble in the final weeks of last year will

become clear over the coming months. We

expect a deep recession this year. Venezuela

and several economies in West Africa,

including Angola, are in trouble too.

In aggregate, we expect the boost to growth in

oil consumers to be broadly offset by a drag on

growth from oil producers, with the result that

overall EM growth remains unchanged at

around 4% in 2015. This is likely to remain the

“new normal” for growth over the coming

years. (See Chart 3.) Asia will remain the

fastest growing region, while the deepening

crisis in Russia will ensure Emerging Europe

stays the weakest performer. (See Chart 4.)

We foresee a further slowdown in China, with

continued strains in the property sector (see

Chart 5), but believe that policymakers there

have room to prevent a hard landing.

Currency weakness will push inflation sharply

higher in some places, pushing up regional

aggregate inflation rates. But these are the

exceptions. For most EMs, lower oil prices will

bring inflation down. (See Charts 6 and 7.)

Meanwhile, fears that lower oil prices could

trigger a damaging bout of deflation in parts of

Asia and Central Europe are overdone. For the

most part, any dip into deflation in these

countries will be temporary and should give a

boost to real incomes and thus growth.

In general, we do not expect big moves in EM

interest rates in 2015. (See Chart 8.) With

inflation low, central banks in much of Asia

will keep rates on hold this year, and some

will cut. Although policy in Brazil, Turkey and

Russia will remain tight, we suspect that the

big rate hikes here have happened. Elsewhere,

monetary policy in Central Europe will remain

extremely loose, but we do not envisage

further rate cuts. The one EM to watch is India,

where we think that interest rate cuts could be

larger than expected.

Overview

The Good, the Bad and the Ugly: EMs in a world of low oil prices


Overview Charts

Chart 1: Net Fuel Imports (% of GDP, 2013) Chart 2: Net Fuel Exports (% of GDP, 2013)

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Chart 3: Emerging Market GDP (% y/y) Chart 4: Emerging Market GDP by Region (% y/y)

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90 92 94 96 98 00 02 04 06 08 10 12 14 16

CE Forecast

Emerging Asia*

Latin America

Emerging Europe


Sub-Saharan Africa

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Chart 5: China Developers’ Inventories of Unsold Residential Property (million units)

Chart 6: EM Consumer Prices* (% y/y)

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CE Forecast

*excludes Venezuela

Chart 7: Consumer Prices (% y/y) Chart 8: Policy Rates (%, Simple Average)

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Emerging EuropeEmerging AsiaLatin America

CE Forecasts

Sources – Thomson Datastream, IMF, Capital Economics; *Incl. China


We expect China’s growth to slow further over

the next two years. That said, policymakers

have plenty of tools with which to shore up

growth if necessary. This, along with the

relatively bright outlook for consumption,

should reduce downside risks.

Our China Activity Proxy suggests that growth

recovered slightly at the start of Q4, on the

back of strong service sector activity. (See

Chart 1.) Nonetheless, we expect it to resume

its gradual downwards slide as overcapacity

across a number of industries continues to

weigh on investment.

Property, in particular, is likely to remain a

drag. While more accommodative policy may

provide some support to sales, a large glut of

unsold properties leaves limited upside for

construction activity. (See Chart 2.)

With employment growth strong (see Chart 3),

we think the government will feel comfortable

allowing this slowdown and will lower the

growth target for 2015 to “about 7.0%”.

As such, we are not expecting fireworks from

policymakers. The People’s Bank is likely to

follow the November benchmark rate cut with

more cuts and liquidity injections but these

will be offset by tougher banking regulations to

slow shadow banking. With credit risks still

rising, there is little appetite for a sustained

rebound in credit growth. (See Charts 4 and 5.)

Meanwhile, although the government says it

will pursue “proactive” fiscal policy once

again this year and is likely to step up

budgeted spending, new fiscal rules, which

require that the two thirds of spending that

currently takes place outside the formal budget

be included in the budget, are likely to result

in a tighter fiscal stance overall.

More positively, low oil prices should give a

boost to spending. In 2013, China’s net

imports of oil cost the equivalent of 2.5% of

GDP. If global oil prices remain at or below

$60 per barrel, the economy as a whole will

be better off to the tune of more than 1% of

GDP. For the same reason, inflation is likely to

ease further. (See Chart 6.) Many are

concerned about deflation, but most firms and

households should find themselves better off.

