The pandemic has introduced a large exogenous shock into economies and markets. While the young age demographic and reduced ability to implement lockdowns may have resulted in less of an impact on frontier economies, the impact has still been significant. These small, yet fast growing markets, have suffered from external shocks impacting the tourism industry and trade of goods and services as well as domestic shocks, with the slowdown in economic activity affecting local businesses and household income. Now that the pandemic hopefully enters a less severe stage, it is a good time to evaluate the frontier markets to see how things have changed 18 months after the pandemic first hit.

Growth

The pandemic severely disrupted the growth path of many economies and frontier markets were no exception to this. But higher growth countries were less affected. The chart below shows that the growth slowdown across frontier markets in 2020 has been close to linearly dependent on the countries’ rate of growth in 2019. The slope (1.25) of the linear regression line tells us that for every additional percentage point of growth a country gained in 2019, the subsequent recession in 2020 was shallower by 1.25 percentage points.

There are a number of frontier markets that have high structural growth rates with the potential to grow into more mainstream emerging markets (EM) over time. Many of these countries didn’t experience a recession in 2020 and could enjoy continued compounding of growth. This includes the more traditional frontier economies such as Benin and Ethiopia. These often have low per capita gross domestic product (GDP) and other measures of human development, still large dependence on agriculture, shallow financial markets, and lower debt levels. At the other end of the spectrum are countries such as Ecuador and Tunisia whose sheer magnitude of recession in 2020 were striking. Neither Ecuador nor Tunisia were growing much before the pandemic, which translated into some of the biggest drops in GDP in 2020.

GDP growth pre- and post-pandemic

We have seen that high growth countries tended to escape severe slowdowns, but for those countries that did not escape, it is instructive to evaluate how long it will take to dig themselves out of the COVID-19 GDP hole. When rebasing GDP in 2019 to 100 we get the below paths, going forward.

The “structurally challenged” group, including Ecuador, Tunisia and Zambia, all suffered very large drops in GDP in 2020 and are unlikely to revert to their pre-pandemic GDP levels until after 2024.

 

• This material is not intended to provide investment advice or be considered a personal recommendation.
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• Past results are not a guide to future results.
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