Emerging markets: What’s next?

In the wake of unprecedented global economic shifts triggered by the US stimulus package and monetary policy adjustments, Treasury yields have surged to their highest levels in recent months, sparking concerns about inflation in the markets. This wave of change begs the question - what does this mean for emerging markets? A recent interview with Simon Quijano-Evans, Chief Economist at Gemcorp, shed light on the implications for emerging markets amidst this economic turbulence. Quijano-Evans highlighted the challenges facing emerging markets, such as soaring commodity prices and fluctuations in exchange rates. He noted that while some countries like Turkey and Brazil have raised interest rates in response to these economic fluctuations, others like South Africa are expected to keep rates stable in the upcoming meeting. This divergence in monetary policies across emerging markets could impact investor sentiment seeking higher yields. Quijano-Evans emphasized the need for central banks in emerging markets to remain vigilant and adapt to potential shifts in the global economy. With the US Federal Reserve projecting interest rates to remain steady until 2023, concerns loom regarding the impact of inflation and tapering on emerging markets. Quijano-Evans expressed skepticism about the Fed's assurances, indicating that any mention of tapering could trigger market reactions akin to the 2013 'taper tantrum.' However, he acknowledged that the market's response to rising Treasury yields might alleviate some pressure on the Fed to hasten monetary policy adjustments. In the midst of these challenges, African US dollar bonds have outperformed other emerging market bonds, a testament to Africa's effective handling of the COVID-19 crisis compared to other regions. This positive outcome bodes well for Sub-Saharan Africa's economic outlook in the coming months. Looking ahead, the injection of liquidity from the US stimulus package raises questions about its impact on emerging markets. Quijano-Evans highlighted significant inflows into dollar and local currency bond markets, signaling a shift in investment patterns amid global economic restructuring. A key concern raised was the unequal distribution of vaccines, with only 1% of Africans vaccinated to date. Quijano-Evans stressed the importance of ramping up vaccination efforts in emerging markets, particularly in Sub-Saharan Africa, to mitigate the economic impact of the pandemic. He called on the international community, especially the G20, to prioritize vaccine distribution to accelerate the recovery process in emerging markets. As the global economic landscape continues to evolve, emerging markets face a balancing act in navigating uncertainties and seizing opportunities for growth amidst shifting economic tides.