Emerging markets — Risks are high, but Australia’s major export markets recovering

Emerging markets (EMs) will enter 2021 vulnerable to further economic and financial stress amid the ongoing COVID-19 pandemic. Although the IMF expects an economic rebound in 2021, this year’s deterioration in growth and public finances will leave many EMs with higher government debt burdens. For many EMs, exposure to commodities and tourism could result in greater economic scarring and prolonged weakness in government and corporate finances. Moreover, the resurgence of the virus in Europe, the US and some EMs could undermine economic recoveries and renew financial market volatility, resulting in tighter financing conditions. Amid rapid rises in government debt and central banks’ diminishing space to further ease monetary policy, many EMs will find it difficult to stimulate their economies if the pandemic becomes protracted.

To assess the countries most exposed to these risks, Export Finance Australia have reviewed a selection of EM countries on five indicators.

  • External position—what is the external debt and reserves position? Is the current account in deficit and how far has the currency deviated from its long-term average?
  • Domestic position—how leveraged is the private and public sector?
  • Economic stability—what is the growth and inflation outlook? How reliant is the country on commodity exports, given the volatility in global commodity prices?
  • Policy effectiveness—how effective is the regulatory environment and how severe are political risks?
  • Market implied ratings—market risk premiums on foreign currency denominated bonds are used to give an indication of market risk appetite.

Based on these indicators, many EMs in the Asia-Pacific (APAC) region rank in the less exposed half of the table. This reflects relatively robust external buffers, lower sovereign risk and stronger economic prospects beyond the COVID-19 pandemic. Malaysia is the highest ranked APAC country, benefiting from its large, diverse and highly competitive economy, solid institutions and a track record of effective macroeconomic policymaking. The Philippines is not far behind, given the country’s strong economic fundamentals, moderate government debt and robust external position. Demonstrated economic and financial stability amid ongoing political risk further supports the Philippines’ creditworthiness. Elsewhere, Indonesia, China and Thailand have some policy room to withstand further global economic and financial volatility.

By contrast, Argentina, Mongolia, Egypt, Pakistan, South Africa and Sri Lanka start from a relatively weaker position to handle downside risks. In general, these countries have relatively poorer public and external finances, are suffering deeper economic contractions and have weaker governance and institutions to counter shocks. Notably, though, these countries account for 1% of Australia’s exports, indicating minimal direct exposure.