A Resiliency Test 2022 EM Economic Outlook

Economic Research
November 30, 2021
Special Report Table of contents
A resiliency test: 2022 EM I. Above-trend growth in EMX 2
Economic Outlook II. Recovery incomplete and uneven 4
III. Varying core inflation dynamics 5

 2022 will test EM’s resiliency: pandemic uncertainties, tighter do-
mestic and global monetary conditions, and more subdued support IV. EM rate buffer rises ahead of Fed 7
from terms-of-trade will challenge the recovery
V. Fiscal drags lessen, CAs worsen……9
 On the upside, substantial private savings provide ample space for
stronger growth as does a potentially stronger policy response in VI. Post-pandemic challenges 13
China
 We expect EM to pass the resiliency test with China delivering
trend-like growth and EM ex China growing above trend
 The recovery will mask wide regional disparities: growth should
rotate towards Asia in 1H22, while Latin America will underper-
form with Brazil and Chile heading for a recession
 Despite above trend growth through 2022-23, EM’s recovery from
the pandemic will remain incomplete and uneven. EM GDP outside
of China is 4% off its pre-crisis path—three times the hit to DM
 Disinflation should set in by 2H22, as base effects in commodity
prices along with easing of supply chain disruptions bring in much
needed relief, albeit, with significant regional variation in core
 We expect an additional 80bp of EMX rate hikes in 2022, roughly
half of that delivered in 2021, but with a differentiated pace of
normalization
 In EMEA EM and Latin America we expect rates to move above
2019 levels, while in EM Asia and SA a more measured pace of
hikes that keeps rates below pre-crisis norms looks appropriate
 The rise in EM’s rate differential with the US is rising, ahead of the
expected 3Q22 start to the Fed’s hiking cycle should help mitigate
financing stability concerns, except where country risks are acute
 Firming investment cycles and reversal of terms of trade gains to
drive further worsening in EM current accounts with largest dete-
riorations in SA, Indonesia, Russia, Poland and the Philippines
 ESG: EM countries made new pledges at COP26 to curb green-
house gas emissions and tackle other climate challenges, though
Jahangir Aziz
commitments do not necessarily imply major near-term impact (1-212) 834-4328
jahangir.x.aziz@jpmorgan.com
Nora Szentivanyi
(44-20) 7134-7544
nora.szentivanyi@jpmorgan.com
Anthony Wong
(44-20) 7742-0985
anthony.wong@jpmorgan.com
www.jpmorganmarkets.com
J.P. Morgan Securities LLC Economic Research
Jahangir Aziz (1-212) 834-4328 Anthony Wong (44-20) 7742-0985 A resiliency test
jahangir.x.aziz@jpmorgan.com anthony.wong@jpmorgan.com November 30, 2021
Nora Szentivanyi (44-20) 7134-7544
I. Growth to remain above trend Exhibit 2: EM regional GDP growth

