Wednesday, May 25, 2022 / 09:10 AM / by S&P Global Ratings / Header Image Credit: The New York Times

Following the drastic economic fallout from more stringent-than-expected lockdowns, S&P Global Ratings earlier this week scaled back its forecast for China's GDP growth in 2022 to 4.2% from 4.9% in our previous forecast, according to its report published today, titled "Emerging Markets Monthly Highlights: China's Lockdowns Ratchet Up Risks". Our baseline scenario assumes that the current lockdowns will be lifted gradually; however, we believe that the government's general COVID-19 stance is unlikely to shift substantially any time soon.

A sharper-than-expected slowdown in China adds to current risks for the outlook. Nevertheless, emerging markets (EMs) that supply metals to China--such as Chile, Brazil, and South Africa--may benefit from China's economic slowdown if its government responds to pandemic-related weakness with more spending on infrastructure. Any pandemic-induced disruptions to supply chains heighten inflationary risks to EMs.

Recovery in some sectors is lagging that of others in EMs. According to sector-level data across key EMs, the median output of the 20 worst-performing sectors is still significantly below the pre-pandemic levels, with tourism-dependent sectors bearing the brunt. Tourism in EM Asia is heavily reliant on China, so any adverse developments in that country could further delay the recovery.

External financing conditions have worsened last month. Amid the likelihood that the Federal Reserve will tighten monetary policy at a greater-than-expected pace, exchange rates across most EMs have weakened, including those that have been performing strongly after the start of the Russia-Ukraine conflict (Brazil, Chile, Peru, and South Africa). Downgrades have spiked in April; however, they occurred mostly in Turkey and Thailand.