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Outlook for emerging-market economies looks stable thanks to rising commodities prices

Global growth prospects over the rest of 2016 and in 2017 look positive, with stronger-than-expected performance forecast for China’s economy

PUBLISHED : Saturday, 17 September, 2016, 12:18am
UPDATED : Saturday, 17 September, 2016, 12:17am

Are emerging markets slowly coming out of the slump and stabilising as commodities prices trend upward?

An assessment by Moody’s Investors Service states that the outlook for emerging markets economies has stabilised, due to the modest recovery in commodity prices, better capital flows and a better near-term outlook for growth in China.

The report says that it now expects China’s economy to grow at the rate of 6.6 per cent and 6.3 per cent in 2016 and 2017, respectively, compared to the previous forecast of 6.3 per cent and 6.1 per cent, with the higher growth rate being driven by significant fiscal and monetary policy support.

Madhavi Bikil, a vice-president and senior analyst at Moody’s, says in the report that the slowdown and rebalancing of China’s economy is likely to be gradual. “Thus we do not expect China to exert a significant drag on global growth prospects over the rest of 2016 and in 2017.”

Swiss-based Union Bancaire Privée (UBP), an investment bank, says in a note to clients that since the start of the year emerging market equities and bonds have turned a corner. “Since 2010 emerging market [EM] equities have lagged their developed market [DM] counterparts, despite offering premium economic growth rates. At the same time, EM bond investors saw performance comparable to DM investment grade investors even though they carried a higher risk profile. We believe the inflection of this trend began in early-2016 and is set to strengthen in favour of emerging market equities.”

We do not expect China to exert a significant drag on global growth prospects over the rest of 2016 and in 2017
Madhavi Bikil, a vice-president and senior analyst at Moody’s

The note further says that stabilisation of growth prospects of these economies in 2016 and an expected acceleration in 2017 provide the foundation for the EM opportunity. From 2011 to 2015, emerging economies suffered from falling commodity prices, as many large EM economies rely on commodity exports, and weak currencies.

With global commodity prices and emerging currencies having stabilised, easing local inflation trends in Latin America and Eastern Europe provide flexibility for rates to fall in support of local economies. This is happening in Asia. Moreover, with tightening from the US Federal Reserve increasingly pushed into 2017, the headwind of US tightening has been removed in the near future.