Adriaan Pask, Chief Investment Officer of PSG Wealth
Emerging market (EM) economies in Europe, the Middle East and Africa (EMEA) are progressing quicker than what was initially projected by S&P Global Ratings in their previous macroeconomic update in March 2021.
Despite lockdown restrictions, GDP grew by 1.10% q/q in Poland and South Africa in 1Q21 thanks to stronger domestic demand and resilient consumption. South Africa’s trade surplus, the main economic indicator of business activity, has been growing on an annual basis, with the country recording its highest trade surplus in May 2021 worth R54.6 billion, driven by mineral, metal, and other exports. Commodity prices have also improved and continue to play a significant role in fast-tracking South Africa’s recovery.
In Turkey, domestic demand and imports fell on the back of elevated interest rates and sluggish credit growth. However, Turkey’s GDP reached and exceeded its pre-pandemic level in the third quarter of 2020 already, and surpassed that level by nearly 7% in the first quarter of 2021. In Russia, the economic recovery accelerated in March 2021, with most indicators suggesting that GDP growth will be much stronger in the second quarter of the year, due to stronger domestic demand.
In light of these developments, S&P Global Ratings upgraded its GDP forecasts and now expects Poland’s economy to grow by 4.50% in 2021 and by 5.40% in 2022, while the economies in South Africa and Russia are expected to grow by 4.20% and 3.70%, respectively for 2021. The ratings agency maintained their 6.10% growth forecast for Turkey in 2021.
While available data suggests that new waves of Covid-19 infections in 2021 have had a softer bearing on EM economies, risks that threaten the economic recovery remain. The mutations of the Covid-19 virus, which have driven more infections and fatalities over the past few weeks in EMEA EM economies, sluggish vaccine rollout programmes and monetary policy tightening, with the US Federal Reserve (Fed) possibly hiking rates sooner than expected is a cause for concern. “A faster vaccination pace will be necessary to keep economic activity on track, prevent on-off lockdowns, and ensure a sustainable return to full capacity,” says S&P.
Lots of the EM economies are also big commodity exporters, like South Africa with its current account surplus, generally an indicator of a country’s economic health. At the moment, our commodity exports are larger than our imports, mainly due to previous lockdown restrictions which limited imports and exports. The South African Reserve Bank said previously that the first quarter current account surplus was mainly driven by the “continuation of a good export performance, on the back of high commodity prices, coupled with a global economic recovery”. This is very good for our GDP and tax revenues. If we see any further upticks in global economies, it will further boost growth in EMs.