Emerging markets: risk on the rise

According to a recent World Bank report, sovereign risk has risen sharply in emerging countries. Indeed, in an overall context of a slowdown in global growth expected this year, several risk factors have been accumulated and could lead to a hard landing for these economies. The global context is already not favorable, with an anticipated deceleration of 1 point in the world GDP growth in 2022 to around 4%. In the emerging countries, this slowdown will be more acute, with a decline of nearly 2 points to 4.5%. One of the factors responsible for this slowdown is the sharp rise in inflation. Indeed, inflation is at its highest level for 11 years and the rise in prices does not only concern food and energy prices, but all categories of goods and services.  As a result, monetary policies have been tightened even though the recovery is still on its way. In addition, recent announcements of faster than expected monetary tightening in the US are expected to increase the devaluation of emerging currencies and capital flows, further pushing up prices. The loss of purchasing power due to inflation is weakening demand (and growth) and is expected to push another 100 million people into extreme poverty this year. Finally, a drop in tax revenues is expected, which should lead to increased indebtedness of these countries in a context of rising interest rates. The debt burden and the slowdown in demand could derail the most fragile countries. All in all, the risks are mounting and a more pronounced slowdown in emerging countries is therefore possible this year.