%q/q, saar, shaded denotes forecast
At 4.5%, EMX GDP growth next year will remain above its
2015-19 trend of 3.3%. The above-trend growth is likely to 12
persist in 2023 too (Exhibit 1). However, the overall strong EM Asia ex. China
10
recovery path masks significant regional disparities. EM's
8
recovery from the pandemic will remain incomplete and une-
ven, representing a key tension in an otherwise upbeat global 6
economic outlook. The main drivers of EMX growth in 2022 4
will be the support to domestic demand as these economies 2
EMEA EM
continue to open as the coverage of vaccination expands and
the supply side disruptions, both domestic and global, fade. 0
Latam
At the same time, easing DM growth and changes in China’s -2
growth drivers, reflecting policy preferences towards ad- 2021 2022
Source: J.P. Morgan
dressing growth imbalances, will act as drags. As EM econ-
omies recover, policy has and will continue to normalize.
This will entail continued withdrawal of the domestic fiscal
Exhibit 3: J.P. Morgan GDP growth forecast
and monetary policy supports provided in the aftermath of
%y/y for annual, %q/q saar for quarterly, %pt for growth diff
the pandemic, albeit at a slower pace than in 2021. Support
2021 2022 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22
from terms-of-trade gains for commodity exporters will also
DM 5.0 4.0 3.6 4.5 3.1 4.3 3.6 2.6
ease relative to 2021.
EM 6.8 4.5 2.1 6.0 4.7 5.2 4.4 4.3
EMX 6.0 4.4 6.5 7.7 4.5 3.8 3.5 3.3
Exhibit 1: EMX growth to slow along with DM
EM Asia 7.1 5.3 1.5 7.3 5.6 6.4 5.2 5.1
%q/q, saar, shaded denotes forecast
EMAX 4.3 5.0 0.1 10.2 6.0 4.9 4.3 4.1
10 China 6.6 4.7 -3.3 4.0 5.0 7.0 5.5 5.5
EM ex. China (EMX) India 6.5 8.6 27.0 18.0 8.0 6.0 5.5 5.3
EMEA EM 5.6 3.6 2.3 2.7 3.7 3.8 3.9 3.7
China Russia 4.4 2.4 0.8 2.3 2.8 2.7 2.5 1.7
5
Latam 6.7 1.8 5.1 3.0 1.4 0.9 0.8 0.9
Brazil 4.8 0.0 1.0 0.2 0.8 -0.6 -1.2 -1.0
DM Growth differentials (%pt)
0 EM-DM diff. 1.8 0.6 -1.4 1.6 1.7 1.0 0.8 1.7
EMX-DM diff. 1.0 0.4 2.9 3.2 1.5 -0.5 -0.1 0.7
Source: J.P. Morgan. EMX excludes China. EMAX is EM Asia ex. China and India.
-5
2021 2022
Source: J.P. Morgan
Latin America, largely driven by Brazil, will see a much Risk #1: new COVID variants
monetary tightening cycle in 2021 in response to stronger- The risks to our baseline outlook turn on three factors. How
than-expected inflation and concerns over fiscal and quasi- the pandemic and its variants evolve and the public-health
fiscal profligacy that, in turn, has threatened financial stabil- policy response is a critical driver. We are seeing an increase
ity. Growth in EM EMEA, particularly in CEE is expected to in infection and mortality rates in some EM economies
recover strongly from the slowdown in 2H22 with the help of (Exhibit 4), and the pressures on their health-care systems
large EU transfers and continued high oil prices in Russia. could elicit further localized restrictions. However, these are
EM Asia (ex. China), where inflationary pressures are the unlikely to be extensive or long-lasting. EM Asia ex China,
least, is likely to post the strongest recovery aided by robust where restrictions on mobility have remained high even in
export growth and recovery in domestic services demand. high vaccination countries (Exhibit 5) should continue to
While China’s sequential growth is expected to rebound move away from its earlier zero tolerance policy as rising
in1H22, reflecting changes in its policy regime change our vaccinations reduces the severity of new waves. We, there-
annual growth forecast of 4.7% will undershoot the govern- fore, see mobility continuing to improve despite episodic
ment's growth target and potential growth. increases in cases.
2
Exhibit 4: COVID deaths have jumped in a number of EMs pushing the growth-interest rate differential significantly be-
COVID deaths per million, both scales low its post-GFC average. In some countries (i.e. Brazil and
Chile) this negative feedback loop is expected to push econ-
6000 700
omies into recession in 2022 (Exhibit 6).
5000 600
500 Exhibit 6: Brazil and Chile are failing the resiliency test
4000 Cumulative since Jan 2020
400 Real GDP growth - real interest rate diff, %-pts: 4Q22f vs 2010-19 average
3000
Latest 30-day total (RHS) 300
2000
200 8
1000 100
4
0 0
ARG
COL
POL
CHL
ZAF
PHL
PER
HUN
ROU
BRA
TUR
ISR
IDN
IND
THA
KOR
TWN
CHN
CZE
MEX
RUS
URY
MYS
0
Source: J.P. Morgan
-4
-8
Exhibit 5: Higher vaccinations have not ensured looser restrictions
Romania
Malaysia
Korea
Colombia
Poland
Thailand
Israel
Taiwan
Czech Rep.
Mexico
Peru
Brazil
Philippines
Hungary
Turkey
S. Africa
India
Indonesia
Russia
Chile
Stringency index (100= most stringent)
85
Other EM PH y = -0.14x + 49.88
75 R² = 0.04 Source: J.P. Morgan
EM Asia PE
65 ID
TH
EC MY Risk #3: China policy stimulus
RO IL
55 There is still considerable uncertainty as to how authorities in
ZA HK SG
45 IN BR AR KR China will respond to the slowing in growth. As things stand
TW
CZ at present, we expect only modest support in 2022 with the
35 RU MX CL
PL TR UY focus of policy tilted towards managing downside risks rather
CO HU
25 than pushing up growth. A crucial assessment is where the
20 30 40 50 60 70 80 90 100 tolerance level for GDP growth is under the new regime.
% fully vaccinated against COVID-19
Source: Oxford University, OWID, J.P. Morgan. OSI = Oxford Stringency Index China’s quarterly growth momentum is expected to pick up
from the 3Q21 pothole in 1H22 before converging to trend
like pace from 2H22 onwards. Even so, growth in 4Q21 and
Risk #2: resiliency test of policy tightening 1Q22 will be below or close to 3% on a year-ago basis,
A critical question is how much more policy tightening might which is typically the way China’s policymakers assess
be needed if inflationary expectations threaten to become growth (Exhibit 7). If this level is judged to be too low, then
unhinged. Currently, we expect EMX inflation to follow the it is possible that macro policies (not industrial or housing
global trend of disinflation in 2H22 as supply disruptions policies) could be eased more than currently in our forecast
ease and, as such, do not expect the need for additional ag- and that could pave the way for a stronger growth in 2022-23.
gressive tightening. However, unlike DM central banks, the
credibility of EM monetary authorities is less well estab- Exhibit 7: China GDP growth
lished given their checkered history with meeting inflation % change, shaded area denotes forecast
targets. Thus, the market may not be as patient. This could 20.0
force EM central banks to tighten more aggressively if infla-
tionary expectations appear to become unanchored. In this 15.0
case, the growth recovery could face more headwinds. %oya %q/q saar
10.0
Parts of EM, where monetary policy has been forced to tight-
en more aggressively because of threats to inflation and fi- 5.0
nancial stability caused by fiscal and quasi-fiscal profligacy,
will face a resiliency test. In order for growth to be support- 0.0
ed, the gap between real GDP and real interest rates needs to
be positive in most EMs. However in a number of EMs, es- -5.0
1Q21 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22
pecially the high-yielders, aggressive rate hikes and slowing
growth amid high inflation and eroding policy credibility are Source: J.P. Morgan.
3
Risk #4: private sector’s excess savings We expect macro policy to be broadly be neutral in 2022,
with a much smaller fiscal drag at 0.5% of GDP (vs. 3.6%
Lastly, as in the case with DM, excess savings in EMX pri-
GDP drag in 2021), relative stable TSF growth at 10.0% and
vate sector, particularly among corporates, remain high and
unchanged policy rates. Although, industrial and housing
above its pre-pandemic levels (Exhibit 8). Private savings
policies might be fine-tuned, they will remain on a tightening
jumped in 2020 as the pandemic took its toll on consumption
bias anchored by medium-term goals of rotating growth driv-
and investment. And although both have recovered, excess
ers from less productive and more energy-intensive sectors to
savings remain above the 2015-19 average even in 2023.
higher value-added and green sectors. We, also, do not ex-
Consequently, EM private sector can fund a much stronger
pect China’s zero-tolerance pandemic policy to change any
increase in domestic demand (especially in investment) with-
time soon. This is likely to weigh in on the pace of services
out exerting pressure undue pressures on domestic bond
sector rebound.
yields or CA balances (foreign savings).
Exhibit 8: EM ex China private sector excess savings The slower GDP growth and rotation of growth-drivers will
% of GDP, private savings less investment, shaded denotes forecast affect both China’s manufacturing and commodity trading
partners and global manufacturing and commodity prices. As
10 we have noted previously, EMX’s dependence on China has
an external and independent driver of demand has increased
8
in the post-GFC period at the cost of DM. A 1%-pts slower
6 China growth, lowers EMX growth by 0.5-pts. However, the
2015-19 avg impact on commodity exporters (0.6%-pts) is much bigger
4 than on manufacturing exporters (0.25%-pts). China acts
primarily as conduit for intermediate goods from EM Asian
2 manufacturing exporters for final demand in the rest of the
world. Thus global goods demand tends to be a more im-
0
10 11 12 13 14 15 16 17 18 19 20 21 22 23 portant driver of regional exports to China than the slowing
Source: J.P. Morgan in China's domestic demand. At the same time, countries
with commodities exposures to China, such as Indonesia,
Spillovers from China’s regime change Thailand and Malaysia could be more affected.
Two aspects of China’s regime change are important for
macroeconomic performance. First, is the shift from a II. EM recovery is incomplete and uneven
growth-dominated to a multiple-objectives (not just growth, Despite our forecast of above trend growth through 2022, we
but also financial stability, de-carbonization, innovation, and expect EM’s recovery from the pandemic to remain incom-
reduction in income and regional equality) policy framework. plete and uneven. EM GDP outside of China is currently
This has increased coordination risks in China’s policy im- around 4% off its pre-pandemic path—three times the hit to
plementation set-up given its vastly decentralized nature is DM. Although the goods sector has recovered, service sector
the shift in the focus of industrial and housing policies. activity remains depressed. Even with EM vaccinations pick-
ing up, we generally see the weak links continuing to deliver
In the past, these policy levers were moved counter- sub-par outcomes. We anticipate that EMX GDP will still be
cyclically along with macro policies to strengthen the effec- 3.5% below the pre-pandemic path at end-2022 compared to
tiveness and reduce the transmission lags of fiscal and mone- the complete recovery expected in DM (Exhibit 9). This per-
tary/credit policies. Increasingly since 2018, industrial and sistent EM-DM performance gap is one of the key tensions in
housing policies have focused on long-term rather than cycli- an otherwise upbeat global outlook. Following its initial V-
cal objectives. As a result, the impact of macro policy chang- shaped recovery through 2Q21 China is tracking around 2%
es has weakened, while their transmission lags have length- below its pre-pandemic path and we now view it as a relative
ened. It is likely that both fiscal and monetary policies need underperformer into 2022. In the rest of EM, many countries
to be recalibrated under the new regime for them to be as in South Asia and Latam will see shortfalls of at least 5%
effective as before. But this is a learning process and could while EMEA EM will recover to within 1% of its pre-
take time, which increases the risk of providing less-than- pandemic path.
adequate policy support.
4
Exhibit 9: Real GDP, COVID-19 impact Exhibit 10: J.P. Morgan Pandemic Impact Metric (PIM) components
% deviation from pre-pandemic potential path Country rank for components; JPM PIM score: 100=most impact 0=least impact
2Q20 2Q21 4Q21 4Q22
Econ vulner.
Investment
Global (2.6) -11.0 -2.7 -2.0 -0.7
Scarring
Services
Labour
Health
Fiscal
score
DM (1.4) -12.6 -2.8 -1.3 0.6
US (1.5) -10.8 -1.4 0.1 1.6
Euro area (1.3) -15.3 -4.5 -2.5 0.3
EM (4.5) -8.5 -2.7 -3.0 -2.7
EMX (3.4) -14.3 -5.4 -3.9 -3.5 KOR 3 3 14 2 2 7 0.0
EM Asia (5.5) -6.3 -2.5 -3.1 -2.7 TUR 1 8 21 12 1 6 4.6
China (5.5) -1.7 0.5 -2.1 -1.8 TWN 2 2 20 3 10 5 9.0
India (6.0) -23.1 -12.0 -5.4 -5.3 ISR 4 10 5 1 17 19 15.1
EMAX (3.0) -9.6 -5.4 -4.8 -3.7 INDO 11 7 17 21 18 1 24.7
Hong Kong (2.8) -6.7 -2.3 -3.0 -2.0 POL 14 15 4 6 12 15 30.4
Indonesia (5.0) -9.3 -7.5 -8.1 -7.8 CHN 8 12 16 13 3 4 31.1
Korea (2.7) -5.6 -2.6 -2.4 -1.9 RUS 19 1 9 10 4 8 32.9
Malaysia (4.7) -18.4 -9.3 -7.7 -4.0 HUN 10 22 12 5 13 2 33.8
Philippines (6.0) -21.5 -17.1 -10.8 -8.3 CZE 13 21 7 4 11 11 35.7
Singapore (2.5) -14.7 -4.1 -2.7 0.2 CHL 17 14 3 8 5 16 36.5
Thailand (3.0) -12.2 -8.3 -9.5 -8.1 THA 7 4 1 16 7 22 40.8
Taiwan (3.0) -2.9 2.5 2.9 3.6 IND 15 9 10 11 16 13 42.4
Latin America (1.9) -16.0 -4.1 -3.2 -4.4 MYS 16 5 15 23 9 3 44.1
Argentina (2.0) -19.9 -6.1 -5.1 -5.2 ROM 6 17 19 7 15 10 46.5
Brazil (1.5) -11.8 -2.3 -2.7 -4.7 ARG 5 19 13 15 6 14 48.1
Chile (3.5) -12.5 -0.3 4.2 -0.8 BRA 9 20 2 17 21 18 55.5
Colombia (3.1) -18.3 -7.3 -1.5 -1.8 URY 12 13 22 9 8 21 69.0
Peru (3.5) -31.9 -6.8 -5.3 -6.9 COL 20 18 11 19 20 9 70.6
Mexico (2.2) -19.0 -5.3 -4.9 -4.6 ZAF 22 11 6 20 23 12 84.4
Uruguay (2.5) -13.0 -6.3 -5.3 -5.3 MEX 21 16 23 14 14 20 86.2
Ecuador (2.3) -12.9 -7.7 -6.8 -6.7 PER 18 23 8 18 22 17 96.7
EMEA EM (2.5) -10.5 -1.9 -2.0 -0.9 PHL 23 6 18 22 19 23 100.0
Czech Rep. (2.6) -13.1 -8.4 -7.6 -5.8 Source: J.P. Morgan
Hungary (3.1) -15.9 -4.8 -4.6 -2.6
Israel (3.5) -11.9 -2.4 -2.1 -1.4
Poland (3.5) -10.8 -4.6 -3.5 -2.6
Romania (3.5) -11.8 -3.6 -4.3 -0.7 The lasting GDP shortfalls in EM contrast with a projected
Russia (1.5) -9.5 -1.8 -1.8 -0.9 complete recovery in much of DM; the level of DM GDP is
South Africa (1.3) -17.8 -3.2 -3.5 -2.4 expected to end 2022 about 0.5% above its pre-pandemic
Turkey (3.8) -12.0 2.9 1.6 2.6
Source: J.P. Morgan. Pre-pandemic potential growth estimates in parentheses. path, with the US 1% above. In the post-GFC expansion,
considerable DM slack contrasted with EM economies that
moved back to operating at full capacity as early as 2011.
In our recent Special Report, we generated a set of indicators This time, we expect the tables to be turned as we anticipate
to identify why GDP performance has differed so much with- DM output gaps will close next year amid persistently nega-
in EM. In terms of what metrics matter for the completeness tive output gaps across much of EM (Exhibit 11).
of the recovery, we find the structure of the economies, the
size of the fiscal response, average income levels as well as Exhibit 11: Output gap
% of potential, shaded denotes forecast
the extent of health and labor market deteriorations (especial-
ly COVID deaths) explain much of the pandemic impact. 3
After accounting for income differences, we project that DM
economies that are more reliant on tourism, and those with
larger service sectors, will experience more persistent losses; 0
countries with larger 2020 fiscal support are projected to ex-
perience smaller post crisis output losses. Finally, the crisis-
year hit to investment top GDP shares has been a reliable EM
-3
predictor of high medium- term output losses, because of its
correlation with the dynamics of capital after the crisis. The
hit to investment has been particularly large in countries like
-6
Philippines, South Africa and Mexico (Exhibit 10).. 10 12 14 16 18 20 22
Source: J.P. Morgan
5
III. Inflation above pre-pandemic pace but In the handful of EMs (mainly CEE but also partly Russia)
with wide variation strong wage growth amid a return to full employment and
fiscal stimulus has driven service price inflation higher; this
We anticipate that large base effects from last year’s com- will be a persistent factor behind elevated inflation over me-
modity price surge along with some easing of supply chain dium-term, keeping core inflation above its pre-pandemic
disruptions from their 2021 extremes will bring EM inflation rates (Exhibit 14). Where inflation has been relatively benign
lower starting from 2Q22. We expect EM ex. China headline (e.g. in South Asia and EMAX) some acceleration in core
inflation to fall from around 6%oya at end-2021 to 4% by inflation is likely over 2022 as economies re-open and ser-
end-2022 with the peak occurring in the early months of next vice price inflation catches up. In terms of headline CPI, the
year. This forecast does not require commodity prices to fall largest disinflation by end-2022 is expected to occur in Latin
from current levels nor does it assume supply chain disrup- America, especially in Brazil where inflation is coming off a
tions will resolve. Even if oil prices increase further to very high base, as well as in Russia (Exhibit 15)
$90/bbl next year (in line with our house view), this would
translate to a 0.7%-pt lower contribution from energy to Exhibit 14: EM core inflation dynamics are nuanced
over-year-ago headline CPI in 2022 as the annual growth in %oya
oil prices would decelerate to around 25% from 65% in 2021
(Exhibit 12). Similarly, we anticipate that to a lesser extent
8
food inflation will also subtract from inflation after this EMEA ex Turkey
year’s outsized gains.
6
Latam
Exhibit 12: Brent crude pass-through to EMX
Brent crude (average) Energy CPI 4
EMAX
US$ %oya %-pt contr. to EMX oya CPI
2021 72 63 1.2 2
2022 88 22 0.5
2023 82 -7 -0.1 China
0
Source: J.P. Morgan. JPM Commodities Research Brent crude forecast.
15 16 17 18 19 20 21 22
Source: J.P. Morgan
Exhibit 15: J.P. Morgan headline CPI inflation forecast

