Emerging markets are gearing up for their largest election year in decades, with investors focusing on fiscal responsibility and populist shifts that could unsettle markets and cloud the outlook for some major economies.
Emerging Countries and Elections
Countries where more than half of the world’s population lives and which account for over 60 percent of global economic output are heading to the polls in 2024.
Impact on the Global Economy
Election events range from Taiwan in January – a geopolitically significant event – to debt-stricken Ghana in December, as the country seeks to emerge from a debt crisis.
Challenges and Risks
These elections come amid a sharp rise in global borrowing costs – putting pressure on the most vulnerable economies even though an interest rate cut by the world’s major central banks is seen as a likely prospect in the near future.
Impact of Elections on Investors
For investors, elections can be categorized into three groups: those where the outcome is relatively clear, such as Russia or Venezuela; those where the outcome seems evident but is contested, such as India, Mexico, and Indonesia; and those with significant uncertainty, such as South Africa.
Financial and Populist Challenges
Elections in Argentina and Poland in 2023 showed that governments facing their voters often tend to loosen spending – a trend that can leave new governments in a tough position to retract these handouts.
Financial and Populist Challenges
Fiscal discipline is essential, especially after a series of external shocks ranging from the COVID-19 pandemic to Russia’s war in Ukraine and the rise in global yields, which highlighted the need for countries to keep spending in check.
Financial and Populist Challenges
Morgan Stanley sees financial risks stemming from pre-election spending as a key factor this year in South Africa, Romania, Russia, El Salvador, the Dominican Republic, and Uruguay.
Financial and Populist Challenges
The situation could be significantly affected after this year. The Institute of International Finance stated that the “tsunami” of elections in 2024 could exacerbate the already accumulated global debt, which is expected to reach $310 trillion by the end of 2023.
Financial and Populist Challenges
Some fear this could lead to a return of the so-called “bond vigilantes,” who punish generous governments by selling their bonds and pushing up yields.
Impact of Elections on Currencies
According to Citi analysts, who also warn that the election cycle in emerging markets might experience “less political discipline than investors would hope for” – they have studied the short-term effects that markets may face.
Impact of Elections on Currencies
While some elections may generate more volatility than others, currency markets are often the first to feel the nerves of elections, particularly in Latin America, according to Citi strategist Dirk Weller.
Impact of Elections on Investments
Kareem Shedeed, Head of Investment Strategy for the Middle East, Africa, and Europe at BlackRock, noted that the impact of a heavy election cycle on equity investment flows has already been observed in 2023, especially in Mexico and India.
Impact of Elections on Investments
Election is expected to take place in April or May in the world’s most populous country, where Prime Minister Narendra Modi is anticipated to win a third term.
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