The good start to 2019 for emerging markets and the global economy was spoiled by US President Donald Trump who toughened the US grip on international trade. In
Q2 19 we saw not only China striking back at the US tariffs, but also countries such as India and Turkey joining the confrontation with President Trump. In particular, the escalation of the tech war and rising geopolitical tensions in the Middle East are throwing a shadow of uncertainty over emerging markets looking forward to Q3 19.
Yet, major central banks around the world have prepared several injections to alleviate the pain of trade war and economic slowdown. This is good news for both developed and developing economies as, for now, the December 2018 'blood bath' seems to have been postponed (not avoided though), and such countries as South Africa and Turkey will continue to deleverage their balance sheets. Thus, the risk of another TRY crisis is decreasing on a macrofundamental basis. We have already seen that central banks in many emerging economies such as India, Kazakhstan, Russia, and Ukraine have already started cutting rates. We expect that more central banks such as Brazil and Turkey will join the monetary easing trend in Q3 19. On the other hand, those monetary authorities which were moving towards hikes three months ago, like Hungary or Poland, are now set to remain dovish despite a rise in inflation.
We expect that emerging markets currencies will be supported by carry hunters in Q3 19 . Despite more upcoming rate cuts by emerging markets central banks, the majority of developing economies will continue to see positive real rates. Good examples of that remain Brazil, Russia, Turkey and several frontier markets.
We believe that the China-US trade deal will be agreed when Trump faces significant financial stress on the US stock market. That could happen closer to Q4 19 . There is still a risk that Trump could start a trade war against the EU or sanction European companies on the Nord Stream 2 project. If that happens in H2 19, the biggest losers would be Central and Eastern European economies.
Economic growth in emerging markets is set to continue slower in 2019 than in 2018, but monetary easing is bringing hopes for improvements in 2020-21. Given stabilisation in currencies across many emerging markets, accelerated inflation is set to calm down further in H2 19. We now see several already green lights in the emerging markets' risks heat map becoming greener, while yellow lights could still turn red.