Even with the sharp disinflation in our forecasts, we expect %eop for annual, %oya avg for quarterly
inflation will settle above its pre-pandemic pace at end-2022 2021 2022 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22
(Exhibit 13). This is in part because EM inflation had fallen EM ex. CN 6.0 4.3 5.4 6.0 5.6 5.0 4.2 3.9
to historically low levels in the years leading up to the pan- China 1.9 2.4 0.8 1.9 1.9 2.4 2.5 2.4
EMAX 2.6 2.0 2.2 2.2 2.2 2.2 2.0 2.0
demic but also because demand driven inflation will be India 5.1 5.0 5.1 5.7 5.1 5.1 4.9 4.7
strengthening. That said, the pace of disinflation next year Korea 1.3 0.7 2.8 2.1 1.6 2.9 2.4 2.2
will not be uniform across EM regions and countries. EMEA EM 9.1 6.2 7.9 9.0 8.5 7.6 6.4 5.7
CE-3 6.6 4.3 4.9 7.0 6.4 5.3 4.3 3.4
Russia 8.0 4.3 6.8 7.8 7.1 6.2 4.5 4.1
Exhibit 13: EMX headline and core CPI inflation S. Africa 5.7 4.1 7.8 5.6 5.0 4.8 4.3 4.3
%oya Turkey 19.6 16.4 8.8 19.4 18.9 17.6 16.9 15.0
Latam 8.2 4.4 7.4 8.1 7.3 6.0 4.5 4.0
6.5 Brazil 10.3 5.0 9.6 10.5 9.9 8.1 5.3 4.3
Headline CPI Mexico 4.8 2.8 6.8 4.0 3.9 6.6 6.2 4.8
6.0
Core CPI Source: J.P. Morgan. EMX excludes China. EMAX is EM Asia ex. China and India.
5.5
5.0
4.5 Un-anchoring of inflation expectations is a key risk to moni-
4.0 tor. With inflation having risen multiples above central bank
targets in a number of EM countries, the risk is that the mul-
3.5
titude of supply shocks along with extended income supports
3.0 in some cases will be perpetuate through persistent shifts in
2.5 expectations and price-setting behavior. Inflation expecta-
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
tions are already showing signs of de-anchoring in several
Source: National statistics, J.P. Morgan. high-yielders and in CEE (Exhibit 16), although outside of
CEE they remain below 2015-16 levels. We anticipate that
6
the proactive central bank response along with headline dis- limited, the disruption will continue to weigh on the global
inflation in 2022 will be sufficient to tame expectations. goods supply, exacerbating cost pressures.
Exhibit 16: EM inflation expectations Exhibit 17: BiDSI container port hours for ships to/from EM Asia
%, 12-month ahead, both scales Index, 2019=100, average hours at port
220
8 Brazil 20
7 Colombia 200
18
CE-3 180 West Coast
6 16
Russia (right) US ex. West Coast
5 160 Europe
14
4 EM Asia
12 140
3
10 120
2
1 8 100
0 6 80
15 16 17 18 19 20 21 Jan 20 Apr 20 Jul 20 Oct 20 Jan 21 Apr 21 Jul 21 Oct 21
Source: J.P. Morgan Source: J.P. Morgan.
Source: J.P. Morgan, MariTrace.
Box: Shipping bottlenecks highly localized to

