EMEA Outlook: Domestic Factors and Geopolitics Dominate Heading to 2024 Election Year
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The EMEA economies continue to be squeezed by elevated DM interest rates, hiking oil prices, EU and China slowdown. Country specific factors and geopolitics will continue to dominate EMEA outlook during 2024 election year.
- In South Africa, we are of the view that the headline inflation will fall to 4.9% in 2024 thanks to SARB’s sensitivity to inflation and loadshedding (power cuts) will partly relieve. We foresee the end to SARB tightening and easing to start in H2 of 2024, and some moderate political volatility during the year as South Africa will hold presidential elections in May-July, 2024. We see decreasing political uncertainty after the elections, and South Africa and China having recently signed agreements on cooperation in clean energy investments and electricity transmission would mean a stronger growth of 1.1% for South Africa in 2024.
- In Turkiye, increasing twin deficits, weakening Turkish Lira (TRY) and low foreign direct investment (FDI) continue to cause concerns over the Turkish economy. We forecast CBRT would continue increasing key rate in 2024, basically to cool off inflation, and this will dent GDP growth. We expect GDP growth at 3.5% and 2.2% in 2023 and 2024, respectively. We also foresee losses for TRY in 2024 as current account continues to deteriorate, and foreign capital inflow remains weak while we predict USD/TRY rate at 37.5 by the end of 2024. Inflation continues to be the core problem for the country, as we expect Q4 inflation to soar to 69%. Taking into account that upside risks emanating from increasing food and energy prices remain high for the country in 2024, in addition to the weakening currency, and expected hike in public spending before the 2024 local elections would cause 2024 average inflation to stand at 57%.
- In Russia, we foresee macroeconomic instability in 2024 taking into account that current account surplus is shrinking, inflation spiking, ruble weakening and presidential elections in March 2024 likely contributing to the political uncertainty. On the war front, we see a pause on territorial advance by Russia or Ukraine and increasing signs of exhaustion on both sides, as a pause and a frozen conflict with or without a ceasefire deal for a long time is likely, which can cause a fall in military spending coupled with tight labor market conditions in 2024 to suppress GDP growth. Our GDP forecast for 2024 remains as 1.3% in 2024. The inflation projections stay strong particularly due to a weaker Ruble, and demand-cost pressures stemming from high demand and lending. We predict annual average inflation to slightly fall to 5.1% in 2024 from 5.5% in 2023.
- Forecast changes: From our June outlook, we have increased the growth forecast both for Russia and South Africa due to higher than expected growth seen during the first half of 2023. We decreased Turkish GDP growth forecast due to ongoing economic problems, and lifted the inflation forecast for the country both for 2023 and 2024 as inflation expectations, weakening currency, and twin deficits set the scene.
EMEA Dynamics: Domestic Factors and Geopolitics Continue to Dominate the Outlook during 2024 Election Year
EMEA economies continue to be squeezed by the elevated DM interest rates, high oil and certain food prices, EU and China slowdown. However, country specific factors and geopolitics will continue to rule EMEA outlook.
2024 will be the election year for all three EMEA countries, and we expect election related populist spending will put further pressure on already struggling government budgets. We expect budget balances to deteriorate further in 2024, contributing both to the GDP and inflation prospects.
In addition to the worsening slump in the Chinese property market darkening global growth trajectories, the ongoing monetary tightening in the EU and the low domestic demand in the U.S. causing EM countries’ export growth to shrink. We see slowdown in China to be prolonged in 2024, with risks to the downside and this would risk wider spillover effects over the EMEA economies, fueling even greater uncertainty over the medium-term prospects, particularly considering China remains as one the main trade partners. European Central Bank’s (ECB) monetary tightening and its fight against the high core inflation deepens recession concerns in the EU, pressurizing especially Turkiye’s exports to its leading trade partner. Trade balances in all three countries are expected to deteriorate in 2024.
Inflation is still the major concern as it remains above the targets in three key EM countries, triggering monetary tightening cycles to be prolonged. Since we anticipate that demand for oil will rise during the second half of 2024, coupled with restrained supply, we forecast WTI to reach $90 by the end of 2024 and this will boost inflation in isolation.
Apart from South Africa, the growth trajectories decrease across EMEA countries in 2024 as the growth outlooks remain patchy. The projected weak growth will make job creation a lot harder, and we expect unemployment to stay high.
Another threat awaiting EMEA economies is the pressure over households stemming from high inflation outlook and low hikes in the nominal wages causing declines in real wages, that could mean some persistence in core inflation. Geopolitical tensions, supply-chain disruptions and financial problems also remain vivid, which darken the macroeconomic prospects of the EMEA countries.
