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Emerging markets: the worst blow of inflation and the least talked about | Economy

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While the media focus does not lose sight of the price boom in the European Union or the United States, the rest of the world is also dealing with a rise in prices that has more serious effects there. A recent report by Axa Investment Managers highlights this issue by looking at the impact of inflation on emerging markets. The main conclusion is that the blow is harder, since the characteristics of this type of economy are added to the global pressures, thereby aggravating the problem.

To put in context, analysts review the figures. “Annual inflation in the United States already set a 40-year record in June, reaching 9.1%. In the set of developing economies, excluding China from the analysis, it is now at 14%, a maximum not reached since 2008. In Mexico, in June, it marked 8% and in Turkey it shot up to 78%; in both cases, it is the biggest rebound in two decades”, they detail.

The relatively superior emerging vulnerability has a logical explanation. The shopping basket varies from country to country, but, based on the averages, both energy and food, the two factors that have become more expensive globally, weigh more in the expenditure made by a consumer in an emerging market than in which an American does. “In emerging markets, the weight in the energy purchase basket is around 10% on average, compared to 8.7% in the United States. For its part, food accounts for 27%, compared to 13.4% in North America”, they explain.

Beyond the global, the document identifies particular characteristics. The booms in wages that have occurred in several of the emerging markets would also be driving the rise in prices, according to Axa IM. This particularly harms the middle classes. “The countries of central and eastern Europe have carried out high increases in the minimum wage in 2022. These increases may cause higher costs, including costs that will be borne by those who have not benefited from the increase in the minimum wage. However, given the rate of inflation, the real minimum wage has fallen in these countries”, say the analysts.

On the other hand, there are the central banks. As the US Federal Reserve has raised interest rates due to the also soaring inflation in the US, the rest of the central banks of emerging countries find themselves up against a rock and a hard place. If they adjust monetary policy they endanger economic growth, if not, it can happen like in Turkey.

“Insuring inflation has become the main goal of most central banks. Interest rates have been raised in an attempt to maintain the currency’s credibility in emerging economies as a whole. In contrast, those countries that have not made these efforts have seen how inflation has gotten out of control, with Turkey being the best example,” they conclude. In this way, the characteristics of consumption in these countries and the less room for maneuver of the central banks have complicated the economic impact of inflation there.

Debt collection capacity compromised

Inflation has another perverse effect. The threat of defaults is also becoming significant in emerging markets. A report prepared by Allianz Trade, a shareholder of Solunion, identifies that loans worth 4.2 billion dollars are at risk in the most complex countries.

“As central banks around the world tighten their monetary policies to deal with inflation, financing costs are rising for companies, contributing to the return of insolvencies. In this context, recovering debt can be difficult. quite a challenge”, starts explaining the document.

After analyzing the ease of debt collection in 49 countries that represent 90% of world GDP and 85% of trade flows, experts conclude that Sweden, Germany and Finland are the three best countries when it comes to trying to recover Debt. On the other side, Saudi Arabia, Malaysia and the United Arab Emirates are at the bottom in how easy it is for foreign companies to get their money back.

Spain is in this ranking in the group of countries in which it is not so difficult to recover. If you look at the list from the perspective of developing nations, emerging countries bear the brunt.

“We identified 12 countries with a high level of complexity when it comes to debt collection in Europe (Bulgaria, Hungary, Poland, Romania, Greece, Italy). In Africa, Asia and Latin America, more than 60% of the countries are considered as very high or severe risk. Argentina, Colombia and Chile have this category of severe risk”, the analysts break down.

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