US West Coast, but set to last six months IV. Wide variation in rate normalization
The sharp rise in freight costs and anecdotal reports of indus- Monetary policy has tightened and in many EM countries
trial shortages have drawn much attention to global supply more than anticipated even with frequent revisions to our
chain problems, in particular shipping bottlenecks—as ship- policy rate paths. EM central banks as a group have lifted
ping is responsible for more than 80% of world trade. Initial- policy rates 165bp (ex. China) from their 2020 lows, effec-
ly, the main supply constraints were pandemic-related tively removing all of the crisis-year easing. We expect addi-
measures in EM Asia that created shortages of semiconduc- tional tightening of 80bp next year but the pace of the nor-
tors and knock-on effects to global trade. Adding to this, zero malization and the reasons behind the more aggressive tight-
tolerance policies in EM Asia, particularly in China, led to a ening in some countries will vary widely. In many Latin
number of port closures over the past year, triggering a seis- American countries (Brazil, Mexico and Chile) a loss of poli-
mic shift in the flow of global shipping. However, these fac- cy credibility and risks of financial instability have been sig-
tors, while important, are not the main pain points of the cur- nificant contributors to the more aggressive rate moves.
rent shipping bottlenecks. However, in CEE and Russia it is primarily strong underlying
inflationary pressures (see previous section).
Using our BiDSI (Big Data Shipping Index) we find that the
current bottlenecks are highly localized to container shipping Exhibit 18: EMEA EM and Latam to hike above pre-pandemic levels
%p.a.
on the US West Coast (Exhibit 17). While some ports have
increased capacity and are running round the clock, it only
10 EMEA EM ex Tur
address part of the problem, Industry reports suggest that one
Latam
of the main issues is the availability of truckers to clear the 8
EM Asia ex Chn & Ind
backlog in container storage yards, which are reaching full
capacity. Industry sources suggest that the US port logjams 6
are likely to last for a minimum of six months. This will like- 4
ly push up contracted shipping rates in the near term as most
of these contracts are set to be renewed in the coming few 2
months (see Container Shipping Insights, JPMM, September
0
8). With contract freight rates on Asia-Europe routes up for 15 16 17 18 19 20 21 22
renewal early next year and for transpacific routes in May, Source: J.P. Morgan
freight costs will likely reset higher next year. Although the In both EMEA EM (excluding Turkey where the CB is on
direct impact of shipping costs into consumer prices may be hold) and in Latin America (not just because of Brazil) we
expect the level of policy rates to move above 2019 levels as
7
a turn towards restrictive monetary policies not just the re- more often than not, have delivered less rate hikes than
moval of crisis-period easing looks justified (Exhibit 18). priced based on the market’s country risk perceptions.
Meanwhile in EM Asia and South Africa where inflation
dynamics have been more benign, output gaps are still nega- Exhibit 20: Policy stance still too loose in EM low-yielders
tive a more measured pace of normalization that keeps rates Real interest rate-GDP growth differential, %-pts
below pre-crisis norms appears appropriate.
10 HY
2010-19 average
EM low-yielders look too easy 5 LY
2010-19 average
Perhaps the simplest way to assess the monetary policy pos-
0
ture stance is to consider the level of real interest rates. On
this metric the EM policy stance is arguably still very loose, -5
with 90% of non-frontier EM countries running a negative
real policy rate at present. We expect next year’s projected -10
inflation decline along with further rate hikes to push EM
-15
real rates back into positive territory, to 1% by end-2022
10 11 12 13 14 15 16 17 18 19 20 21 22
from -1.5% at present, and the number of central banks with Source: J.P. Morgan. HY excludes Turkey and Argentina, LY excludes China.
negative real rates should reduce to around 50%. The real
interest rate differential between EM high-yielders and DM
Exhibit 21: Taylor rule model points to more hikes vs our forecasts
in particular is rising to over 4% from 0% a year ago. Bps change over 2022
Exhibit 19: More EM CB to hike rates in 2022 J.P. Morgan