Figure 1: South Africa, Russia and Turkiye GDP (% YoY)
Source: Datastream, Continuum Economics
South Africa
In South Africa, on the inflation front, we envisage prices to pick-up slightly in Q4 2023 ignited by strengthened loadshedding, global oil prices hiking and rand losing value, as we expect annual average inflation to stand at 5.9% in 2023. We see SARB remains worried about remaining inflation risks as an upward revision to 2024 CPI headline inflation forecast recently (not 2025) also hints in this direction. Despite inflation partly easing over the winter and South African Reserve Bank (SARB) halted monetary tightening, we think the pressure to the Rand remains high due to shrinking trade surplus, China slowdown, country risk premia in long-dated bonds and inflation expectations.
We are of the view that the headline inflation will fall to 4.9% in 2024 thanks to SARB’s previous tightening and as loadshedding will be partly relieve. Food price inflation continues to fall in the recent months and this is good news for the country. (Note: The food and non-alcoholic beverages inflation continued to drop from 9.9% in July to 8.0% in August 2023). Some further progress should be made with global raw material prices falling (here) and this is likely to lead to less food price inflation in S. Africa by the end 2023, but the termination of the Black Sea grain deal on July 17 and El Nino mean the outlook remains uncertain. Despite positive developments, housing and utilities price inflation coupled with surging water and electricity prices remain as threats for inflation. A weakening currency is another risks for the inflation outlook as its importance extends beyond direct import prices to inflation expectations. We expect gradual weakening of Rand to continue by the end of 2023 and our end year forecast is 19.20.
Strong SARB tightening in 2023 will likely feed through with a lagging during late 2023 and 2024. We foresee the end to SARB tightening and possible easing to start in H2 of 2024, as SARB recently hinted that 2024 rate cuts would likely be smaller (here). We see some moderate political volatility during the year as South Africa will hold presidential elections in May-July. The economy will be still supported by a trade surplus in 2024 coupled with probable FED and ECB easing, which can increase investor’s appetite for South Africa, but we expect a fall in trade surplus mostly due to global slowdown, particularly China.
Given the energy crisis in the country is set to continue in 2024, food prices globally hiked following the termination of Black Sea grain deal, and transportation bottlenecks remain, we think downward pressures on South African economic outlook would be more visible in Q4, triggering GDP growth to stand at 0.4% in 2023. (Note: SARB revised up the 2023 GDP forecast to 0.7%, due to a better trajectory of private investment, and it kept the 2024 GDP growth forecast at 1.0%, which reflects the uncertainty over future power cuts and logistics constraints). We expect South African economy to grow by 1.1% in 2024, in line with SARB forecast.
One reason why our prediction is slightly higher than SARB’s for 2024 is that we expect a positive change to occur in the electricity outlook. The country had targeted lifting the share of renewable energy in its power generation mix from 11% currently to 41% by 2030, and we think both private and government investments may accelerate in 2024, despite major reforms will have to wait depending on the 2024 election outcome. South Africa and China having recently signed agreements on cooperation in clean energy investments and electricity transmission.
On the government debt trajectory, the country still has need for large domestic and international financing. We think the government fiscal balance and debt trajectory would remain cloudy in 2024 as fiscal room remains limited to fund structural reforms, productive investments, social spending needs and renewable energy efforts despite effort enhancing revenue collections, and improving the institutional fiscal framework. The 2024 election will likely not help fiscal trajectory to improve. (Note: According to the IMF Fiscal Report, South Africa’s general government fiscal balance (% of GDP), which recorded -5.6% and -4.5% in 2021 and 2022, is projected to jump to -5.9% and -6.1% in 2023 and 2024, respectively, while the primary balance is also estimated to turn back to a deficit (-0.8%) in 2023 after hitting +0.1% surplus in 2022.)
On the political front, South Africa-U.S. relations remain intense due to the allegations on South Africa providing shipment of arms to Russia but we think U.S. will not react with sanctions against S Africa, avoiding a lasting economic impact on the economy.
Additionally, the approach of the 2024 general election will likely restrain private investment, as the ANC is at risk of losing its majority. We think a small ANC majority or coalition government could slow decision making on dealing with the power cuts, while a surprise healthy ANC victory could allow the ANC to continue to reduce power cuts and the lower the adverse growth and inflation impacts. We think a clear ANC victory would be a positive surprise if Ramaphosa remained president, but the election outcome is close to call this far out.
SARB remains seriously concerned over inflation risks, probably due to the pick-up in oil prices and the country is still struggling with ongoing power crisis and a weak Rand as other inflation shocks. This will likely sustain the tightening bias through the remainder of 2023/early 2024 and a serious debate could occur if WTI sustainably rises above $100 – not our baseline forecast. Our baseline forecast though is that SARB will not hike further, given the lagged impact of policy and as inflation is projected to be not too distant from 4.5%.
