After the fall of 2008, the emerging EMEA region contracted by extreme levels. The Baltics, in particular, endured some of the highest current account deficits in the world as private sector debt levels reached unprecedented heights, driven by the lending boom that preceded the crisis.
Households in Hungary, Romania, Bulgaria, Croatia, Ukraine had accumulated extensive mortgage debt in foreign currency. When local currencies depreciated against the euro, the Swiss franc and the dollar, the real estate markets in some of these countries crumbled as borrowers – faced with higher debt-servicing costs – defaulted left, right and centre. In 2009, EEMEA saw real GDP fall by 4.7%, around the same rate as the eurozone at 4.4%.
The IMF, ECB and the Vienna initiative came to the rescue for some. And the EEMEA region started to recover, albeit some countries fared better than others. But we all know how the story played out - the most recent crisis has sent the EEMEA region into a tailspin. Again.
But analysts at UBS are optimistic the region will withstand pressures from the most recent global financial crisis this time around:
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...While emerging EMEA and the euro zone contracted by roughly the same pace in 2009, we believe EMEA should be in a position to achieve visibly higher growth rates than the euro zone in 2012/13. Following our latest downward revisions, we now expect EMEA to grow by 2.8% this year and 3.4% in 2013, compared with euro zone growth rates of -0.4% and +0.4%, respectively; so essentially, we expect EMEA to outgrow the euro zone by around 3pp
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What’s more, despite the acute correlation of business and capital market cycles between EEMEA and Western Europe, UBS reckons the emerging region can outperform its Western counterparts thanks to stronger monetary and fiscal policy tools:
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First of all, many countries in emerging EMEA have put their 'house in order' and re-established macroeconomic 'sustainability' through years of deleveraging. For example, the current account deficits of many countries have been drastically reduced and their fiscal position has improved. This implies that, unlike 2008/09, there should now be much less of a need to tighten macroeconomic policies.
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And that’s not all:
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Secondly, Russia should prove more resilient this time around than in 2008/09. Back then the collapse of oil prices and the ruble, combined with waning trust in the banking system, led to massive deleveraging which we do not expect to occur again, although the oil price risk – not least for the budget – remains substantial of course. Last but not least, while the global economy was almost universally depressed in 2008/09, there are more shades of grey this time around, with the US, Asia and other regions holding up better. This means that there is some scope even for emerging EMEA to 'diversify' away (within limits) from the euro zone. Turkey, for example, is actively strengthening its trade links to the Middle East and Central Asia.
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But Russia, in particular, is feeling the heat:
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The combination of accelerating food inflation and hikes in utility tariffs [in Russia] should mean that headline inflation starts to rise over the coming months, reaching around 6.5% by the end of the year. This will eat into households’ real incomes and is one of the main reasons (along with falling oil prices) why we expect the economy to slow over the coming quarters. Our forecast is for GDP to expand by 3.8% this year and by 2.5% in 2013. |
| UBS GDP growth forecasts for euro zone and emerging EEMEA (recent chnages marked in bold) |
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| Source: UBS |