A year ago, while emerging markets grappled with whether they could afford to lock down their economies, richer governments side-stepped the dilemma by doling out giant fiscal support packages.
Today, a big question the developing world faces is whether to raise interest rates to curb inflation — another problem that western central bankers have so far been able to delay.
More so than in the west, rising prices already pose a threat to the economic stability of emerging markets. One reason for that is the rapid increase in global food prices, which are now near their highest level in a decade, according to a closely watched UN index.
That price surge mirrors what happened before the Arab Spring protests of 2010 and 2011. “Last time it was the Middle East,” said Hasnain Malik, emerging market strategist at Tellimer, a consultancy. “Who’s to say the next time won’t be in parts of Latin America or Asia?”
How to deal with the issue is dividing emerging market central banks into inflationary hawks or doves. In Latin America alone, every major economy has now surpassed its central bank’s inflation target.
In the hawkish camp are countries such as Brazil and Russia, which have increased rates multiple times this year to begin to bear down on rising prices.
In Moscow inflation is a particularly sensitive issue ahead of this month’s parliamentary election amid soaring food prices. Last week the central bank showed its hawkish credentials when it warned of a 2008 style financial crisis if global inflation was not kept in check.
It has already raised rates by 2.25 percentage points to 6.5 per cent, and another rise is expected on Friday.
Brazil’s central bank has also tried to get ahead of rising prices, lifting its policy rate from a record low of 2 per cent at four successive policy meetings.
But inflation has continued to rise as the Brazilian real has slumped against its trading partners and as investors have been unnerved by president Jair Bolsonaro’s response to the coronavirus pandemic and his increasingly anti-democratic rhetoric.
By contrast, among emerging market doves, which include Turkey and Poland, governments are openly driving for growth and prices are rising fast.
In Poland, where the nationalist governing PiS party is running an expansionary budget, inflation has hit a decade high of 5.4 per cent — prompting one former central bank chief and government critic to warn that failing to squash rising prices would risk a “catastrophe”.
Yet as Adam Glapinski, the dovish current head of Poland’s central bank, said this week, lifting borrowing costs would be “very risky”. On Wednesday, the bank left its benchmark rate at 0.1 per cent.
In Turkey, meanwhile, prices are surging 19.25 per cent as the economy grew almost 22 per cent in the second quarter.
Sahap Kavcioglu, the central bank governor, has pledged that the bank’s policy rate, currently 19 per cent, would remain above inflation. But on Wednesday he said the bank would base its policy on core inflation rather than the higher headline figure, undermining that promise.
Timothy Ash of BlueBay Asset Management said Kavcioglu “will cut at the very earliest opportunity”. Since 2019 President Recep Tayyip Erdogan, a self declared “enemy of interest”, has fired three central bank chiefs after they tightened policy too much.
Analysts say that how hard governments locked down to fight the pandemic has had a determining inflationary role.
Those countries that did not seek to close down their economies are now experiencing faster growth and more inflation, as in India.
“For those [governments] that absorbed the pain of illness, hospitalisation and death from Covid, the flip side is that they allowed their economies to breath,” said Malik. “That means activity is carrying on and driving up inflation.”
In countries that locked down harder the opposite is true, as in South Africa and parts of Asia.
In Thailand, which at present has some of the world’s harshest lockdown restrictions, inflation more than halved to 0.02 per cent in August. In South Africa, which locked down heavily last year and has nevertheless been hard hit by Covid-19, inflation fell in July to its lowest in three months.
In such countries “there is really a deflationary story going on,” said Tatiana Lysenko, lead emerging markets economist at S&P Global Ratings.
As for China, which has taken a zero-Covid approach to the pandemic, producer prices are rising, spurred by rising international demand. But consumer price inflation has fallen to about 1 per cent and the central bank is expected to ease monetary policy to keep the recovery on track.
It is a question for policymakers everywhere: which is worse, stagnation or instability. But in emerging markets the stakes are arguably higher if inflation gets out of control.
Even among the hawks, only Russia currently has interest rates higher than inflation. The rest may have to raise their rates much further yet if they are to bring prices back under control.
Additional reporting by Ayla Jean Yackley in Istanbul