S&P: External Environment For Emerging Markets Is Becoming More Difficult

NEW YORK (S&P Global Ratings) Aug. 17, 2022–Emerging markets (EMs) have been experiencing significant net portfolio outflows over the past few months, according to S&P Global Ratings (see attached report). Tightening financing conditions, expectations of economic slowdown in developed economies, as well as geopolitics are all contributing to portfolio outflows from EMs, particularly from China. External environment for EMs is currently worsening, and we expect pressures on EM assets to remain. A more polarized political landscape in some EMs also magnifies uncertainty, potentially amplifying capital outflows.

With exception of energy and food, commodity prices have mostly returned to their pre-2022 values. Expectations of global slowdown have lowered demand for most commodities, and particularly, industrial metals. Nevertheless, food and energy prices remain elevated. As a result, price trajectories across commodity markets have become less supportive for many EMs in terms of exports; however, they continue to fuel inflationary pressures, as energy and food prices remain above their pre-2022 levels.

Sharper-than-expected slowdown in the U.S. economy poses risks through trade and China-related knock-on effects. From a trade perspective (directly or via secondary trade impact), Mexico, Thailand, and Malaysia seem to be the most affected. However, if disinflation ensues from a weaker-than-expected U.S. economy, the Federal Reserve will likely (at least) pause its tightening cycle–an outcome that should help cushion the impact on EM economies by improving financial conditions and encouraging capital flows back into EMs.

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Source: S&P Global Ratings [This report does not constitute a rating action].