Finally, while slowing investment growth is

likely to remain a drag on imports, we expect

exports to remain healthy. (See Chart 7.) With

lower commodity prices further reducing the

import bill, the current account surplus is

likely to rebound.

This will put upwards pressure on the

renminbi. However, it was one of the world’s

strongest-performing currencies in 2014 and

the scope for significant gains against the

dollar is limited from here. (See Chart 8.)

Indeed, while we expect the renminbi to

sustain its gains in trade-weighted terms and to

end the year stronger against the dollar too,

short-lived bouts of depreciation against the

US currency are likely.

China

Growth to slow further despite more rate cuts

TABLE 4: CHINA

% change on a year earlier Forecasts

Ave.02–12

2013 2014e 2015 2016

GDP 10.3 7.7 7.3 7.0 6.5

Cons. prices 2.6 2.6 2.0 1.5 2.0

Current account(1) 5.1 2.0 2.7 3.5 3.5 (1) As a % of GDP


China Charts

Chart 1: China Activity Proxy & GDP (% y/y) Chart 2: Developers’ Inventories of Unsold Residential Property (million units)

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CE China Activity Proxy (latest = Nov.)

SARS

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Chart 3: New Urban Jobs (millions) Chart 4: Contribution to Annual Credit Growth (%-pts)

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Chart 5: Credit & GDP (% y/y) Chart 6: Consumer Prices (% y/y)

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Consumer pricesConsumer prices excl. food

CE forecasts

Chart 7: Merchandise Trade ($bn, seas. adj.) Chart 8: RMB Exchange Rates

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Exports

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Nominal Trade-weighted Exchange Rate (Jan. 2002=100, LHS)

Dollar Spot Rate (inverted, RHS)

Renminbi stronger

Sources – Thomson Datastream, CEIC, Bloomberg, Capital Economics


Growth in Emerging Asia (excluding China) is

likely to accelerate over the next couple of

years. (See Chart 1.) Most countries in the

region will benefit from lower global oil prices

through an improvement in their terms of

trade. Lower oil prices will also help keep

inflation low, which will allow monetary

policy to remain loose. This should all come

against a backdrop of gradual export recovery.

The Newly Industrialised Economies (Hong

Kong, Singapore Taiwan and Korea) should see

a decent improvement in growth over the next

year. (See Charts 2 & 3.) Not only are they

best-placed to benefit from an improvement in

US growth, but they should all be big winners

from falling oil prices. (See Chart 4.)

The outlook for South East Asia is mixed. The

Philippines is likely to remain a star performer,

while Malaysia looks set for a couple of years

of decent growth. In contrast, Indonesia is

likely to disappoint against a backdrop of weak

commodity prices and high interest rates. And

although growth in Thailand should accelerate

after the political crisis of last year, it is still

likely to be South East Asia’s worst performer.

Growth in India is likely to accelerate. Inflation

has recently fallen to multi-year lows, leaving

some scope for policy loosening. Meanwhile,

the government’s reform agenda is building

momentum. Nevertheless, hopes of wide-

ranging reforms are unlikely to be realised, and

growth is still likely to remain below the rates

achieved during the boom years of 2002-2011.

Inflation across Emerging Asia has fallen back

sharply in recent months and looks set to

remain low throughout the forecast period.

There are few signs that countries are running

out of spare capacity. The recent fall in

commodity prices should also help keep

inflationary pressure low. (See Chart 5.)

With inflation set to remain subdued,

monetary policy is likely to remain loose over

the next couple of years. We have interest rate

cuts pencilled in for India, Indonesia and

Vietnam. Although we still expect rate hikes

elsewhere as policymakers move to stem credit

growth, the pace of tightening is likely to be

gradual and may not start until 2016. (See

Chart 6.)

The two exceptions are Hong Kong and

Singapore, which, because of their currency

regimes are forced to adopt a similar monetary

policy stance to the US Federal Reserve.

Market interest rates in both economies are

likely to rise by around 300 basis points by the

end of next year. (See Chart 7.)

One of the key risks facing the region is that

rate hikes in the US acts as a trigger for

renewed market turmoil. Countries with

external deficits, notably Indonesia (see Chart

8), could be forced to hike rates aggressively in

the event of another EM currency sell-off. That

said, with foreign currency debt relatively low

and foreign exchange reserves high, a full

blown crisis is unlikely.

