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These Emerging Markets May Benefit Most from the Rebound in China and the DM

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We’ve previously examined how various emerging market economies might weather the pandemic through four lenses: virus exposure, pre-existing macro vulnerabilities, exposure to global economic deterioration, and respective policy responses. As vaccine rollouts facilitate an acceleration in economic activity, we turn our attention to which emerging markets may be best positioned to benefit from the recovery in the developed markets and China. This analysis involves determining an EM country’s export orientation—in terms of  GDP share and types of goods exported—towards these engines of growth.

We estimate that global growth will accelerate by 6.3% in 2021, propelled by an expansion of 5.4% across the developed markets and 9.0% in China. However, the outperformance of these key economies indicates an uneven global pattern. The IMF acknowledged this disparity in its latest World Economic Outlook, stating that “economic recoveries are diverging across countries and sectors, reflecting variation in pandemic-induced disruptions and the extent of policy support.”1

The divergence is highly pronounced among emerging markets with Asia expected to grow by 8.5% in 2021 (and still strongly even when excluding China), while LatAm and EMEA are expected to grow at less than half of that pace—at 3.2% and 3.5%, respectively. The divergence is due to a combination of several factors ranging from slower vaccine rollouts to the lack of fiscal space for additional stimulus. While domestic demand will certainly play a role in supporting EM growth, countries with a robust export orientation appear poised to reap the benefits of the rebounding growth in the DMs and China.

Therefore, we have analyzed the relative shares of exports of goods and services in GDP for the emerging market countries in J.P. Morgan’s EMBIGD Index.2 A higher share of exports in GDP indicates that a country is more active in and open to international trade. Thus, the more it stands to benefit from stronger external demand.

Figure 1 plots a simple measure of export orientation (exports as a percent of GDP) against the share of each country’s goods exports that is bound for the DMs and China. The countries that are commodity dependent are grouped by their main export—i.e. fuel, minerals/ores/metals, and agricultural products. We calculated annual averages over 2017-19 given data availability and the distortions caused by the pandemic in 2020.

Figure 1: Exports as a % of GDP vs. Exports to DM & China

Source: PGIM Fixed Income and J.P. Morgan.

While using trade statistics for goods excludes international travel spending (logged as services exports and economically significant for some EMs), goods exports will be significantly more relevant in driving the EM recovery this year and next as the timeline for the normalization of cross border travel remains highly uncertain. 

We find that the countries in the top right quadrant of Figure 1 are more strongly export-oriented with a higher share of exports to DMs and China relative to their EM peers. Countries that are not structurally dependent on commodity products (grey triangles) dominate this space. Regionally, these well-positioned, non-commodity dependent exporters, such as Slovakia, Hungary, and Poland, are concentrated in Emerging/Central Europe where membership in the European Union is a significant positive in terms of export demand. These countries also tend to have a meaningful share of vehicle part exports, particularly to China. Similarly, Mongolia’s elevated share of exports to the DMs and China is due to its trading relationship with the latter: 89% of its exports, which are concentrated in minerals, ores, and metals, are destined for China.

Exporters of agricultural products (green circles), such as Argentina and Kenya, are heavily concentrated in the lower left quadrant, with simultaneously lower shares of exports to GDP as well as less exposure to demand from DMs and China. Protectionist measures in DMs are likely to negatively impact some of these exporters. Fuel exporting countries are more mixed, as Gulf Cooperation Council economies are much more export-oriented than their oil-extracting peers in Latin America and Africa. Additionally, exporters of minerals/ores/metals are heavily clustered around the median of both indicators. Although commodity prices are notoriously volatile, if the recent increase in most commodity prices is sustained through the remainder of the year, it could provide a welcome revenue boost to exporters.

Emerging markets encountered severe headwinds at the height of the pandemic, and those economies, such as South Africa and Brazil, with significant virus counts, pre-existing macro conditions, and changes in fiscal balances perhaps face the greatest challenges.

Yet, tailwinds are amassing behind the global economy with developed markets and China leading the way, and the momentum could create opportunities in certain commodity exporters, depending on the levels of specialization and the relative value of the bond pricing. However, our analysis of export orientation across emerging markets supports our preference for countries with high-export concentrations in non-commodity products amid the value-added features and the established trading relationships. These EM economies that are poised to benefit from the accelerating growth in the developed markets and China should continue to do so in the quarters and perhaps years ahead.

This material reflects the views of the author as of April 23, 2021 and is provided for informational or educational purposes only. Source(s) of data (unless otherwise noted): PGIM Fixed Income.

1International Monetary Fund, “Managing Divergent Recoveries,” April 2021.

2Refers to the J.P. Morgan Emerging Market Bond Index Global Diversified.

Giancarlo Perasso

Giancarlo Perasso

Giancarlo Perasso is a Principal, Lead Economist for PGIM Fixed Income, based in London. Mr. Perasso is responsible for formulating the macro-economic outlook for the CEEMA region to support alpha generation in rates, FX and sovereign credit markets. Before joining PGIM in 2012, Mr. Perasso was the chief economist of Matrix-Redux, a London-based macro hedge fund with a strong emerging market focus. Prior to that he was the Global Head of Emerging Market Research at West LB, where he developed market-oriented global research, focusing on both external debt and local markets (FX and fixed income). Mr. Perasso was also a Senior Economist for Central and Eastern Europe (CEECs) at Chase Manhattan Bank and JPMorgan-Chase, and a member of the Chase research team ranked No. 1 in Emerging Market Research in both 1999 and 2000 by Institutional Investor. Mr. Perasso has also been an economist for the Organisation for Economic Co-Operation and Development (OECD), and has been a consultant for the World Bank and a visiting professor at Franklin College. He has published papers in revered journals on the transition process in CEEMA and emerging markets more generally, is a contributor to www.lavoce.info, Italy’s leading economic website, and has been a visiting professor to the Universita' Carlo Cattaneo of Castellanza, Italy. He received a BA in Social and Economic Sciences from Universita’ Commerciale Luigi Bocconi, and an MA in Political Economy from Johns Hopkins University.

Elizabeth Doppelt

Elizabeth Doppelt

Elizabeth Doppelt, is an Associate for the Global Macroeconomic Research Team at PGIM Fixed Income. Ms. Doppelt joined the Firm in 2018 and is responsible for maintaining the team’s proprietary quantitative sovereign credit ratings model as well as providing macroeconomic coverage and analysis of countries in the CIS region. Prior to joining the firm, she worked as a Senior Policy and Markets Analyst at the Federal Reserve Bank of New York in the Markets Group and as a Senior Research Assistant at the Federal Reserve Board of Governors in the International Finance division. Ms. Doppelt received a B.A. in Economics and History from Tulane University.

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