Emerging Markets' Growth To Slow Below 3 per cent: Fitch Solutions

New Delhi, March 24: Fitch Solutions forecast that emerging markets (EM) growth will slow sharply to below 3 per cent, marking their slowest pace since 2009. The combination of financial market stress hitting EMs, less policy space, weakening external demand and a rising number of localised coronavirus cases will weigh heavily on growth. 

“Although we have not seen many large localised outbreaks of COVID-19 (coronavirus) across emerging markets (EMs), we forecast EM growth to come in below 3 per cent in 2020. This will mark a sharp deceleration from the recent high of 4.8 per cent in 2017 and the slowest pace of growth since 2009 during the financial crisis, when EMs grew by 2.6 per cent in 2009,” Fitch Solutions’ report stated on Tuesday.

Fitch Solutions have already made several revisions in growth forecasts and expect more over the coming weeks, as an increasing number of countries experience outbreaks of their own and as more governments impose localised lockdowns and travel restrictions. It believes that growth in EMs remains susceptible to significant downside risks through four main channels.

“First, a sharp deterioration in financial market conditions typically results in weaker growth. Second, less room in general for policymakers to respond than in previous years. Third, weakening external demand given the sharp slowdown in China, the US, and Europe. Lastly, fourth, we believe that localised outbreaks in EMs could still occur, which would further dent global domestic economic activity, particularly as we believe the number of cases is under-reported across EMs, given much lower levels of healthcare access in many markets,” the report stated.

Global financial market stress has seen a sharp tightening of liquidity conditions for EMs, which we believe will weigh significantly on growth.

In another report, Fitch Solutions said the Indian rupee will persist on a long term weakening trajectory against the US dollar. It revised its forecast for the rupee to average Rs 77/$ in 2020 and Rs 80/$ in 2021, versus Rs 73/$ and Rs 75/$ previously.

“The Indian rupee has depreciated by about 7 per cent since our January forecast and has averaged Rs 72.10/$ in 2020 year-to-date. The rupee’s weakness initially began with a risk-off sentiment as a result of the central bank’s takeover of Yes Bank, which raised fears among investors regarding the banking sector’s stability. The drop has since been sustained by investor concerns around the growing COVID-19 pandemic, which is still causing a massive sell-off in global risk assets at the point of writing. We at Fitch Solutions are revising our forecast for the rupee to average Rs 77/$ in 2020, from Rs 73/$ previously,” the report added.