Emerging Markets Strategy 28 October 2020
- As EM exports return to pre-pandemic levels, countries’ performances (measured as share of the total) have diverged significantly.
- The differences reflect export performance in terms of price (including FX effects) and volume (i.e., supply changes affected by the pandemic), as well as shifting global demand for certain products.
- China has been by far the greatest beneficiary, followed by Taiwan and Poland. On the other hand, Russia (due to oil), Korea, India and Mexico have retraced the most. The big FX under-performers (TRY, BRL, ARS) have not seen a significant export boost.
Last week (here) we introduced our analytical framework to rank countries according to the magnitude of their combined stimulus efforts in response to the pandemic. Today we examine what has taken place in terms of export performance, a key indicator for the sustainability and strength of each country’s recovery. Previously, we analysed the health of the external accounts across EM countries, as well as the implications for FX valuations (here).
In this piece we do something simpler: we rank which countries have gained and which ones have lost market share of total EM exports (focusing on the largest 23 EM exporters). We think the metric will gain importance as global demand stabilizes.
We take the average for July and August and compare it the same period last year as our measure of the shifts in implied competitiveness that have taken place since the onset of the pandemic. The results are presented on the table to the left. Given that they are shares of the total, the gains in some countries have to come from losses in others. The absolute change in the share also reflects the relative size of the countries’ exports, so in some cases the absolute number is less relevant.
We think this is a nice way to summarize the different factors that have affected exports:
- Direct changes in export prices, which is most notable for highly concentrated commodity producers;
- Supply side shocks as some countries have had a harder time bringing production back up;
- Changes in the product composition of global demand (more industrial and medical products, for example), some of which might be structural in nature;
- Importantly, the impact of relative FX changes compared to competitors.
This also controls for the overall level of global export production, as they are measured as relative market shares. It also highlights changes that could outlive the pandemic, given that shifts in market shares tend to have some lasting effects. We have shown this for the case of Mexican competitiveness in the US import market over the past few years (details here).
China and industrial exporters are gaining ground…
The clearest conclusion is China’s significant increase in EM export market share in just the span of a few months, from around 36% in the summer of 2019 to slightly more than 40% this year. Indeed, this is the highest Chinese market share in a while, which holds for different time samples following the pandemic. This is the result of a much more resilient production chain as contagion rates have been significantly lower than in the rest of EM, as well as more global demand for specific (medical) products, especially at the onset of the virus.
Even if this edge vs the rest of EM narrows over the next few months, it will have significant longer-term implications, as it shows China’s ability to capture market share despite FX appreciation against most competitors.
The two other economies that have gained absolute market shares are Taiwan and Poland. The absolute values are smaller given their smaller exports, but they are very telling of their capacity to gain a slice of the global market. Both countries’ main exports are concentrated on industrial equipment (electronics, machinery, cars, etc.), which have been very resilient during the past few months.
Their gains are interesting compared to Mexico’s loses, even as the MXN has depreciated more than both throughout the pandemic. Indeed, Mexico’s share of the US market has increased in the same period, but hasn’t been enough to compensate for the rest of the world. At face value, it demonstrates that export destination and position in the value chain plays a key role, although crude oil exports also have depressed Mexico’s overall export value.
… at the expense of commodity producers and a few Chinese competitors
Russia is the EM country with the largest decrease in export shares as crude prices remain significantly lower than last year. It has lost about 1.6% of the total EM market – from 5.6% to 4%, accounting for a large chunk of China’s gain. This alone has important implications for the rebalancing of the global economy after the pandemic (remember that we’re talking about a $6.7tr market over the past 12 months). Mexico and Colombia’s declines (much smaller due to their absolute size) fall exactly under the same category.
The loss of market share by Korea and India are noteworthy. Korea’s export basket is similar to Taiwan and Poland (largest categories are electronics, machinery and vehicles), but it has been unable to keep up with those competitors. For reference,
Korea’s most recent exports have declined by almost 3% YoY, while they have increased by 1.5% in Taiwan and Poland. India’s export basket is a lot more diversified than the rest, and is perhaps a case where the relative currency strength (in real effective terms) could be playing a role.
Finally, the big FX underperformers have not seen any improvement in export competitiveness. Turkey, Argentina and Brazil score relatively poor despite their significant depreciations, which have been more effective in compressing imports.
Brazil and Argentina’s performance reflects their export concentration on few commodities even as their terms of trade have improved. Turkey’s exports reach across more products, but industrial goods have contracted over the past few months. While the trade balances have shown some improvements, this is an important lesson in the modest effects of weaker FX to boost competitiveness even in the short-term.
Strategists: Alvaro Vivanco, Head of LatAm Strategy and Macro Analysis +1 203 897 4896 alvaro.vivanco@natwestmarkets.com
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