Figure 2: South Africa General Government Overall Balance and Primary Balance, 2014-2028 (% GDP)
Source: IMF
Figure 3: South Africa Inflation (YoY, % Change)
Source: Continuum Economics, Datastream
Turkiye
Increasing trade and budget deficits, weakening Turkish Lira (TRY) and low foreign direct investment (FDI) continue to cause concerns over the Turkish economy, and we expect this to be the case for 2024 despite various actions by the government to improve the current macroeconomic outlook. The budget deficit is causing fears in the markets that the government will start increasing spending before local elections planned for March next year, particularly considering AKP wants to “win” the big cities back.
Despite strong Q2 figure, we expect GDP growth to slow in the remainder of 2023 due to hawkish actions by the Central Bank of Republic of Turkey (CBRT) after the elections, fiscal actions like tax rate hikes aiming to suppress demand and squeeze lending, elevated inflation, and increasing trade deficit. We believe the steady decline in export revenues in addition to the country’s heavy dependence on imported inputs for exported goods, -which are increasingly expensive due to TRY devaluation-, continue to jeopardize GDP outlook in the upcoming quarters. In addition to this, we think that possible slowdown in the growth for the country’s main trading partners in the region coupled with geopolitical threats stemming from the ongoing Ukraine war might also hurt Turkish exports in 2023 and 2024. We feel recent fiscal actions like hikes in the tax rates will probably risk GDP growth in the near term by suppressing domestic demand. In addition, CBRT would likely continue increasing the key policy rate in 2024, basically to cool off inflation, and this will also curb GDP growth.
On the other hand, we also think it is highly possible that fiscal spending and stimulus will soar again in Q4 2023 and Q1 2024 as the local elections are planned for March 2024, which will stimulate growth. The growth can also be supported partly by envisaged increase in public investment projects, as the government promised to build temporary residences for earthquake victims and this is in progress. The reconstruction efforts are expected to provide a boost to domestic demand. Given all of this, we expect GDP growth at 3.5% and 2.2% in 2023 and 2024.
Medium Term Plan (MTP), which was announced on September 6, draws a more positive trajectory for Turkish economy in 2024-2026. MTP expects Turkiye's GDP to grow 4.4% this year, 4% by 2024, 4.5% by 2025, and 5% by 2026. Driving a turnaround toward more orthodox policies since June, we interpret the new program intends to help the country to improve the current account balance (CAB) by triggering exports (and cutting imports), cutting the budget deficit, cool off inflation and support strategic investments in the long-term, to help sustain high GDP growth. Turkey is helped by its population dividend, with the labor force also set to grow at in the next few years. The shift back towards more orthodoxy policies should also help productivity. However, we consider Turkiye also requires structural reforms to enhance productivity to achieve 5% growth by 2026, such as encouraging job creation and investments improving productivity, reallocating workers across productive sectors, labor training focused on catching the latest manufacturing and technological developments and redesigning investments support scheme. In addition, the forecast pick-up in GDP growth by MTP to 5% by 2026 appears to be optimistic, while getting inflation down to 8.5% by 2026 will be difficult to achieve. Our forecasts stand at 3.5% GDP growth, and 31.4% inflation by 2026.
Slowing the pace of TRY decline is important in cooling down inflation given FX pass-through from a weak TRY as currency fluctuations continue to prevail. We see losses for TRY in 2024 as current account continues to deteriorate, particularly imports growing faster than exports, and foreign capital inflow remains weak. We see the USD/TRY rate at 30 and 37.5 by the end of 2023 and 2024.
Given forward guidance by the CBRT with disinflation beginning in 2024, and macroeconomic stability forecast beginning in 2025, we are of the view that CBRT has shown determination in monetary tightening by hiking the rate from 8.5% to 30% in only three months after the May elections. We continue to foresee that the CBRT will hike the policy rate to 38.5% gradually through the end of 2024, until inflation is under better control. Despite the Central Bank continues to seek to regain credibility and restart foreign inflows through the shift to traditional economic policy moves, restoring confidence will take time.
Inflation continues to be the core problem for the country, as we expect annual average inflation to soar to 55.6% in 2023, and Q4 inflation to stand at 69%. Taking into account that upside risks emanating from increasing food and energy prices remain high for the country in 2024, in addition to the weakening currency, and expected hike in public spending before the 2024 local elections would cause 2024 average inflation to stand at 57%. (Note: Inflation continued to gallop along and increased to 58.9% y/y in August from 47.8% y/y in July). Although MTP is projecting inflation to be 33% in 2024, we think the road to glory looks bumpy, taking into account that upside risks emanating from increasing food and energy prices remain high for the country in 2024, in addition to the weakening currency, and expected hike in public spending before the 2024 local elections. Despite anti-inflationary actions, though, deterioration in pricing behavior remained strong in mid-2023 as buoyant demand allow companies to pass their cost hikes directly on to consumers while Turkish households struggle with escalating costs, increases in taxes and the eroding value in TRY bank deposits. With its recent maneuvers, CBRT aims to encourage banks to slow loan growth and, in turn, slow private consumption growth.