180
% share of EMs (GDP weighted), 2022 is JPM forecast Model-implied
150 131
90 84 125 124
114 126
80 120
as of November 2021
87
70 90
end-2022F
60 51
46 60
50
40 30
28
30 0
20 EMX HY LY
10 Source: J.P. Morgan. excl. CN, TR, AR.
0
EM EMX Exhibit 22: Markets pricing more hikes than our forecasts
Source: J.P. Morgan Current policy JPM 4Q22 policy Market pricing minus
The interest-rate-growth differential (IRGD), which bench- rate (%) rate forecast (%) JPM forecast (bp)
Brazil 7.75 11.75 36
marks the policy stance against activity and has historically Chile 2.75 5.50 -11
been negative in EM, also fell sharply this year as real rates Colombia 2.50 5.25 138
fell and growth rebounded. Over 2022, additional rate hikes, Mexico 5.00 6.25 111
easing growth, and disinflation will push the IRGD back up Czech Rep. 2.75 4.00 -96
Hungary 2.10 4.00 -50
to its 2010-19 average. For EM high-yielders, the IRGD is Israel 0.10 0.25 14
forecast to move 100bp above its post-GFC average. Howev- Poland 1.25 2.50 17
er, for low-yielders rates will remain around 150bp too on Russia 7.50 7.75 54
South Africa 3.75 5.25 66
this measure (Exhibit 20). Our open economy Taylor rule Turkey 15.00 15.00 871
models broadly echo this message; they suggest our end- China 2.95 2.95 14
2022 bottom-up policy rate forecasts are too easy for EM India* 3.35 4.00 80
South Korea 0.75 1.50 -4
low-yielders, but slightly tight for high-yielders (Exhibit 21). Malaysia 1.75 2.25 15
Thailand 0.50 0.50 24
Markets price more hikes than our forecasts except in a few Taiwan 1.125 1.375 -5
countries (Exhibit 22). Overpricing of rate hikes in EM is not Source: J.P. Morgan. As of 29-Nov-21 COB
new and, especially in high-yielders like Brazil and Colom-
bia, reflects elevated country risk premia. Central banks,
8
EM yield buffer restored ahead of Fed Exhibit 24: EM policy rates are sensitive to US rate changes
Coefficient on Fed funds rate in EM Taylor-type rules
Given their historical dependence on external funding, EM
central banks keep a close eye on interest differentials with 0.8
the US as a signal of the buffer necessary to compensate in- 0.7
vestors for country risk. This year’s patient Fed has provided 0.6
a much-needed offset to rising inflation pressures and erod- 0.5
ing policy credibility, particularly for countries where activi-
0.4
ty remains depressed. Pressure will likely build, however, as
0.3
we move closer to Fed liftoff. EM-US interest rate differen-
0.2
tials fell to a decade low last year suggesting there was little
by way of an interest rate buffer left to protect currencies. 0.1
The rate differential is now correcting higher, however, as 0.0
TR ID MX IN IS RO TH SA KO TW PH BR CL PE CO CZ PO ML
EM has returned to more conventional monetary policies
well ahead of DM (Exhibit 23). This lowers the need for ex- Source: J.P. Morgan estimates. 10-year UST yield for India and Indonesi.
cess risk premia at the longer end of yield curves (except
where country risks are acute, such as Brazil). V. Fiscal drags lessen …
Exhibit 23: EM (ex. China and Turkey) policy rate
In 2022 EM will continue to withdraw fiscal policy supports
%p.a. provided in the aftermath of the pandemic, albeit at substan-
tially slower pace than in 2021. After a drag of 2.2%-pts in
12
2021 next year we forecast it will subtract just 0.5%-pts, with
10 modest tightening in most of the large economies, including
Nominal rate China, India, Russia, Korea and Poland (but not in Brazil).
8 This implies that the crisis year fiscal stimulus will still not
6 be fully reverse by the end of 2022 (Exhibit 25).Unlike in
previous crises, EM provided an unprecedented amount of
4 fiscal support last year, averaging 3.5% of GDP, only mar-
2 ginally less than DM’s 3.9% of GDP stimulus. However,
Differential with FFR both markets and policymakers feared that easing extended
0 for another year could signal a loss of credibility, especially
00 05 10 15 20
among high-yielders whose history of policy discipline is
Source: J.P. Morgan Global Economics
checkered. This, we believe, prompted several EMs to un-
wind much of that support in 2021 despite the recovery re-
High-yielding EMs, especially those in Latin America, typi- maining incomplete
cally most vulnerable to Fed tightening, have hiked rates sig-
nificantly, opening up a significant positive differential with Exhibit 25: EM has withdrawn fiscal stimulus more quickly than DM
the US. Moreover, we forecast further rate hikes early next %-pt impact of fiscal policy on GDP growth, % of GDP
year so the differential will rise further before the Fed starts
hiking. EM low-yielder where currency stability is a key pol- 4.0
icy objective (EM Asia and Israel) and those with large 2022
CA deficits (South Africa, India and Indonesia) also are like- 2.0
ly to synchronize their hiking cycles with the Fed (Exhibit
24). 0.0
-2.0 2020
2021
2022
-4.0 2020-22 cumulative
DM
EM LatAm EM Asia EMEA EM
Source: J.P. Morgan
9
The EM fiscal stance outside of China turned less restrictive In Brazil, given the binding legal constraint of the spending
as the year progressed and policymakers extended COVID- cap, demands for increased spending fiscal require creating
related support amid the Delta wave. However, China ended more space in the 2022 budget. But more important than the
up tightening more than we initially envisaged. Several of the amount of additional spending, per se, is the signal sent by
largest EM economies, namely China, Brazil, and Russia the change in spending cap rule, which has been seen as an
have shifted to a large drag in 2021, with net changes versus important anchor to stabilize spending and expectations since
2020 on the order of 5-9%-pts of GDP. In China fiscal policy it was implemented in 2016. The political lesson of the epi-
added 4.6% to growth in 2020 but is tracking a 3.1% drag sode is that, if needed, the fiscal goalposts can be changed,
this year. The shift is even larger in Brazil and Russia. De- leading to a dent in credibility. We cannot rule that the gov-
spite these shifts, headline fiscal deficits will remain on aver- ernment might resort to a plan B to maintain the spending
age 2% of GDP larger in 2022 than they were in 2019 plans next year, but outside the spending cap like in the past
(Exhibit 26). two years.
Exhibit 26: Fiscal deficits still broadly wider than in 2020 EM “QE” to remain opportunistic
%-pt change in fiscal balance (% of GDP)
Among the many unconventional measures that EM central
10 banks undertook during the pandemic, one of the most nota-
ble was to start QE operations even before conventional poli-
5
cy rates had hit their zero lower bound. The motivation was
0 clear: fiscal deficits and borrowing requirements ballooned
2020 during the pandemic, and central bank intervention in the
-5 2021 bond market was meant to absorb some government supply
2022
-10 2020-22 cumulative and serve as a backstop, thereby precluding an undue harden-
ing of yields and monetary conditions at a time when activity
was under significant pressure. In the event, actual absorption
by central banks was lower than anticipated, because private
Source: J.P. Morgan. sector savings surged (both because of lockdowns and pre-
cautionary motives) and these “excess savings” were able to
...but off-balance sheet support rises absorb a significant share of government issuance. That said,
QE was large and significant in some countries like Hungary,
Behind the scenes of narrowing budget deficits, off-balance
Poland, Israel, Philippines and Indonesia (Exhibit 27).
sheet support has increased, and institutional circumvention
is growing. Policymakers in Latin America, in particular, Exhibit 27: Central bank purchases of local currency bonds
have been creative in using tools at their disposal to either lccy billion unless stated
complement or help finance their budgets. In Chile and to a % of GDP % of fiscal deficit
lesser degree Peru, a significant early disbursement of private 2020 2021YTD 2020 2021YTD
pension savings complemented stepped up fiscal supports Colombia** 0.3 1.1 3.3 12.9
and direct transfers in the budget. In Chile, a significant Mexico^^ 0.1 - 2.2 -
overhaul of the pension system is likely to emerge in the con- Peru 0.2 0.1 1.8 1.6
text next year’s constitutional rewrite, and may represent an Hungary 2.2 5.1 26.9 76.1
unfunded mandate that could eventually fall back onto fiscal Israel 3.5 2.4 31.1 40.3
accounts. In Colombia and Mexico, governments have been Poland* 4.6 1.6 66.0 42.5
exploring the limits of the institutional lines between the Romania 0.5 - 5.3 -
budget, the central bank, and SOEs. In both countries, the Serbia 1.8 - 22.6 -
disbursement of IMF SDRs were channeled to governments South Africa 0.6 - 6.2 -
Turkey 1.4 - 39.8 -
rather than saved as central bank reserves, though in both
India 1.4 1.6 10.3 13.9
cases central banks stood ground and received local currency
Indonesia** 3.4 0.8 56.7 16.0
compensation from Treasury accounts—in Colombia in the
Korea** 0.6 0.3 15.4 8.4
form of previously issued local bonds. In Mexico, IMF dol- Malaysia 0.7 - 10.2 -
lars could facilitate Pemex’s debt amortizations but in Co- Philippines 6.4 3.1 83.7 34.6
lombia, Ecopetrol’s balance sheet has been used for deficit Thailand 1.0 0.1 18.3 1.0
financing. Source: J.P. Morgan, IMF. **trillion ^^Includes Mbonos and UDIs *Non-Govt bond purchases
includes PFR + BGK bonds.
10
Consistent with still large excess private savings and ongoing likely to ease substantially in in 2022 even if many commodi-
fiscal consolidation, EM QE has remained limited in 2021. ty prices, including energy, remain at elevated levels. Coun-
Looking into 2022, a Fed in motion, along with still elevated tries like Russia, South Africa and Indonesia where current
inflation and eroding policy credibility in some EMs will accounts improved the most in 2021 are expected to see the
make large QE programs unfeasible. Countries with official largest deteriorations next year (Exhibit 29). At the opposite
bond purchases programs, mostly the low-yielders (e.g.: Isra- end of the spectrum, Thailand, where the CA swung to deficit
el, Hungary) are likely to phase out or end their purchases by due to the tourism industry shutting down, will likely see
mid-2022. While QE is unlikely be front and center in terms improvement over 2022-23 as international borders reopen.
of financing fiscal deficits, EMs will likely continue to use
QE as a tool to help anchor yields during periods of stress. Exhibit 29: Covid-era CA improvements to partially reverse
Thus bond purchases will likely be carried out opportunisti- %-pts of GDP, change in current account
cally to lower market volatility if external conditions prove 6.0
challenging. This in turn should help to mitigate any undue
4.0
tightening of monetary conditions that is at odds with still-
incomplete recoveries in many emerging markets. 2.0
0.0
Current accounts reverse crisis-year gains -2.0
A corollary of the projected firming of investment cycles in -4.0 2021 vs 2019

