Credit rating agency, Fitch Ratings, forecasts that more than a quarter of its rated emerging markets (EMs) will experience budget and current account deficits of at least 4% of GDP in 2022, against a challenging economic and financing backdrop.
The rise in the prevalence of sizeable twin deficits, Fitch said, primarily reflects the surge in budget deficits caused by the Covid-19 pandemic plus a rise in EM countries running larger current account deficits in the wake of Russia’s invasion of Ukraine and the ensuing jump in energy and food prices.
“For 2022, we forecast that the Maldives (B-), Rwanda (B+), Tunisia (CCC), Uganda (B+), Kenya (B+) and Romania (BBB-) will run twin deficits of at least 7% of GDP; the Seychelles (B+), Georgia (BB), Uzbekistan (BB-), Namibia (BB) and North Macedonia (BB+) will run deficits of at least 5% of GDP; and Cabo Verde (B-), Lesotho (B), Morocco (BB+), Turkey (B+), Benin (B+), Colombia (BB+), Pakistan (B-), Armenia (B+), Egypt (B+) and Ghana (B-) will run deficits of at least 4% of GDP.
“Sizeable twin deficits sit against an environment of slowing global growth, rising US Federal Reserve interest rates, quantitative tightening, a strong US dollar, high inflation and rising domestic policy rates.
“The surge in food prices is adding to social and fiscal pressures.
“Twin deficits can indicate macroeconomic imbalances and mean that budget deficits depend on foreign financing in net terms. That said, twin deficits in some EMs reflect project loans and are therefore effectively pre-financed,” Fitch said on Tuesday June 7.
In April this year, the World Bank indicated that the war against Ukraine and sanctions on Russia are hitting economies around the globe, with emerging market and developing countries in the Europe and Central Asia region expected to bear the brunt.
According to the World Bank’s Economic Update for the region, the region’s economy is now forecast to shrink by 4.1 percent this year, compared with the pre-war forecast of 3 percent growth, as the economic shocks from the war compound the ongoing impacts of the COVID-19 pandemic.
This would be the second contraction in as many years, and twice as large as the pandemic-induced contraction in 2020.
Ukraine’s economy is expected to shrink by an estimated 45.1 percent this year, although the magnitude of the contraction will depend on the duration and intensity of the war. Hit by unprecedented sanctions, Russia’s economy has already plunged into a deep recession with output projected to contract by 11.2 percent in 2022.
“The magnitude of the humanitarian crisis unleashed by the war is staggering. The Russian invasion is delivering a massive blow to Ukraine’s economy and it has inflicted enormous damage to infrastructure,” said Anna Bjerde, World Bank Vice President for the Europe and Central Asia region.
“Ukraine needs massive financial support immediately as it struggles to keep its economy going and the government running to support Ukrainian citizens who are suffering and coping with an extreme situation.”
By Laud Nartey|3news.com with additional files from Fitch and World Bank