S&P Global Ratings: EM economies outlook

The global economic landscape is fraught with uncertainty as the Federal Reserve's decision to delay interest rate cuts has implications for monetary policy normalization in emerging markets. S&P Global Ratings' Chief Emerging Markets Economist, Elijah Oliveros-Rosen, sheds light on the potential effects of this delay on countries like South Africa, India, and Mexico, whose recent election outcomes have added to policy-related risks. While many market commentators expected a September rate cut from the Fed, Oliveros-Rosen suggests that December is a more likely timeline for this adjustment. He points to the strong growth and high core services inflation as factors influencing the Fed's decision. The slow process of rate cuts is projected to extend into 2026, with a terminal rate of around 3%. The upcoming US elections are unlikely to significantly impact the Fed's timing, as it is considered an independent central bank maintaining focus on inflation expectations. The impact of Fed rate cuts on emerging markets, particularly those like South Africa that are yet to initiate reductions, remains crucial. The interest rate spread between the Fed and local central banks will guide the timing of rate adjustments. In South Africa's case, considerations of inflation, fiscal policy uncertainty, and the recent election outcome play a key role in determining the timeline for rate cuts. While initial signals post-election in South Africa have been positive, concerns linger regarding the stability and efficacy of the new coalition government. The growing geopolitical complexities and economic uncertainties are challenging investors to identify value within the emerging markets. Countries like China and India are in focus, with structural changes such as supply chain relocations and energy transitions driving investment decisions. Oliveros-Rosen notes that despite better growth projections in most emerging markets for 2024, growth rates remain below potential. Structural trends like near shoring in Mexico and energy transition in Africa, Indonesia, and Latin America attract investor attention. The forecasting of currency movements adds another layer of complexity to the economic landscape, with the South African rand facing bearish forecasts of hitting 19 rand against the US dollar. The strong dollar, interest rate differentials, and election uncertainties contribute to this outlook. If the Fed continues to delay rate cuts into next year, there could be significant implications for emerging markets. A stronger dollar, potential capital outflows, currency depreciation, and increased inflation could pose challenges for central banks in the region. The trajectory of future US monetary policy will be critical in shaping the macroeconomic baseline for emerging markets moving forward.