Emerging markets growth to remain subdued in 2016

MANILA, Philippines - Growth in emerging markets including the Philippines will remain somber this year but will see an improvement, according to investment bank UBS.

In its report titled “House View: 2016 and Beyond,”  UBS said “growth in EM will remain subdued, but should improve in aggregate.”

“We expect a 4.3 percent growth for developing economies, relative to 4.1 percent in 2015,” it said.

 UBS said the plunge in many currencies last year boosted competitiveness, which would allow weaker currencies to improve their current account positions and provide the potential for positive growth surprises.

 At the same time, UBS cautioned private companies to be watchful of their debt.

Private sector deleveraging would need to continue in several countries. Furthermore, the falls in many EM currencies mean that US dollar debts are now more burdensome, it added.

 Data culled by UBS showed that the stock of US dollar-denominated bonds from EM corporate issuers amounted to $1.3 trillion, more than double the 2009 amount.

“We see great vulnerabilities for companies that are heavily indebted in foreign currencies but do not generate a significant part of their revenues abroad,” it said.

 Some countries could see downgrades in credit ratings or outlooks in 2016,” UBS said in the report.

However, the Switzerland financial giant did not name which EMs could get downgrades in credit ratings this year.

“EM policy makers will look for opportunities to ease fiscal and monetary policy, but the scope to do this will be more limited in those countries which have experienced the most severe currency depreciation,” UBS said.

Thus, emerging markets would need to look for new drivers of growth, it noted.

They would also need to have some combination of reduced reliance on investment, commodities, and cheap capital, and a greater focus on structural and political reform.

“The way each country manages its own transition will define its years ahead,” UBS said.

At the same time, it noted many merging markets still have comparatively favorable loan-to-deposit ratios, and its banks are well capitalized on average.

“Favorable demographics in many emerging market countries mean that their growth story should be far from over. But only through this transformation will EM be able to find new drivers of growth,” it said.