Omicron is Fueling Uncertainty Across Inflation-Ridden Emerging Markets

Thursday, January 20, 2022 / 05:39 PM / by S&P Global Ratings / Header Image Credit: Sky News

New COVID-19 cases are rising in emerging markets (EMs) due to the Omicron strain. Currently, hospitalization rates in EMs seem to be moderate, but countries with low vaccination rates are still at risk. The new virus wave puts a strain on services and travel sectors, due to temporary lockdowns and widely imposed restrictions for international travel; however, the overall impact of this wave is uncertain, according to S&P Global Ratings' report published today, titled "Emerging Markets Monthly Highlights: Omicron Is Fueling Uncertainty Across Inflation-Ridden Emerging Markets".

Geopolitical risks have flared up. International security talks between the U.S. and Russia are currently ongoing, but the sides seem to be far from reaching the agreement and the risk of further escalation persists. The U.S.-Russia confrontation as well as public unrest in resource-rich Kazakhstan have contributed to a price rally in commodity markets.

Inflation is still climbing across most EMs. Rising food and energy prices are pushing inflation higher for most EMs. EMs continued to tighten monetary policies in December, but with exception of some Southeast Asian economies, inflation is still rising. The new COVID-19 wave can exacerbate existing inflation challenges due to supply-chain pressures.

Recent news from the U.S. suggest that financing conditions for EMs in 2022 may be tighter than previously expected. Amid a tight job market, accelerated inflation readings, and increasingly hawkish forward guidance, we now expect at least three hikes by the Federal Reserve in 2022. This may prompt EM central banks to pursue tighter monetary policies. Interest rates are already high in some EMs, for example in Latin America, and prolonged presence of high interest rates may slow their post-crisis recovery.

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