Emerging markets with twin 4% deficits to hit record – Fitch

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People wearing protective masks walk at market in Bucharest

By Rachel Savage

LONDON – The share of emerging markets with budget and current account deficits of 4% of GDP or more is set to hit a record this year, ratings agency Fitch said Tuesday, as price hikes caused by Russia’s war in Ukraine compound the COVID-19 pandemic’s impact.

More than a quarter of emerging markets that it rates are forecast to have “twin deficits” of 4% or more of gross domestic product, Fitch said in a note, predicting that Tunisia, Kenya, Uganda, Rwanda, Romania and the Maldives will record deficits of at least 7%.

Russia’s invasion of Ukraine in February sent food, fuel and fertiliser prices soaring, while global interest rate hikes have increased turbulence, adding to the troubles of emerging markets already struggling to recover from the pandemic.

“Sizeable twin deficits sit against a more challenging financing backdrop of slowing global growth, rising US Federal Reserve interest rates, quantitative tightening, a strong US dollar, heightened risk aversion, high inflation and rising domestic policy rates,” Fitch said in the note.

“The surge in food prices is adding to social and fiscal pressures,” it added.

Fitch noted that commodity exporters’ current account balances are improving thanks to high prices, but said net commodity importers will “lose out” and only be able to adjust slowly to the inflationary shock.

It said that credit ratings were on a downward trend this year, with nine countries downgraded compared to one upgrade and a record 48% of emerging markets rated below A grade.

(Reporting by Rachel Savage; Editing by Tomasz Janowski)