Another significant matter worth pondering is the current account deficit (CAD). According to the figures announced by Central Bank of Turkiye (CBRT) on September 11, the current account balance registered a $42.3 billion deficit in January-July, nearly matching the government’s year-end forecast of $42.5 billion that was outlined in the MTP, which puts more pressure on TRY. (Note: The MTP projected current account deficit is expected to be $42.5 billion in 2023, and $34.7 billion in 2024.)
The ballooning CAD, -mostly triggered by the increasing energy costs, and imports growing faster than exports-, and international debt service requirements would likely exacerbate the need for the foreign exchange in the country in 2024. The government hopes to fill in the gap by tourism revenues or via a possible hike in the export revenues following the devaluation, but these might have a limited impact. Attracting foreign direct investment (hitting historical low levels in the last three years), and winning back investors’ credibility continue to be a top agenda item for Turkiye in 2024.
Figure 4: Turkiye Inflation (YoY, % Change)
Source: Turkstat, Continuum Economics
Russia
Taking into account that the current account surplus is shrinking, inflation spiking, ruble weakening and the Ukraine war drags on, we foresee macroeconomic instability to remain in 2024.
Despite the cloudy macro outlook, our forecast for Russian GDP is to grow by 1.7% in 2023. There are various factors for our reasoning. First, increased war related defense spending and strong consumer demand are continuing to boost industrial production amid greater outlays on social support and higher wages. Despite this, Central Bank of Russia (CBR) considers the recovery of economic growth is close to completion as the utilization rates of manufacturing capacities have reached peak levels, and unemployment levels hit the lowest figures in Q3 2023, signaling a partial slowdown over the horizon due to staff shortages and a possible fall in the utilization rates in the remainder of 2023. Strong monetary tightening in August and September is also expected to suppress demand and imports, and squeeze lending with lagged effects too.
On the war front, which we think will be one of the key determinants over the economy in the short run, we see a pause on territorial advance by Russia or Ukraine and increasing signs of exhaustion on both sides. We forecast there could be a pause and a frozen conflict with or without a ceasefire deal for a long time, which can cause a fall in military spending coupled with tight labor market conditions in 2024, thus can suppress GDP growth as well.
In this respect, our GDP forecast for 2024 remains as 1.3% in 2024 while sanctions on Russia’s energy sales leading to a steady weakness in export revenues, coupled with growing imports, would continue to jeopardize the GDP expansion in 2024. Increasing financial burden in addition to aggravation of staff shortages, elevated inflation, and risks posed by the sanctions darkens the GDP outlook for 2024.
Inflation continues its rise recently. The inflation projections stay strong particularly due to a weaker Ruble, and demand-cost pressures stemming from high demand and lending. Considering that CBR is actively aiming to cool off inflation via key rate hikes, we think this can suppress prices in the upcoming quarters with lagged impacts. We predict annual average inflation to slightly fall to 5.1% in 2024 from 5.5% in 2023.
Concerned about higher inflationary pressure seen across an increasingly broader range of goods and services, and growing domestic demand exceeding capacity, we forecast CBR would continue increasing the key rate in the remainder of 2023, slightly up to 13.5% (depending on the course of the inflation in Q4), considering inflation is quickly deviating from the target in the current framework. We believe that recent hikes would encourage banks to slow loan growth by adjusting their credit and deposit rates and in turn slow private consumption and limit imports. We predict the rate will be 11% at the end of 2024 as the Bank could start easing in Q3 2024 if inflation and ruble would allow. (Note: CBR updated its projections of the key rate to 13-13.6% for the end of this year. The key rate is expected to stand at 11.5-12.5% in 2024 (up from previous 8.5-9.5%)).
On the currency front, it appears buoyant public sector and consumer demand contribute to pump up imports which has been a triggering factor for the Ruble to lose value. Increasing consumer spending seems supported by the expansion of lending and increased real wages. According to the CBR, high demand for imports coupled with reduced exports is a key factor of the ruble’s depreciation in 2023 and will continue to be the case in 2024. We expect inflationary expectations and currency volatility to remain high in 2024. All of this mildly uncomfortable for the CBR, while the authorities may also intend to allow a moderate pace of real exchange rate decline to sustain competitiveness during a period of a hawkish CBR’s stance.
2024 will be the election year for Russia, and the country will choose its president in March 2024. Putin remains as the strongest candidate according to various polls and we think he would win the elections as he is seen as the most popular political figure in Russia. We expect election related populist spending will increase putting further fiscal pressure on already struggling government budget.
Figure 5: Russia Trade Balance, Exports and Imports (Million $)
Source: Datastream, Continuum Economics