With major Western economies around the world slowing down significantly, emerging markets find themselves in a perfect storm of multiple stress factors as the Covid-19 pandemic continues to spread.
With major Western economies around the world slowing down significantly, emerging markets find themselves in a perfect storm of multiple stress factors as the Covid-19 pandemic continues to spread.
The corona virus could claim as many as three million lives around the world, David Miliband, president of the International Rescue Commission, warned on Tuesday (28 April).
“We see this disease taking off around mid-May. We only have weeks to prepare for this disease to go on a rampage in some of the poorest countries in the world,” Miliband told Sky News, commenting on the findings of the Imperial College Covid-19 study and their implications for emerging countries.
“We need to make sure that we recognise this is a global disease which is only beaten when it’s beaten everywhere,” added Miliband.
In a Bloomberg Markets and Finance podcast broadcast on 21 April, some of the factors of the extent of the crisis are outlined: the spike in the dollar, the contraction in global trade, the fall in the oil price, and the coronavirus crisis itself.
According to Brad Setser of the Council on Foreign Relations who features on the podcast, this will be the most severe shock emerging economies have faced in the last 30 years. In his view, it’s the combination of the financial shock and the ‘real’ shock to trade that constitutes such a fatal blow for emerging economies.
A recent report by S&P Global Ratings suggests that all key emerging economies will fall into recession or see sharply lower growth in 2020.
“We believe stress could become more significant in the coming weeks given that most EMs are only beginning to show an escalation of Covid 19 cases. As the epidemic accelerates, measures to contain the spread of the virus will compound the hit to economic activity from external shocks,” the rating agency commented on the report.
Nordic corporate bank SEB listed Zambia, Tunisia, Argentina, Venezuela, Angola, Turkey, Ukraine and South Africa as some of the large emerging market economies most at risk of financial stress due to Covid-19.
Moreover, Colombia, Chile, Indonesia and India could be at risk due to relatively high private external debt financing needs in 2020.
Per Hammarlund, chief EM strategist at SEB, says there are rising risks of financial stress, social unrest and political instability in these countries as a result.
Hammarlund deems Ukraine, Turkey, the Philippines, India and Thailand as particularly prone to political instability among EM economies at the moment.
“The most acute problem facing EM countries with high external debt levels and large current account deficits is how to secure capital to service their external financing needs,” he explains.
Rating agency S&P also said that downside risks are significant. “Prolonged outbreak will depress activity and stress health systems. Extended shock to investor sentiment could result in heightened refinancing risk, especially for low rated issuers,” it stated.
And as governments around the world have temporarily pressed the pause button on their national economies, the economic downturn from the coronavirus pandemic could jeopardise the ability of the poorest countries to ‘resume’, the Financial Times stated in a recent piece on what the corona crisis will mean for emerging markets.
The strength of an eventual recovery will depend on policy measures to cushion the blow and limit economic disaster.
Miliband’s non-profit organisation, The International Rescue Committee, responds to the world’s worst humanitarian crises related to conflict and disaster.
He argues that in order to get back to any sense of normality again on a global level, we will need to fully fund the aspirations of the World Health Organisation in combating the virus and its effects.
In order to save lives in some of the countries with minimum access to healthcare equipment, such as South Sudan, the former Secretary of State for Foreign and Commonwealth Affairs says that basic infrastructure needs to be put in place including hand washing facilities, proper information, a modicum of social distancing, and by isolating cases so they don’t spread across the entire population.
There is some cause for optimism however, as some commentators maintain that Africa could have factors that work in its favour; a young population, for example (average age is 19), or the fact that many are vaccinated against tuberculosis which could have a mitigating effect on a Covid-19 infection.
While some of the richest countries in the world have temporarily been brought to their knees by Covid-19, emerging economies are already leaking resources.
The net outflow of capital from EM slowed in April 2020, but as long as net flows are negative, some countries will need external support or default and restructure their debt.
Meanwhile, a swift recovery in capital flows is unlikely in the coming months, and the economic fallout inflicted by this crisis is just starting to show in emerging markets.