many EM is further narrowing of external balances. Shifts in 2022 vs 2021
-6.0
2022 vs 2019
private savings and current account balances have varied
-8.0
across EM countries, yet most countries have seen only a
Korea
Romania
Mexico
Peru
Poland
Thailand
Brazil
Israel
Czech Rep.
Russia
Indonesia
S. Africa
Argentina
Chile
Malaysia
India
Hungary
Colombia
Philippines
Turkey
partial reversal in CA improvements in 2021 despite the
strong GDP growth rebound (Exhibit 28). In 2022 we expect
the EM ex. China CA to deteriorate 0.6%-pts to 0.9% taking
Source: J. P. Morgan
it back to 2019 levels. EMs will continue to reverse the pan-
demic-driven improvement despite moderating GDP growth The impact of strengthening domestic demand on external
largely because the drivers of growth are shifting increasing balances is perhaps most striking in CEE countries, where
towards domestic demand which will entail strengthening CAs are turning back into deficits amid overheating demand
import demand. Many countries (e.g.: India, Indonesia, Phil- conditions and exports that remains constrained by supply
ippines, SA, Thailand, CEE and Peru) will see their CAs issues. EM manufacturing exporters in general (e.g.: CEE,
swings to deficits over 2021-22 although HY EMs will still EM Asia) benefitted from the surge in global goods demand
maintain deficits well below pre-pandemic and 2013 levels. early in the pandemic, which coupled with import compres-
sion on the back of subdued domestic demand led to a signif-
Exhibit 28: EMX current account and GDP growth icant external tailwind. But both supply bottlenecks and the
Left: %oya; right: % of GDP (reverse scale) rebalancing of DM growth from the goods sector to services
have turned these dynamics around.
5 0.4
4 EMX capital flows show resilience

3 0.9 Capital flows have remained challenging for EM so far this
2 year. Last year, EM (proxied by the 20 large economies cov-
ered) witnessed net capital flows (including FDI, portfolio,
1 1.4
borrowings, and short-term) stood at -$88 billion. We have
0 GDP full balance of payments data for these economies only up to
-1 CA (right, reverse scale) 1.9 2Q21. In 1H21, net capital flows turned positive to $57 bil-
lion. Leaving aside China, which has continued to dominate
-2 the flow dynamics but for several idiosyncratic reasons asso-
15 16 17 18 19 20 21 22
Source: J.P. Morgan ciated with changes in its domestic regulatory structure, net
capital into EMX in 1H22 at $30 billion has more than offset
the total net outflow of $21 billion in 2020 (Exhibit 30).
The rise in terms of trade in 2021 has been an important tail-
wind for EM commodity exporters. However, this boost is
11
Exhibit 30: Cumulative capital flows Exhibit 32: EMX resident versus non-resident capital flows
USD billion USD billion
Inflow
400 EM 300 Outflow
EM ex China Net
300
150
200
0
100
0
-150
18 19 20 21
Source: J.P. Morgan 05 07 09 11 13 15 17 19 21
Source: Haver and J.P. Morgan
Despite continued strong bond inflows, the impact of the
Our long established workhorse model for tracking capital
regime change in China has clearly had a strong negative
flows, in which net capital into EM is driven primarily by
impact on other flows as, on a cumulative basis, inflows re-
EM-DM growth differential and the relative strength of the
main below the peak in 3Q20. In the rest of EM, the recovery
USD, also did not capture the flow dynamics because of the
in the inflows have been differentiated across asset classes.
unprecedented volatility in the growth differential, the sur-
While net FDI inflows have surged and commercial borrow-
prising evolution of the USD, and investors treating these
ings remained broadly flat, portfolio inflows were negative
dynamics as reflection of short-term reaction to the Delta
on a net basis (Exhibit 31).
wave rather than as a signal of underlying growth (Exhibit
Exhibit 31: EMX capital flows in 1H21 by type 33). Indeed, the stability in inflows despite the large negative
USD billion EMX-DM growth differential that opened up in 2Q22 (-
9.6%-pts, the largest since the 1997-98 Asian crisis) under-
250 scores the underlying resilience in EMX.
Inflow Outflow Net
200
Exhibit 33: EMX capital flows –model-implied versus actual
150 % of GDP
100
1.5
50
0 1.0
Model implied
-50
0.5
-100
FDI Portfolio Borrowings
0.0
Source: J.P. Morgan
The pattern once again underscores the rising importance of -0.5

