The macroeconomic outlook for the emerging markets shows a sharp deterioration in 2009. To begin, Latin America’s GDP growth rate will slow to 0.9% y/y, from a level of 4.3% y/y in 2008. Although the region’s level of economic activity peaked in 2007, with an expansion of 5.3% y/y, the deceleration in 2008 was mild. That was why there was a feeling of disconnect across the region, making it seem that it was averting the maelstrom that was blowing throughout the U.S. and Europe. However, the level of stress will mount in 2009, when the pace of economic activity comes to a halt. The malaise will become more apparent in 2010, when the region contracts. Unfortunately, structural impediments will prevent consumer prices from adjusting. This means that inflation will remain high in 2009.
Consumer prices will rise 6.6%, slightly lower than the 8.8% that was posted in 2008 but higher than the 6% that was reported in 2007. The widespread use of price controls are allowing food and energy prices to rise, despite the fact that commodities are plunging across the rest of the planet. The combination of no growth and high inflation will add to the level of misery in Latin America, adding new social and political complications. Last of all, the region’s balance of payments will take a sharp turn for the worse.
The combined current account deficit will triple to $72 billion, representing 2% of GDP. This will deplete international reserves and trigger more devaluations.
Unfortunately, the situation across Eurasia is slightly worse. The regional economy will expand 0.4% y/y in 2009, compared to an expansion of 4% y/y in 2008 and 7.6% y/y in 2007. The Ukraine will lead the way down, posting a contraction of more than 6% y/y. The marked slowdown in 2008 versus 2007 in Eurasia versus Latin America was one of the reasons why a feeling of crisis felt more apparent. To make matters worse, the misery factor in Eurasia will be higher than in Latin America because its inflation rate will be worse
Consumer prices will rise 9.9% in 2009, versus 12% in 2008. Fortunately, Eurasia’s balance of payments will fare better than its Latin counterparts. The region should report a current account surplus of $2 billion, or 0.1% of GDP. This will allow central banks to husband their reserves to meet foreign exchange and debt service obligations.
Fortunately, the situation will not be as bad in Asia. GDP growth will be 2.8% y/y in 2009, which is significantly less than the 7.3% y/y that was posted in 2008, but still better than Latin America and Eurasia. Inflation will decline to 5.6%, from a level of 8.5% the previous year, but it will still be painful. Last of all, the region’s current account should hold up relatively well, with a combined surplus of $171 billion. Of course, this is less than half of the $370 billion surplus that was posted in 2008 or the $419 billion that was reported in 2007. Nevertheless, it is a much healthier macroeconomic picture than what will be shown in Latin America and Eurasia. Still, there are concerns that Asia will not avoid political unrest. Local analysts consider 5% y/y GDP growth to be the minimum level of activity that China can post without experiencing social unrest. Our GDP growth forecast for China is 4% y/y this year, but some analysts are calling for 2% y/y growth. Instances of social unrest are already present throughout parts of the industrial southeast, as thousands of workers are unceremonialy sacked due to the decline in exports. Political tensions are running high in Thailand, Malaysia and India, and it does not take much to ignite the powder keg under Indonesia and The Philippines. Therefore, the emerging markets may be in for a very difficult year. Latin America may have the most worrisome numbers, but Asia may be the region with the nastiest surprise.