COVID-19: Financial conditions of emerging economies improve despite high inflation, Delta challenge

According to a report by Oxford economics, financial conditions in emerging economies, including India, is improving as there is abundant liquidity in the system, interest rates are at a record low and asset prices are high. ETV Bharat Deputy News Editor Krishnanand Tripathi writes about trends of economic recovery happening across the world during the ongoing Covid-19 pandemic

New Delhi: Despite a strong inflation and Delta induced global supply disruptions, the financial conditions in emerging economies, including India, are improving as there is abundant liquidity in the system, interest rates are at a record low and asset prices are high, said a report by Oxford Economics.

“Abundant liquidity should keep financial conditions for emerging markets favourable even as emerging markets come under pressure from rising inflation and weakening currencies force some central banks in these countries to tighten policy,” said the report.

According to an analysis by Tamara Basic Vasiljev, senior economist of Oxford Economics, stock markets of emerging economies are performing better and real estate prices are high except China where cracks in the country’s real estate market began to appear due to the Evergrande crisis. Today (October 21, 2021) morning, Evergrande shares recorded a 14% fall in Hong Kong stock market when trading in the company’s shares started after a 17 day break.

Though China’s Evergrande crisis still poses a threat, a much bigger problem is high inflation across several emerging economies that may force their central banks to tighten the monetary policy. The report said more emerging market central banks are joining the hawks’ camp with eight of the major countries hiking key policy rates currently and only Indonesia easing.

In India, the Reserve Bank maintained the status quo in policy rates announced early this month, which was the eighth time in a row when the RBI decided not to change key policy rates as it grapples with high inflation but needs to maintain the low rate and accommodative stance to support fragile recovery.

Inflation a cause of concern

Inflation remains a concern for most of the central banks for emerging economies. For example September inflation in Brazil was in double digit and in worrying range in other countries such as Poland and Hungary.

According to Oxford Economics, inflation in China and India is low and falling.

India’s retail inflation measured as consumer price index (CPI) was 4.35% in September, which was well within the Reserve Bank’s target of keeping it below 6% but high wholesale prices remain a cause of concern which has been in double digits in the last six months (April-September).

It is this high inflation that is keeping economists worried as most of the Central banks have started tightening their monetary policy which may eventually impact the investment, growth and stock markets.

Abundant liquidity, low policy rates

However, despite recent tightening of policy rates in several emerging economies, there is abundant liquidity in the world market and financial markets of emerging economies are bearing up the rate hikes.

“As global liquidity is still abundant (though retreating), rate hikes are still relatively cheap for EMs – 10-year government bond rates, interbank rates, and risk spreads all remain extremely low compared to historical levels,” said the report.

According to the researchers at Oxford Economics, rising inflation is a bigger cause of concern for emerging economies than it is for the advanced economies and they are also tightening their policy rates sooner than expected but despite this there was no threat to credit availability.

“To forestall a depreciation-inflation vicious cycle, some emerging markets are tightening much sooner than advanced economies even though the recovery from the pandemic crisis is embryonic,” they said.

Economists at Oxford Economics believe that emerging economies will be able to contain the inflation swiftly and effectively.

“Emerging markets interest rates and spreads remain extremely low, with EMBI spreads reaching record lows in most of these countries. Though policy is tightening, we see no signs of credit growth slowing significantly in most EMs, nor credit quality worsening,” said the report.

Another concern for emerging economies is a strong dollar as it has been gaining strength in recent times but researchers believe that emerging economies are not better equipped to deal with a strengthening dollar.