resident capital flow dynamics. As we had noted earlier (see Actual
Emerging Markets: Inflows, Outflows, and Sudden Stops, -1.0
Morgan Markets, December 2018), while, in the past, (before 05 07 09 11 13 15 17 19 21 23
2013) non-resident flows dominated the capital dynamics in Source: J.P. Morgan
EM, resident flows have increasingly become important
(Exhibit 32). This is largely because several EM economies How the new COVID-19 variants evolve will once again
now run current account surpluses or low current account impact how investors view growth dynamics. Assuming that
deficits along with relatively less FX intervention to stabilize the excessive growth volatility is over, then based on our
the exchange rate. In fact, outflows have broadly matched growth and USD forecast, we expect net flows to turn mildly
inflows resulting in lower net capital inflows than in the past. positive again, but remain below the pre-pandemic average
In 1H22, non-resident inflows across all asset classes were given smaller EMX-DM growth differential and a modestly
positive. It is the outflows of residents than turned portfolio stronger USD path.
into net negative and borrowings broadly flat.
12
VI. The pandemic hurt potential growth... quickly. A shrinking middle and greater vulnerable popula-
tion implies a larger fiscal burden through a smaller tax base
We anticipate that the pandemic will have done permanent
and higher current expenditures. Middle-income households
damage to EM potential growth and scarring has likely oc-
tend to contribute the largest share to overall tax revenues,
curred to labor markets, household and SME balance sheets.
so, barring changes to taxation policies, EM economies may
While there are some evocative stories about why productivi-
face larger net fiscal burdens. On the expenditure side, a
ty is entering a new golden era, including leapfrogging of
larger vulnerable and poor population will require greater
digitization, our estimates of the drivers of TFP growth in
fiscal support through social assistance.
EM point to a continuation of subdued trends in productivity
growth.
Future potential growth could also be at risk from reduced
human capital investment, since the middle-income group is
Our top-down estimate of EM potential growth is 3.9% in
associated with greater spending on education and health,
2021-24 (and 2.5% for EMX) which would imply a 0.3%-pts
which supports development. Increased poverty and worse
decline for EM and a larger 0.5%-pts for EMX compared to
health and educational outcomes will further hinder EMs’
our pre-COVID estimates (Exhibit 34). Relative to 2015-19,
effort achieve the Sustainable Development Goals by
the downshift in both China and EMX potential growth will
2030. These dynamics can a take a toll on social and politi-
be more significant due in part to the pre-existing drags unre-
cal stability. Taking Latin America perhaps as a more ex-
lated to the pandemic (e.g.; demographics, economic nation-
treme example, even prior to the pandemic years of low
alism and trade protectionism).
growth and frustrated expectations following the commodi-
ties boom fueled a rise of social tension in much of the re-
Exhibit 34: EM potential growth – top-down model estimates
gion, manifesting in the electoral success of political outsid-
Pre-Covid Post-Covid
2005- 2011- 2015- ers in some countries and in a number of others spasms of
2020-24 2020-24 breakdown in social order.
07 14 19
EM 6.2 5.1 4.7 4.2 3.9
EMX 4.6 3.5 3.2 3.0 2.5 ...and a shift towards populism
China 11.1 8.0 6.6 5.5 5.3
EM Asia 8.2 6.9 5.9 5.2 4.9 EM will enter an electoral cycle from 2022, and a shift to-
EMAX 5.6 5.2 4.8 4.6 4.0 wards populism is already under way, especially in Latin
EMEA EM 4.6 2.5 2.5 2.1 2.0 America. The pandemic has taken a toll on social and politi-
LATAM 3.4 2.4 1.4 1.1 0.5 cal stability and even prior to the pandemic years of low
Source: J.P. Morgan growth and frustrated expectations following the commodi-
ties boom fueled a rise of social tension in much of the re-
gion. This has manifested in electoral success of political
…amid a shrinking middle income class… outsiders in some countries and sporadic episodes of break-
COVID-19 shrank EM’s middle income class and created down in social order in others. Following Peru’s surprise turn
larger vulnerable populations. Over the last decades the ex- to a leftist outsider, and in the wake of a tumultuous few
pansion of the middle-income population in EM has fueled years for Chilean politics, the political cycle will remain un-
consumption-led domestic demand and raised the profile of settled in the coming years in Latin America.
the EM citizen as a global consumer. A larger middle-income
class has enjoyed better developmental outcomes, including Colombia, and Brazil face presidential election cycles in the
education and health. But in 2020 COVID-19 dealt a blow to coming year, while Mexico is likely to see a recall referen-
middle-income populations, increasing the proportion of the dum on President AMLO. Eroding fiscal credibility has al-
economically vulnerable and lifting global poverty rates (see ready led to strong market stress in Brazil, while Colombia
“EM: Losing middle ground”). In our view, the middle- lost investment grade from two rating agencies. Debt dynam-
income group in EM is unlikely to recover quickly as it is ics are likely to remain under pressure, not just from strong
harder to re-enter the middle class than it is to fall out of it, fiscal demands, but also given the lack of a pro-growth agen-
especially as many EM economies face long-term scarring da. In Mexico, policy uncertainty has contributed to a dearth
from the COVID-19 shock. of private investment and economic stagnation. A similar
dynamic may constrain growth in the coming years in the rest
A challenge for economic development and fiscal positions. of the region.
Policymakers have to contend with fiscal and developmental
challenges should the middle-income group not recover
13
EM election calendar and previews in power. Agreeing a new IMF program before the elections
in 3Q next year seems unlikely, casting further doubts over
Exhibit 35: EM elections in 2022
Country Election type Date the sustenance of the current reform momentum.
Costa Rica Presidential & legislative February 6
South Korea Presidential March 9 Philippines: As the country seeks to recover from the
Colombia Legislative March 13 COVID-19 pandemic, which has left scarring on the econo-
Hong Kong Executive March 27 my, all eyes are on the next elections and who will take the
Serbia Presidential & legislative April* top posts. As President Duterte is unable to run again due to
Hungary Presidential & legislative April / May*
Philippines Presidential & legislative May 9 the single-term limit, the next president will be key in setting
Colombia Presidential May 29 the tone for policy-setting in social and economic aspects of
Lebanon Legislative May* the country. While the baseline case is for policy continuity
India Presidential July in the Duterte era, particularly in the infrastructure program,
Kenya Presidential & legislative August 9 the election landscape in the Philippines remains fluid.
Brazil Presidential & legislative October 2*
Angola Legislative TBC*
Source: National Democratic Institute, IFES, J.P. Morgan *Date not confirmed.
Costa Rica: At this early stage of the electoral race in which
there are 26 parties, front-runner and former President José-
Brazil: With recent polls showing low approval ratings for María Figueres of the PLN leads with 19% of the vote inten-
the current administration, the election cycle has already led tions. Undecided voters are still at 48%. Considering that a
to a shift in economic policy that dented the credibility of candidate needs 40% of the votes to avoid a second round
fiscal policy. Polls suggest polarization between left-wing between the two front-runners, a second round in early April
former president Lula and right-wing president Bolsonaro. At appears likely.
this point, the political space for centrist alternatives with a
more orthodox economic policy seems limited, but history Hungary. April’s general election is the first in a long while
suggests that public opinion a can shift dramatically as the in which there is a strong contender to defy PM Orban’s
election approaches. Fidesz. A fragmented opposition is running under a single
list, a strategy that proved successful to conquer the capital
Colombia: Colombia’s presidential first round election will city, Budapest, and which they now replicate at the national
take place on May 29, and President Duque cannot stand for level. The polls show Fidesz and the opposition coalition
reelection. With polls revealing perceptions the country is on neck and neck. In case Fidesz wins, it seems almost certain
the wrong track, leftist Senator Gustavo Petro, the runner-up that the party would lose its two-thirds majority in parlia-
in the 2018 election, is leading early polls by a wide margin, ment, and hence, its dominance over Hungarian politics is
and seems nearly certain to make it to the run-off. Depending likely to be reduced. In addition, the victory would likely
on his rival (too soon to forecast) his path is not guaranteed, result in a more conservative and prudent fiscal stance with
given his high and well defined negative ratings. March con- more leeway to tighten monetary policy too. In the event of
gressional elections and presidential primaries should better an opposition win a rapprochement with European institu-
shape the field. If he does prevail, he will face institutional tions, and after some legislative moves, faster access to EU
constraints, but probably emphasize a policy framework that funds could follow.
weighs on already concerning debt dynamics.
Macro risks up on debt
Kenya and Angola: African political parties rarely have Looking at macro and political risks holistically, our Emerg-
strong political leanings or ideologies but the pandemic woes ing Markets Macro Risk Score (EMRS) has worsened since
exacerbated socio-economic conditions across the continent end-2019 and is not expected to improve materially in 2022
and that will likely be a major political leverage tool for op- (Exhibit 36). Despite high inflation, overheating risks remain
position parties ahead of the 2022 general elections in Kenya contained amid negative output gaps. However, improve-
and Angola. Africa’s young population and their desire for ments in external balances and FX debt vulnerabilities have
change will again be tested next year after the record youth only partially offset the large increases in fiscal deficits and
voter turnout in Zambia earlier in the year, delivered a regime debt ratios. The largest deterioration in our since end-2019
change. In Kenya, the incumbent is ineligible for a third term has occurred in Turkey, Chile, Thailand, Romania, Colom-
so a regime change is plausible. Angola's incumbent is seek- bia, Peru and Romania. Political risks have risen main in Lat-
ing his second term in office but now faces a united coalition in America: Brazil, Peru, Chile and Argentina.
determined to stop the ruling party's reign after over 45 years
14
Exhibit 36: EM Macro risks current vs. 2019 vs. forecast ESG: EM steps up to more ambitious
EMRS score, (sorted by current score)
commitments
1.4 Latest EM countries made new pledges at COP26 to curb green-
1.2
1.0 Dec '19 house gas emissions and tackle other climate challenges,
0.8 2022 Forecast though commitments do not necessarily imply major near-
0.6 term impact and some are viewed with skepticism especially
0.4 where previous targets were missed, details lacking or time-
0.2
lines distant. Still, agreements are steps in the right direction
0.0
-0.2 amid increased political awareness. Under the final deal,
-0.4 countries pledged to “revisit and strengthen” their 2030 NDC
-0.6 targets by end-2022, though there is concern that the added
-0.8 caveat, “taking into account different national circumstances”
-1.0 High Medium Neutral Low could be used to side-step. Key to garnering more ambitious
-1.2
commitments from EM is the mobilization of a previously
TUR
ROU
BRA
COL
HUN
IND
CHL
PHL
ZAF
PER
THA
POL
CHN
KOR
ISR
TWN
ARG
URY
INDO
MYS
MEX
CZE
RUS
pledged, but under-delivered, $100bn of annual climate fi-