Other Emerging Asia

An EM bright spot

TABLE 5: SELECTED ASIA-PACIFIC

World Share (1)

GDP Inflation 2013 2014e 2015f 2016f 2013 2014e 2015f 2016f

Emerging Asia(2) 13.1 4.3 4.4 5.0 5.1 6.1 4.9 4.0 4.0

India 6.8 4.7 5.2 5.5 6.0 10.1 7.2 5.5 5.5

Indonesia 2.4 5.8 5.1 5.0 5.0 6.4 7.0 7.5 5.0

South Korea 1.7 3.0 3.5 4.5 4.0 1.3 1.3 1.0 2.5

Thailand 0.9 2.9 1.0 3.5 3.5 2.2 2.3 1.0 2.5 (1) Share of world GDP in 2014 PPP terms. (2) Excl. China


Other Emerging Asia Charts

Chart 1: Emerging Asia (ex. China) GDP (% y/y) Chart 2: GDP (% y/y)

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CE Forecast

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12South East Asia*NIEs**

CE Forecasts

** Hong Kong, Singapore, Korea & Taiwan

* Malaysia, Philippines, Indonesia & Thailand

Chart 3: GDP (% y/y) Chart 4: Net Oil Imports (% of GDP)

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Chart 5: Global Commodity Prices & Emerging Asia Consumer Prices (% y/y)

Chart 6: Change in Main Policy Rate (%-point, Now-End 16)

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S&P GSCI (LHS)

Consumer prices (RHS)

If commodity prices stay at their current level

Phi. Kor. Tha. Mal. Tai. Idn. Ind. Vie.

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Chart 7: Interest Rates (%) Chart 8: Current Account Balance (% of GDP)

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HIBOR

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CE Forecast

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Sin. Tai. Kor. Mal. Phi. Tha. HK Ind. Idn.

2013Latest (4 Qtr Avg.)

Sources – Thomson Datastream, Capital Economics


After a torrid 2014, economic growth in Latin

America is likely to improve in 2015-16. But

we expect the pace of the recovery to be weak

compared to previous cycles.

Regional GDP growth was probably just 1.0%

last year, the weakest annual rate since the

Global Financial Crisis. (See Chart 1.)

Low oil prices will create divergences within

the region in 2015-16. The biggest beneficiary

will be Chile. Brazil, Argentina and Peru

should all benefit too.

However, the losers are likely to dominate the

aggregate picture. Things could turn ugly in

Venezuela and Ecuador. Colombia and

Mexico will suffer too, albeit to lesser extents.

(See Chart 2.)

Meanwhile, the wider commodities boom that

lifted regional growth in recent years has now

ended. While the bulk of the falls in

commodity prices has probably happened,

rapid price growth is unlikely. Softer Chinese

demand will weigh on commodity export

volumes too. This will constrain income

growth in the region’s commodity-dependent

economies. (See Chart 3.)

External financing conditions are likely to start

tightening this year too as the US raises interest

rates. As a result, funding the region’s large

current account deficits may become more

difficult. That is likely to weigh on domestic

demand, meaning that deficits across the

region have to narrow. (See Chart 4.)

The fact that growth is likely to remain below

trend in most places should mean that inflation

edges down. (See Chart 5.) That should allow

monetary and fiscal policy to stay loose in

most countries. (See Charts 6 & 7.)

The exception is Brazil. A more orthodox

approach to policymaking in President

Rousseff’s second term should mean that both

monetary and fiscal policy is tightened in

response to above-target inflation.

One wildcard for 2015-16 is Argentina. A shift

towards more market-friendly policymaking is

possible if the general election in October

triggers a change of government. Some small

policy tweaks could lead to a significant

upturn in medium-term growth prospects.

In summary, we expect a limp recovery in

2015-16 for the region. Economic growth is

likely to remain weaker than the previous

decade averages in most places. The exception

is Mexico, where faster growth in the US and

structural reforms mean that it should grow at

a faster pace than in the past decade. (See

Chart 8.)

