For the last six years, global monetary trends tended to affect emerging markets as a unit. First, near-zero interest rates in the developed world pushed yield-seeking capital into emerging stocks and bonds, then the “taper tantrum” sucked it back out. Today, however, their economic paths are diverging. Whether it’s sanctions on Russia dragging its entire economy to a halt or India’s economy finally delivering a positive surprise, the world’s emerging markets are once again charting their own courses, with growth rates ranging from a 1.5 percent contraction (Russia) to 6.8 percent (India).
Regaining mastery of one’s own economic destiny is a good thing. Unfortunately, none of those destinies seem overly compelling in the short-term, as both country-specific and regional risks loom large in the months ahead. Weak euro-zone growth and Russian sanctions threaten Eastern Europe. Low oil prices will hurt exporters in Latin America and Asia. And what if the U.S. does go ahead and raise interest rates in mid-2015? Overall, Credit Suisse expects the growth of emerging market economies to rise a mere 0.2 percentage points to 4.6 percent in 2015. Below, we consider the growth prospects for each region.
Eastern Europe, Middle East, and Africa (EEMEA)
Regional GDP growth in EEMEA is expected to fall for the fourth straight year in 2015, from 2.2 percent to 1.8 percent. But that’s largely due to Russia, where Credit Suisse sees no end to Western sanctions until 2016. Higher military spending and household stockpiling of goods ahead of potential shortages buoyed industrial output and consumer demand for much of 2014, but a weakening ruble, high inflation, tight monetary policy, and low oil prices are expected to thwart growth going forward. In a show of regional resilience, however, domestic demand led growth significantly higher in the Czech Republic, Hungary, and Poland this year, helping to mitigate declining exports to Russia and Western Europe. That trend is expected to continue next year in Poland.
Outside Eastern Europe, there are brightening hopes that 2015 will bring less turbulence than 2014 did. In Israel, exports slowed and investment fell during a three-month military conflict in Gaza, but with the crisis over, the economy should perform much better this year. Even South Africa, which Credit Suisse dubbed the most troubled emerging market economy just a year ago, should see its currency stabilize, fewer labor strikes, higher industrial output, and a doubling of GDP growth from 1.2 percent to 2.4 percent. In Turkey, where the lira was among the hardest-hit currencies in both the taper tantrum and an emerging markets selloff in January, lower oil prices should help improve all three of the interconnected economic ailments that led Foreign Affairs magazine to call the Turkish economy the most vulnerable of the “Fragile Five” – a large current account deficit, unstable currency, and high inflation. With the exception of Russia, 2015 looks like a year of modest improvement for EEMEA.
Overall Latin American GDP growth is forecast to rise from 1.2 percent to 2.2 percent in 2015. Setting the pace: Mexico. Though drug violence and low oil prices pose a long-term threat to foreign investment and growth, close proximity to the strong U.S. economy should help raise GDP growth from 2.3 percent to 3.9 percent in 2015. And although Peru, the world’s third-largest copper producer, has been hurt by falling copper prices, higher output from its mines should ensure the country grows faster than any of its Latin American peers in 2015.
But not all is rosy in the Southern Hemisphere, particularly for Argentina, Brazil, and Venezuela. If Argentina can’t strike a deal with holdout creditors early in 2015, there’s a risk of further peso devaluation and difficulty servicing international debt. Newly re-elected Brazilian President Dilma Rousseff will have her hands full in 2015 dealing with a corruption scandal involving the country’s oil company, Petrobras, paltry growth (0.6 percent), high inflation (6.5 percent), and the threat of a credit rating downgrade. Finally, Venezuela desperately needs to take measures such as devaluing the bolivar to ensure it can meet international debt obligations, but unpopular President Nicolas Maduro will surely be wary of difficult policy moves. Despite these headaches, however, Argentina and Venezuela are expected to grow – albeit slowly – in the coming year, after seeing their economies contract in 2014. Colombia is the only economy in Latin America that is expected to grow more slowly in 2015 than it did in 2014, as low oil prices and declining production promise to widen the current account deficit and force government spending cuts.
As for Asia, Credit Suisse is calling 2015 the year of three D’s – disappointing growth, macro cycle divergence, and a disinflationary environment. As we’ve written previously, low oil prices will lower inflation in many economies, while China’s ongoing economic slowdown will keep downward pressure on other commodity prices. While lower inflation levels will be a welcome development for high-inflation countries such as India, cheap oil will hurt producers such as Malaysia. Meanwhile, sluggish growth in Europe and Japan should weigh on Asian exporters.
China surprised the world with a rate cut on Nov. 21, but those that need to tighten macroeconomic policy ahead of the Fed’s rate hike (Indonesia, Malaysia, and the Philippines) are unlikely to be able to spend their way to growth. A few others, however, such as India, South Korea, and Thailand, may yet enact some stimulus, but Credit Suisse sees only one true bright spot in Asia next year – India. There, low oil prices will help sew up a large current account deficit and curb government losses on fuel subsidies. Analysts are also hopeful that structural reforms from newly elected Prime Minister Narendra Modi will jumpstart higher growth. While a rolling three-month measure of industrial output has started to inch higher in EEMEA and Latin America, it’s declining from relatively high levels in Asia. Each emerging market region faces its own specific challenges next year, but alone among its peers, Asia will enter 2015 in a cyclical slump.