September 2024, From the Field -
Inflation has come down across the board and is now largely moving into the rearview mirror, while growth concerns are moving forward.
Today, we’re going to take a look at three key themes that we are watching for the rest of the year.
The first theme is the transition that is taking place from a focus on inflation to a focus on growth. Inflation has come down across the board and is now largely moving into the rearview mirror, while growth concerns are moving forward.
The second theme that we are going to talk about is interest rates. Currently, there are two sets of emerging markets, one that has been able to cut rates throughout the year because inflation has come down, and a second group that, due to other concerns, such as currency stability or stickiness in their inflation, have waited on cutting. With the Fed cutting
interest rates that set of countries should see a window of opportunity to also
cut rates.
The third and final theme that we're going to talk about is the U.S. presidential election that's coming up. The political cycle in emerging markets is largely done for the year, with elections having taken place in Indonesia, Mexico, South Africa, and India. But the U.S. presidential
election will be the key focus as we head into November. Given the two candidates have staked out vastly different economic positions, we're likely to see increased rates and currency volatility as we approach that key date.
Thanks for joining us today. We hope you found this useful and look forward to sharing more insights in the future.
What does the rest of 2024 have in store for emerging markets (EM)? It will be important to keep an eye on developed market economic growth and whether the slowdown turns into a recession that drags down EM and weighs on investor sentiment. For now, EM growth is fairly steady overall, while inflation has moved into the rear view mirror as a concern for investors.
On the monetary policy front, the U.S. Federal Reserve moving to a cutting cycle is likely to open up the opportunity for new EM countries to also begin easing over the coming months. This should be supportive for EM local currency bonds, but the outlook for currencies is mixed, with uncertainty over the U.S. presidential election likely to stoke volatility.
The focus in markets has shifted from inflation concerns to economic growth worries. Although EM growth is fairly steady overall at present, there are divergences. Central and Eastern Europe, for example, is lagging other regions, while the two powerhouses of Latin America—Mexico and Brazil—are going in different directions with the former slowing while the latter is growing. Going forward, EM growth will likely be tested, especially as the economies of both China and the U.S. are slowing. How that evolves could be important for EM and broader risk sentiment. As the impact is most likely through the export channel and demand for EM goods, it will be important to monitor this area.
"The focus in markets has shifted from inflation concerns to economic growth worries."
On the external front, current account balances are in relatively good shape in major EM countries. Deficits are not as out of control as they are in some developed economies, although there’s a risk of some fiscal deterioration in nations where elections have taken place this year that resulted in surprise outcomes. In Mexico, for example, the ruling party won with a landslide victory, and despite pledges of fiscal responsibility, it will likely be challenging to adhere to fiscal rules given promises made not to raise taxes and increase social and infrastructure expenditures.
As of September 2024.
For illustrative purposes only. This is not intended to be investment advice or a recommendation to take any particular investment action. Actual future outcomes may differ materially.
Source: T. Rowe Price analysis.
EM countries can largely be split into two groups when it comes to monetary policy this year—those that have been able to cut interest rates and those that have not. The group that has been easing monetary policy, which includes Chile, Hungary, and the Czech Republic, are nearing the end of their cutting cycles. The second group is yet to start, but that could change soon.
The Federal Reserve kicking off its easing cycle is expected to open up the opportunity for those EM countries that have been waiting on the sidelines—due to either currency concerns or sticky inflation—to also begin cutting interest rates. This group could include Mexico and South Africa, as well as some Asian countries. However, the cutting cycle in the Asia region is likely to be shallower than for EM peers as the inflation problem was not as deep in Asia. One country that bucks the broader easing trend is Brazil—where the central bank looks set to begin hiking again soon amid stronger growth.
The outlook for EM local rates remains constructive as there’s potential for a new wave of countries to start easing monetary policy. For EM external debt, the backdrop is less positive as valuations are expensive versus history. But an encouraging year‑to‑date development in this area has been the progress made in key debt restructurings. Zambia, for example, reached an agreement with bondholders, while Ghana is also close to finishing its debt restructuring.
Within currencies, the outlook is mixed. Although medium‑term fundamentals are well anchored in EM, their currencies may struggle with uncertainty surrounding the U.S. presidential election. There’s potential for volatility as the race is tight and both presidential candidates have staked out vastly different economic plans.
Christopher J. Kushlis
Chief Emerging Markets Macro Strategist
Chris Kushlis is an emerging market sovereign analyst in the Fixed Income Division at T. Rowe Price. He is a vice president of T. Rowe Price Group, Inc. and T. Rowe Price International Ltd.
Mr. Kushlis has 15 years of investment experience, eight of which have been at T. Rowe Price. Prior to joining the firm in 2007, he was an advisor to the U.S. executive director at the International Monetary Fund.
Mr. Kushlis earned a B.A. from Middlebury College and an M.A. from the Johns Hopkins School of Advanced International Studies. He also has earned the Chartered Financial Analyst designation.
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