The legacy of the 2020 pandemic-led contraction will weigh on much of the emerging market (EM) countries in the EMEA region for years to come. Encouragingly, we appear to be entering what could be the final stretch of the pandemic and on the cusp of reopenings with the contours of a post-virus equilibrium coming into sight, with commodity prices rebounding, deficits narrowing and funding flows remaining robust.

COVID-19 and vaccines

  • Despite encouraging signs that global case growth as slowed markedly, EM EMEA is experiencing a moderate rise but fatalities are contained
  • Stern mobility restrictions remain in place across most of EM EMEA but we are on the final stretch of the virus and on the cusp of reopenings
  • EM EMEA leads the world on vaccine inoculation given accessibility to vaccines, first-rate infrastructure and centralised healthcare systems


  • We forecast a strong rebound in EM EMEA as economies normalise, outperforming most DMs given higher cyclical sensitivities of EM assets
  • Our EM EMEA real GDP projections are for 4.5% in 2021 (well above consensus 3.5%), with output back to pre-virus levels by Q4 2021
  • Private consumption will be the dominant driver of the resilience as household spending patterns return due to a swift deployment of vaccines


  • While the path is bumpy, we view relative cyclical outperformance and attractive FX returns for EMs that can manage rapid vaccine rollouts
  • Conditions supportive for undervalued EM FX are anchored on broad USD weakness, robust EM growth outlook and strong portfolio flows
  • RUB to gain on higher oil and improved external balances, TRY to rise should policy remain orthodox, CEE should benefit from a stronger EUR
  • ILS appreciation will continue on strong fundamentals whilst our bearish view on ZAR and RON remains given macro vulnerabilities and deficits


  • Investor appetite robust for ESG compliant portfolios in EMs and the market is willing to own them through the normal yield curve of the issuer
  • Green issuance is by far the largest type of structure used (USD103bn), and corporations/FIs far exceed sovereigns in terms of outstanding bonds
  • Within EM, the MENA region has climbed the most on ESG metrics in the last three years given the improvements in the ease of doing business
  • ESG “arbitrage" returns in EM remain too subjective given the lack of forward looking data and market standards – but will change with time


  • Lingering apprehensions surrounding virus setbacks – virus mutation, fresh restrictions, vaccine inefficacy and issues around inoculation
  • After major easing cycle, EM's risk premium cushion is low (negative in real rates in places), leaving it vulnerable to any pullback in liquidity
  • Limited room for further policy support for most EMs, with fiscal financing needs and debt service ratios high – credit rating implications
  • Inflation pressures should not be dismissed given higher food/energy costs, whilst corporates are keen to raise margins given a poor 2020
  • Labour market pressures could weigh on the pace of the consumption recovery, especially as stimulus measures are gradually removed

Winners and losers

  • CEE countries will outperform – policy flexibility with more scope than peers to offer bridging support with Poland remaining our favourite story
  • Energy exporters will muddle through – lasting impact of twin nature of oil-virus shocks, alongside stern fiscal consolidation to delay recovery
  • SSA region remains top of mind of our concerns – fiscal pressures, macro vulnerabilities and high debt ratios continues to mire the outlook

For more analysis on the outlook for EMs, listen to Ehsan's weekly podcast here.