Five large emerging markets (EMs) needed to sustain significant medium-term primary fiscal surpluses to stabilise the debt-to-GDP ratio – Brazil, Egypt, South Africa, Colombia, and Mexico, Oxford Economics said in a note yesterday.
Most had scope to tackle ongoing fiscal challenges, but policies needed to be stiffened, the note said.
“Our comprehensive survey of our country economists covering 21 large EMs reveals fiscal risks are partially mitigated because those with the most urgent need for fiscal cuts also tend to be the ones with greater scope and the ability to implement them. Of the five with sustainability issues, only Brazil and Mexico have major obstacles to consolidation in 2024, in the form of elections.”
Oxford Economics said most EMs had budgeted fiscal consolidation in 2024, but of these consolidators, outcomes would likely disappoint markets in Colombia, India, Peru, and South Africa.
“Alarmingly, we find the budgets for Mexico, Peru, and Turkey to be expansionary, yet we predict fiscal overshoots.”
The legacy of the supply-shock era was still playing a major role on fiscal outcomes in several EMs, particularly Poland, Turkey, South Africa, Indonesia and Hungary, with transmission channels including the impact on interest payments, subsidies and other expenditures, and revenues.
Progress on longer-term fiscal issues such as fiscal rules and pension reform had tended to go backwards over the last few years, in the context of the social challenges of the supply-shock era.
Mexico and Brazil looked to have the most vulnerable combination of fiscal sustainability metrics and expansionary policies, though in Mexico’s case the election may be a temporary position after years of fiscal conservatism.
“In the next risk tier are those with adverse sustainability metrics, and policies that only partially address them – Egypt, Colombia, and South Africa. We have concerns over those with reasonable sustainability metrics but lax policies – Peru, Hungary, and Poland, whose new government may act to reduce fiscal risks,” the organisation said.