Latin America

A limp recovery

TABLE 6: SELECTED LATIN AMERICA

World Share (1)

GDP Inflation % y/y 2013 2014e 2015f 2016f 2013 2014e 2015f 2016f

Latin America 8.5 2.5 1.0 1.5 2.5 8.5 10.5 9.5 8.5

Brazil 2.9 2.3 0.2 0.0 0.5 6.2 6.3 6.0 5.0

Mexico 2.0 1.1 2.0 3.0 4.0 3.8 3.8 3.0 3.0

Argentina (2) 0.9 3.0 -2.0 1.0 2.0 25.0 30.0 35.0 32.5

Colombia 0.6 4.3 4.5 2.5 3.0 2.0 3.2 3.0 3.0

Chile 0.4 4.1 2.0 3.0 3.0 1.9 4.4 3.5 3.0

(1) Share of world GDP in 2014 PPP terms. (2) Forecasts are for Capital Economics proxies


Latin America Charts

Chart 1: Latin America GDP Growth Chart 2: Net Oil Balance (2013, % of GDP)

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Chart 3: Net Commodity Export Revenues (% of GDP, 2014e) Chart 4: Current Account Balances (% of GDP)

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Chart 5: Consumer Prices (% y/y) Chart 6: Policy Interest Rates (%)

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CurrentCapital Economics End-15Market Pricing End-15

Chart 7: Public Sector Budget Deficit (% of GDP) Chart 8: GDP (% y/y)

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Per. Arg. Ven. Col. Ecu. Chl. Brz. Mex.

2014e2015f2016fAverage 2004 - 2013

Sources – Thomson Datastream, Bloomberg, CE


The fallout from Russia’s economic crisis

means GDP in Emerging Europe will contract

in 2015 for the first time since 2009. A deep

recession in Russia is almost inevitable. But

while the rest of the region will suffer a hit to

exports, it shouldn’t be a disaster. Indeed, the

economies of Central Europe are likely to see

steady, if unspectacular, growth in 2015-16.

GDP in Emerging Europe grew by just 1.5%

y/y in Q3, its weakest pace since early 2013.

And our GDP Tracker suggests that the

region’s economy remained weak at the start

of Q4. (See Chart 1.) This was mainly due to a

slowdown in Turkey as well as persistent

weakness in Russia. (See Chart 2.)

Of course, this all predates Russia’s crisis at the

end of 2014. Given our view that oil prices

will stay low, we don’t think the ruble will

recover its losses. As a result, we expect

inflation in Russia to rise further, interest rates

to stay high, and the economy to enter a

recession. For now, we have pencilled in a 5%

fall in output in 2015. (See Chart 3.)

The rest of the region’s exports will suffer from

this. But for most countries, exports to Russia

are fairly small. (See Chart 4.) All told, we

think the impact on exports could knock 0.3-

1%-pts off GDP growth in the rest of the region

in 2015. This is painful, but not a disaster.

Perhaps more worrying for most countries is

the weakness in the euro-zone, the region’s

largest export market. We expect sluggish

growth in the single currency bloc in 2015-16,

which is likely to lead to only a modest pick-

up in Emerging Europe’s exports. (See Chart 5.)

We’re more upbeat about the prospects for

domestic demand. Fiscal austerity is easing,

labour market conditions are strengthening,

and consumer and firms’ confidence is rising.

Meanwhile, large amounts of spare capacity,

as well as the plunge in oil prices, will keep

inflation low. (See Chart 6.) This will boost real

incomes and allow central banks to maintain

loose monetary conditions. (See Chart 7.)

Turkey is an exception. There, capacity

constraints will keep inflation high, in spite of

the fall in oil prices. This, coupled with a large

current account deficit, means monetary

conditions will remain tight.

Bringing this all together, we think regional

GDP will fall by 1.3% in 2015. Russia will

suffer a severe recession and Turkish growth

will be disappointingly weak. But growth in

Central Europe should be better than in recent

years, at around 3%. (See Chart 8.)

Emerging Europe

Russian crisis to drag regional growth down

TABLE 7: SELECTED EMERGING EUROPE

World Share(1)


Emerging Europe 7.3 1.8 1.3 -1.3 2.5 5.0 5.5 9.0 6.0

Russia 3.3 1.3 0.5 -5.0 2.0 6.8 7.5 15.0 8.0

Turkey 1.4 4.0 2.5 2.5 3.0 7.5 8.8 6.8 7.3

Poland 0.9 1.6 3.0 2.8 3.8 0.9 0.0 -0.2 1.3

Czech Republic 0.3 -0.7 2.3 2.8 3.3 1.4 0.3 0.4 1.3

Hungary 0.2 1.2 3.3 2.0 2.5 1.8 -0.2 0.0 1.8

(1) Share of world GDP in 2014 PPP terms.


