27 March 2020
Renaissance Capital holds online press briefing on forecasts for EEMEA during COVID-19

Analysts encouraged by a flattening of cases in Italy, see EM currencies as the cheapest since late 1990s, focus on countries best positioned for a rebound

On 26 March 2020, Renaissance Capital, a leading emerging and frontier markets investment bank, held an online press briefing on ‘Where are we in the struggle to make forecasts for EEMEA during COVID-19?’ for top international media, hosted by Renaissance Capital’s analysts Charles Robertson, Global Chief Economist, Daniel Salter, Head of Equity Strategy & Head of Eurasia Research, Yvonne Mhango, SSA Economist and Adesoji Solanke, SSA/Frontier Banks Analyst.

During his presentation, Charles Robertson underscored the real encouragement from the flattening of new COVID-19 cases in Italy, which appeared to peak last Saturday. The progression of the virus is fairly straightforward to monitor, according to Charles, who believes that US markets might see new cases peak in April. He stressed that emerging markets have beaten Europe in their lockdown-enacting measures, acting faster and more effectively overall if we judge from the number of cases per 100,000 population. Russia, South Africa, Turkey and Egypt have all acted earlier than many European countries – similarly to East Asia, where the virus is much more contained.

Charles pointed out that the further crash in EM currencies has taken them to seriously cheap levels, their lowest since the late 1990s, with the biggest currency downward moves in Latin America – Columbia, Brazil and Peru – all at 25%.

Commenting on the G20 virtual summit and the $5trn support package announced on 26 March, Charles said: “The G20’s focused set of measures appears to be aimed at supporting the US, EU and UK economies, and is not a global package of growth to support those hit hardest by the virus at a time of rapidly rising unemployment. The lack of detail is indicative – the G20 appears to have not recognised this is a global crisis that requires a global response.”

The key question for Daniel Salter was which of the countries would find it easier to rebound when lockdowns are eased. Daniel believes it will be easier for low interest rate countries where bond yields are low and have been stable or even falling over recent weeks. He added that developed markets are best positioned, followed by Emerging Asia: Taiwan, Thailand, South Korea, Malaysia, the Philippines, India and Vietnam – all of which are well placed to offer fiscal stimulus, with low yields and little or no increase in yields YtD.

Daniel’s data indicate that Morocco also looks fine, and Russia should be in good shape given fiscal savings of 9% of GDP and the rouble adjustment, while Kazakhstan has huge fiscal savings (~30%+ of GDP). For Russia, Renaissance Capital’s tentative scenario in the new reality, with both domestic and external restrictions to be prolonged, is at -0.8% YoY GDP growth for 2020.

Yvonne Mhango focused on Sub-Saharan Africa’s (SSA) oil exporters, which will be hit hard by the drop in oil prices, she said. This implies a sharp slowdown across all SSA economies, and SSA’s growth will fall to 1.3% in 2020, according to her estimates, vs her previous forecast of 3.5%. Slower growth implies fiscal positions will deteriorate across the board, she said.

Yvonne assumes that three of the region’s five biggest economies – Nigeria, South Africa and Angola – will contract, and the Nigerian naira will continue to come under pressure to depreciate as Nigeria’s external balances deteriorate. A sharp decrease in oil revenue implies a significant deceleration of GDP growth, and the Nigerian economy is expected to fall back into recession in 2020, according to Yvonne.

However, lower oil prices are positive for SSA’s oil-importing countries, especially those of East Africa, such as Kenya, and positive for their current account balances and their currencies. Inflation is likely to slow on the back of lower transport and energy costs, allowing for accommodative monetary policy, although this will be undermined by the COVID-19 related drop in global demand that will subdue GDP, she concluded.

The main factors flagged by Adesoji Solanke for the SSA banking sector were the COVID-19 implications, low oil prices, the devaluation of currencies, and deteriorating asset quality.

“Across the key markets we cover,” he said, “our view is that COVID-19 has negative demand and supply side implications for banks’ customers whether large, small or individuals. There are also growing operational risks stemming from branch closures, poor internet and energy availability for stay-at-home employees; and risks to earnings across interest and non-interest income as well. Overall, how bad this get depends on how long countries remain locked down and how quickly we get the economic engine moving afterwards.”

“For oil prices, the extent of potential damage depends on whether we see a “V” or “U” shaped recovery in oil prices. Banks have put hedges in place for many of their oil customers but not for all production, and these are also time-limited between 6 and 18 months.” “However,” he concluded, “banks are in a better position today to navigate a low oil price environment as the vintages they went into the 2014 crisis with have now been properly stress tested and they simply need to dust up the playbook – restructurings and moratoriums will happen but with impairment implications under IFRS 9.”