MUFG: IMF’s perspectives on EM fiscal balances

MUFG: IMF’s perspectives on EM fiscal balances

May 17, 2022

Emerging Markets War Ukraine
Emerging Markets (02) EM Opkomende landen Azië

The latest IMF Fiscal Monitor offers markets a critical update to fiscal policy and debt dynamics at a time of high uncertainty. The IMF assesses that the war will in fact have a limited impact on EM fiscal balances in aggregate, though it expects wide-reaching cross-country divergence across EM economies.

On net, the IMF’s forecasts resonate well with our own estimates with clear outperformance in EM commodity exporting countries across the GCC region, South Africa and LatAm, whilst the CEE region is most vulnerable.

FX views

EM currencies have continued to correct sharply lower this month alongside the broad-based USD rally with fears building over a sharper slowdown in China’s economy. At the same time, commodity-related EM currencies have corrected lower as global growth fears have intensified. On net, we expect EM FX weakness to continue without a clear catalyst yet to trigger a reversal.

Week in review

Prospects of a Russian sovereign default hangs in the balance with 25 May the next key date to watch. Meanwhile inflation readings in April were higher in Russia (17.8% y/y), Egypt (13.1% y/y), Poland (12.4% y/y) and the Czech Rep. (14.2% y/y). Finally, Romania raised rates by 50bp to 3.75% and the Czech Rep. announced a new Central Bank Governor.

Week ahead and calendar

Interest rate meetings in Egypt (MUFG: 150bp to 10.75%) and South Africa (MUFG: 50bp to 4.75%) as well as Q1 GDP data in Russia (MUFG: 3.7%), Poland (MUFG: 2.2%), Hungary (MUFG: 1.6%) and Romania (MUFG: 0.6%) will dominate the week ahead.

Forecasts at a glance

We continue to expect the easing of pandemic effects to supporting recoveries, although the going will get tougher in EMs – key risks stem from a continued tightening in global financial conditions and a lower gear in China.

Core indicator

EMs witnessed a second consecutive month of outflows in April (USD-4.0bn), as geopolitical uncertainty, tighter financial conditions, realised inflation and concerns over Chinese COVID lockdowns is weighing on sentiment.

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