Emerging Europe Charts

Chart 1: Emerging Europe GDP & CE GDP Tracker (% y/y) Chart 2: GDP (% y/y)

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CE Emerging Europe GDP Tracker

Emerging Europe GDP

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Central Europe*

Turkey

Russia

*Cze, Hun, Pol & Slk

Chart 3: Russia GDP (% y/y) Chart 4: Exports to Russia (% of GDP, 2013)

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(*) Avg. of Emerging Europe, excl. Russia, Turkey & Ukraine -2

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Chart 7: Policy Interest Rates (%) Chart 8: GDP (% y/y)

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Sources – Thomson Datastream, Capital Economics


The sharp slide in oil prices is likely to result in

a period of softer, rather than an outright

collapse in, growth in the Gulf economies over

the coming years. In contrast, we think that

growth in North Africa should strengthen in

2015-16.

Growth in the Gulf appears to have held up

well over the course of 2014. But the recent

plunge in oil prices has cast a cloud over the

outlook. Equity markets may have tumbled

(see Chart 1), but policymakers have largely

taken the fall in oil prices in their stride.

This is not too surprising. After all, the Gulf

economies are in a stronger position than other

oil producers to absorb the hit to their income.

Admittedly, most countries are likely to run

budget and current account deficits this year.

(See Chart 2.) But large savings and low debt

levels mean that these should be easily

financed for years to come. (See Chart 3.)

Accordingly, while government spending looks

set to slow (see Chart 4) for the case of Saudi

Arabia), policymakers won’t be forced to

tighten fiscal policy aggressively. Meanwhile,

the Gulf is likely to resist pressure from other

OPEC members to cut oil output in order to

shore up prices. The upshot is that while we

think growth in the Gulf will weaken in 2015-

16, we don’t expect it to collapse.

Fears have surfaced that the fall in oil prices

could lead to renewed debt problems in

Dubai. (See Chart 5.) For now, we don’t think

that we’re about to witness a repeat of the

Emirate’s debt crisis in 2009. But a prolonged

period of low oil prices could see some quasi-

public companies struggle to repay their debts.

Elsewhere, we remain upbeat on the prospects

for the North African countries (Egypt,

Morocco and Tunisia). Their governments

have embarked on much-needed economic

reforms and recent investments should support

strong growth in manufacturing sectors.

There are, of course, risks to the outlook.

Parliamentary elections in Egypt bring the

threat of fresh civil unrest and large twin

budget and current account deficits remain a

concern. (See Chart 6.) However, lower oil

prices will provide some relief. This, combined

with IMF deals, financing from the Gulf and a

return of foreign investors to the region (see

Chart 7), mean that external financing

concerns should be limited. At the same time,

the fall in oil prices will improve fiscal

positions, even if subsidy cuts mean that it

won’t necessarily lead to lower inflation.

All told, we think the North African economies

should start to outperform their oil-rich

neighbours in the Gulf in 2015. (See Chart 8.)

Middle East and North Africa

Gulf entering an era of softer growth as oil boom ends

TABLE 8: SELECTED MIDDLE EAST AND NORTH AFRICA

World Share (1)


Mid. East & N. Africa 6.8 3.2 3.5 3.0 3.0 4.3 4.0 4.8 4.5

Saudi Arabia 1.5 2.7 3.6 2.0 2.0 3.5 3.0 3.5 3.8

Egypt 0.9 1.5 3.8 4.0 4.5 9.5 10.0 10.0 8.5

UAE 0.6 5.2 4.5 3.8 3.5 1.1 2.3 3.0 3.3

Morocco 0.2 4.3 2.5 4.5 5.0 1.9 0.5 1.5 1.8



Middle East and North Africa Charts

Chart 1: MSCI GCC (Local Currency, 1st Jan. 14 = 100) Chart 2: Oil Price Needed to Balance Current Account & Budget Positions (2015)

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Oil at $50pb

Chart 3: SWF Assets & Gov’t Debt (Latest, % of 2014 GDP) Chart 4: Saudi Arabia Government Spending (% y/y)

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Kuwait UAE Saudi* Qatar Bahrain

Sovereign Wealth Fund (SWF) Assets

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* SWF assets are those held at the Saudi Arabian Monetary Agency

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Chart 5: Dubai GRE Debt by Maturity (US$bn) Chart 6: Cur. Acc. & Bud. Deficits. (Avg. 2015-16, % of GDP)

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Chart 7: Net Foreign Purchases of Egyptian Stocks (EGP bn) Chart 8: GDP (% y/y)

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GCC

North Africa

CE F'casts

Sources – CEIC, Thomson Datastream, IMF, Capital Economics


Sub-Saharan Africa’s (SSA’s) economy is likely

to have grown by around 5% in 2014. (See

Chart 1.) But growth looks set to slow this year

to the weakest pace since the late 1990s.

