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EM EMEA 2024 outlook mired in inflation dispersion and policy divergence

EHSAN KHOMAN
Head of Commodities, ESG and
Emerging Markets Research –
EMEA
DIFC Branch – Dubai
T:+971 (4)387 5033
E: ehsan.khoman@ae.mufg.jp

RAMYA RS
Analyst
DIFC Branch – Dubai
T:+971 (4)387 5031
E: ramya.rs@ae.mufg.jp

LEE HARDMAN
Senior Currency Analyst
Global Markets Research
Global Markets Division for EMEA
T: +44(0)20 577 1968
E: lee.hardman@uk.mufg.jp

PAUL FAWDRY
Head of Emerging Markets FX Desk
Emerging Markets Trading Desk
T: +44(0)20 577 1804
E: paul.fawdry@uk.mufg.jp 

MUFG Bank, Ltd.
A member of MUFG, a global financial group

Macro focus

Economic growth across EM EMEA has remained resilient this year in the face of severe headwinds from tight financial conditions, geopolitical conflict and, in parts of the region, a loss of access to external funding. As we approach the close of 2023, sequential growth has risen to an above-trend pace, and we expect annual growth to accelerate in 2024. However, this relatively rosy aggregate picture masks considerable cross-country rotation, with recent strong growth performers (Turkey and Russia) poised to slow and the current growth laggards (CEE region and South Africa) set to accelerate. Much of this growth rotation is being driven by divergent inflation cycles. Central banks that reacted decisively to last year’s inflation shock (CEE region and South Africa) are now seeing inflation return to target and can start to ease policy. By contrast, countries that either did not react sufficiently early to inflation (Turkey and Nigeria) or that are experiencing largely idiosyncratic shocks (Russia) are hiking rates now.

FX views

Emerging market currencies have rebounded over the past week driven by heightened speculation over earlier and deeper Fed rate cuts next year. The main trigger for the emerging market currency rebound was the surprisingly dovish policy pivot from the Fed. Chair Powell has clearly signalled that the Fed’s next policy move is now more likely to be a rate cut rather than a hike which could even be delivered as soon as in Q1 of next year in response to slowing US inflation.

Trading views

Well clearly not everything was priced with last week being one of those everything rally that saw significant FOMO function come into EM. In spite of developed stock markets continuing to significantly outperform EM ones last week was a huge week of inflows with India registering USD1.2bn of flows on Friday alone and Turkey registering multi year bond inflows. ZAR was the outperformer with a near 5% move immediately following the Fed and as can be the case many year ahead outlooks now having targets already hit in December.

Week in review

Central bank of Russia hiked interest rates by 100bp to 16.00%, while Inflation slowed in Israel and South Africa to 3.6% and 5.5% y/y, respectively.

Week ahead

Central bank meetings are scheduled in Turkey (MUFG:+250bp hike to 42.50%), Hungary (MUFG:-75bp cut to 10.75%), Egypt (MUFG: on hold at 19.25%) and Czech Republic (MUFG:-25bp cut to 6.75%).

Forecasts at a glance

In a world of tightening global financial conditions and questions about the liquidity implications of the now-finalised US debt ceiling, we see a degree of macro risks for EM economies in H2 2023, with external funding requirements the central concern. We expect EM growth to trough this year but remain below potential in the 2024 recovery. The silver lining is that subdued growth should cap inflation, facilitating monetary policy easing where external balances allow.

Core indicators

EM securities attracted around USD43.4 bn in November 2023 - with inflows into equities and bonds at US14.8bn and USD28.6bn, respectively.