Source: J.P. Morgan. Higher EMRS scores indicate higher risk.
nance through 2025, from developed to developing countries.
Debt to GDP ratios in both the public and the private sector The financing target was missed in 2020 and the COP26
have risen to all-time highs. However, debt service ratios in agreement emphasized the need to deliver and scale up con-
most EM countries (excluding China and frontier economies) tributions, and urged DM to at least double financing to for
have been kept low helped by falling borrowing costs, rising adaptation by 2025. Many EM leaders consider current
debt maturities and moderate credit growth. Credit growth commitments from insufficient to ensure a just transition, and
picked on the back of last year’s policy stimulus, but the some (including Brazil and Indonesia) have conditioned their
pandemic increase in private sector leverage has not sus- climate targets on receiving sufficient funding.
tained in the recovery. The absence of credit growth also
suggests that beyond a reduction in private sector excess sav- EM countries step up to more ambitious commitments. The
ings, there is little fuel to sustain higher inflation next year. COP26 Glasgow Climate Pact included for the first time a
pledge to move away from fossil fuels, and though China and
As discussed in our earlier research (“This time it’s differ- India pushed for softer language (i.e. “phasedown” rather
ent”), while public debt-to-GDP dynamics depend on several than “phase-out” unabated coal power) the agreement is,
factors, trend GDP growth has a disproportionate influence nonetheless, momentous. Moreover, a number of EM coun-
on medium term debt dynamics in most EM economies. The tries (including Indonesia, Kazakhstan, Poland, and Vietnam)
typically long maturity profile of public sector debt means pledged earlier to accelerate the transition away unabated
that current debt ratios unlikely to be a significant source of coal power generation by 2040. China and the U.S. also
vulnerability (outside of frontier economies) at least in the agreed to enhance cooperation on climate change in a geopo-
near term. However, the deterioration in debt sustainability litically symbolic joint declaration. Analysts describe China’s
for some countries could become a concern if growth re- commitments around methane reduction as most meaningful
mains weak over the medium term and US yields normalize. despite not official signing up to the US-endorsed methane
pledge. Separately, India announced the country’s first net
After spiking due to the 2020 GDP collapse, the rapid re- zero pledge, though it fell somewhat short of expectations as
bound in EM growth and inflation accompanied by low in- G20 leaders had previously agreed to reach net zero “by or
terest rates helped drive EM interest-rate-growth differentials around mid-century”, rather than India’s 2070 target. Else-
sharply lower, helping to reduce debt ratios despite an aver- where, Brazil and Indonesia were notably among 137 coun-
age primary deficit of around 2%. With growth and inflation tries that committed to halt and reverse deforestation by
expected to slow and interest rates set to rise, the IRGD is 2030, and were among 103 countries (alongside Mexico,
projected to move higher again next year. However, it would Nigeria and Argentina) pledging to reduce methane emis-
still remain around 100bp below its 2015-19 average, accord- sions by 30% by 2030.
ing to our forecasts.
15
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Completed 30 Nov 2021 01:48 PM EST Disseminated 30 Nov 2021 01:48 PM EST

A Resiliency Test 2022 EM Economic Outlook

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A Resiliency Test 2022 EM Economic Outlook

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Economic Research

November 30, 2021

Special Report Table of contents

A resiliency test: 2022 EM I. Above-trend growth in EMX 2

Economic Outlook II. Recovery incomplete and uneven 4

III. Varying core inflation dynamics 5

I. Growth to remain above trend Exhibit 2: EM regional GDP growth

Exhibit 15: J.P. Morgan headline CPI inflation forecast

Source: J.P. Morgan, MariTrace.

Box: Shipping bottlenecks highly localized to

Exhibit 19: More EM CB to hike rates in 2022 J.P. Morgan

A corollary of the projected firming of investment cycles in -4.0 2021 vs 2019

4 EMX capital flows show resilience

The pattern once again underscores the rising importance of -0.5

pledged, but under-delivered, $100bn of annual climate fi-

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