There are a range of causes of this weakness,

but a common theme is that the global

commodities boom has come to an end.

Granted, most countries in the region are net

oil importers, so stand to benefit from the

recent slump in oil prices. But a number of

SSA’s largest economies – Angola, Nigeria and

Ghana – will be hit hard. (See Chart 2.)

In Nigeria and Angola, current account

surpluses are likely to turn into deficits. And

Ghana will face continued balance of

payments problems. (See Chart 3.) We suspect

that Nigeria’s and Angola’s central banks will

allow their currencies to weaken further,

having previously tied them to the US dollar.

This is likely to push up inflation, prompting

interest rate hikes. While we do not expect

further hikes in Ghana, monetary policy there

will remain tight.

Elsewhere, in net oil importing countries,

lower global oil prices will put downward

pressure on inflation. But we think this will be

partly offset by currency weakness. The result

is likely to be that inflation remains close to

the upper limit of central bank target ranges.

(See Chart 4). Interest rates are likely to rise in

these countries, although the increase should

be relatively gradual and rates will remain

below the levels seen in oil-exporting

economies with balance of payment problems.

(See Chart 5.)

As tax revenues from commodity production

fall, budget positions in commodity-dependent

countries (such as Angola and Nigeria) will

deteriorate. (See Chart 6.) Governments in

South Africa and Ghana have already

announced plans to rein in their deficits in the

coming years. In contrast, Nigeria’s

government is likely to be wary of announcing

drastic cuts to spending ahead of February’s

general election. So the bulk of cuts there are

likely to be introduced later next year.

Against this backdrop, growth in SSA is likely

to slow next year, while growth elsewhere in

the world picks up. (See Chart 7.) We expect

the worst performer in the region to be Angola,

which we forecast to slip into recession.

That said, the long-run outlook remains strong

for most economies in SSA. Demographic

trends are likely to boost the labour force. And

given that per capita GDP is generally low,

there is still plenty of scope for catch-up

growth. (See Chart 8.)

Sub-Saharan Africa

Slowest regional growth since the late 1990s

TABLE 9: SELECTED SUB-SAHARAN AFRICA

World Share(1)


Sub-Saharan Africa 3.1 5.1 4.8 3.8 4.0 6.6 7.8 9.0 8.3

Nigeria 1.0 5.4 6.5 5.0 5.5 8.5 8.7 10.0 10.0

South Africa 0.6 1.9 1.5 2.0 2.5 5.8 6.1 5.0 6.0

Kenya 0.1 4.6 5.5 6.0 7.0 5.7 6.9 6.0 7.3

Ghana 0.1 7.1 5.0 3.0 4.0 11.6 15.5 14.0 10.0



Sub-Saharan Africa Charts

Chart 1: GDP (% y/y) Chart 2: Net Fuel Exports (2013, % of GDP)

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Chart 3: Current Account Balances (% of GDP) Chart 4: Consumer Prices (% y/y)

Angola Ghana Kenya S. Africa Nigeria-12

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Inflation Target Ranges

* Uganda's inflation target is "about 5% or less"

Chart 5: Central Bank Policy Rates (%) Chart 6: Government Fiscal Balances (% of GDP)

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Angola Kenya Uganda South Africa Nigeria

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Chart 7: GDP (% y/y) Chart 8: Potential GDP Growth (% y/y, Next 10 Years)

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Nga. Gha. Tan. Moz. Ken. Uga. Zam. Bot. Mau. Ang. SA

Sources – Thomson Datastream, IMF, Bloomberg, Capital Economics


KEY INDICATORS (2014, UNLESS OTHERWISE STATED)

Share of World Output (%)(1)

GDP ($bn, Mkt Ex. Rates)

Population (mn) GDP per cap. ($, Mkt Ex. Rates)

GDP per cap. (% of US)

Stock Mkt. Cap. ($bn, Dec. 14)

Emerging Europe Russia 3.3 2,057 144 14,317 26 359 Turkey 1.4 813 77 10,518 19 260 Poland 0.9 552 39 14,330 26 172 Ukraine 0.3 135 45 2,979 5 8 Czech Republic 0.3 200 11 18,985 35 28 Romania 0.4 202 20 10,161 19 20 Hungary 0.2 130 10 13,154 24 14 Slovakia 0.1 100 5 18,480 34 6 Bulgaria 0.1 55 7 7,648 14 4 Croatia 0.1 58 4 13,624 25 19 Lithuania 0.1 49 3 16,476 30 4 Latvia 0.05 33 2 16,145 30 1 Estonia 0.03 26 1 19,777 36 2

Latin America Brazil 2.9 2,244 203 11,067 20 809 Mexico 2.0 1,296 120 10,837 20 448 Argentina 0.9 536 42 12,778 23 56 Colombia 0.6 400 48 8,394 15 149 Venezuela 0.5 209 30 6,870 13 85 Peru 0.4 208 31 6,625 12 81 Chile 0.4 264 18 14,911 27 234 Ecuador 0.2 100 16 6,270 11 n/a Bolivia 0.1 34 11 3,031 6 n/a Uruguay 0.1 56 3 16,332 30 n/a China Mainland China 16.5 10,355 1,368 7,572 14 4,965 Hong Kong 0.4 293 7 40,304 74 4,151

Emerging Asia India 6.8 2,048 1,260 1,626 3 1,557 South Korea 1.7 1,449 50 28,739 53 1,183 Indonesia 2.4 856 251 3,404 6 422 Taiwan 1.0 505 23 21,572 39 967 Thailand 0.9 380 69 5,550 10 416 Pakistan 0.8 233 186 1,275 2 75 Malaysia 0.7 337 30 11,062 20 453 Philippines 0.6 290 99 2,913 5 257 Singapore 0.4 307 5 56,113 103 571 Vietnam 0.5 188 91 2,073 4 54 Sri Lanka 0.2 72 21 3,414 6 22

Mid. East and N. Africa Saudi Arabia 1.5 778 31 25,401 46 482 Egypt 0.9 285 85 3,337 6 75 Algeria 0.5 228 39 5,886 11 n/a United Arab Emirates 0.6 416 9 44,771 82 214 Qatar 0.3 212 2 94,744 173 186 Morocco 0.2 113 33 3,392 6 53 Kuwait 0.3 179 4 44,850 82 93 Tunisia 0.1 49 11 4,467 8 9 Oman 0.2 81 4 21,688 40 24 Lebanon 0.1 47 5 10,531 19 9 Jordan 0.08 37 7 5,460 10 26 Bahrain 0.06 34 1 28,424 52 19

Sub-Saharan Africa South Africa 0.6 341 54 6,354 12 506 Nigeria 1.0 594 174 3,416 6 63 Angola 0.2 131 21 6,128 11 n/a Ghana 0.1 35 26 1,353 2 3 Kenya 0.1 63 43 1,461 3 25 Uganda 0.1 26 38 686 1 1 Cote d’Ivoire 0.1 34 25 1,370 3 n/a Zambia 0.06 26 15 1,705 3 4

Sources – Thomson Datastream, IMF, Bloomberg. (1) Share of world GDP in 2014 PPP terms (IMF Forecasts).

This document has been prepared by:

Jack Allen

Roger Bootle

Liam Carson

Liza Ermolenko

Julian Evans-Pritchard

Edward Glossop

William Jackson

Gareth Leather

Chang Liu

Daniel Martin

David Rees

Shilan Shah

Neil Shearing

Krystal Tan

Jason Tuvey

Mark Williams

For any enquiries, please contact your local office:

North America Europe Asia

2 Bloor Street West, Suite 1740 150 Buckingham Palace Road #26-03 Income at Raffles

Toronto, ON M4W 3E2 London SW1W 9TR 16 Collyer Quay

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Telephone: +1 416 413 0428 Telephone: +44 (0)20 7823 5000 Telephone: +65 65 95 5190

Email: [email protected]

Website: www.capitaleconomics.com

Emerging Markets Outlook Q1 15 TEMPLATE · Emerging Markets Economic Outlook Q1 2015 1 Q1 2015...

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