Emerging Economies Face Devastation Amid COVID-19 Pandemic
In a period that Kristalina Georgieva, the IMF director, has described as “humanity’s darkest hour,” emerging economies continue to suffer some of the hardest blows from worsening market conditions as they also brace for their own surges of COVID-19 cases.
Since its emergence in late December, the novel coronavirus has infected at least 185 countries and territories, sending the global economy into free fall. Originating in China, the virus went on to engulf Europe, North America, and the rest of the world. Since its spread, COVID-19 has induced one of the most volatile months in stock market history, with a record-breaking 16.8 million U.S. jobless claims and emergency aid packages amassing to the trillions. While much is known about the impacts of COVID-19 on developed countries, its effect on emerging economies lacks coverage.
For many developing countries, the shock to their economies arrived before the one to their health care systems. Mass shutdowns in China, Europe, and North America have caused supply chains to collapse and the price of commodities to plummet. In addition, the “double shock” of an oil price war is crippling countries that are dependent on global prices. Recent failures to agree on cuts are sending developing countries like Algeria, where oil and gas account for 85% of export revenue, into social and economic turmoil. Meanwhile, the drop in commodity prices is severely affecting Latin American countries that have already been experiencing years of persistently weak economic growth. According to the credit rating agency Fitch’s 2020 projections, real GDP will drop by 2% in Brazil, 4% in Mexico and by 4.5% in Argentina.
Falling commodity prices are not the only hit that emerging economies have taken. Despite a series of emergency cuts and liquidity measures by the Federal Reserve, the demand for liquidation continues to escalate. This surge in demand for the American dollar is yet another blow to already fragile currencies. The Mexican Peso, the South African Rand and the Brazilian Real have depreciated by 25% this year. The risk of currency destabilization is increasing as central banks must also cut interest rates to push economic growth. As unexpected dollar appreciation further worsens world trade, emerging economies must also grapple with spiraling costs of dollar debt.
On average, the Latin America region had a public-debt to GDP ratio of 57% in 2019, with Brazil at 75.8%. As the COVID-19 pandemic worsens, credit rating agency Moody’s has been downgrading over-indebted countries. Bearing $69 billion in foreign debt, Argentina was downgraded to Caa2 on April 3rd along with Ecuador and Zambia to Caa3 and Caa2, respectively. While emerging economies face an increase in future borrowing costs, they must also deal with capital flight. Foreign investors own more than one-quarter of emerging economies’ local currency sovereign debts. Moreover, emerging market corporate debt has sky-rocketed from $500 billion to $2.3 trillion between 2007 and 2019. As financial conditions deteriorate, the drainage of foreign funds grows. Already, emerging markets have seen an outflow of $92.5 billion of portfolio investments held by non-residents since January 21st.
The countries that are least able to generate their own funds and also the ones least prepared to handle the public-health emergency of COVID-19. For many developing countries, the pressure of debt payments has left inadequate funding for public health care. According to the Jubilee Debt Campaign, the governments of 121 low and middle-income countries spent on average 12.2% of government revenue on external debt payments in 2019, but only 10.7% on public health systems. Brazil has only two hospital beds and two doctors per 1000 people while India has just one for each measure. Many doctors and hospitals in Venezuela don’t even have access to running water. Beyond hospital conditions, efforts to provide government assistance will be challenging for countries with large informal sectors, such as India where unregistered employment has reached 84%. Unlike in developed economies, it will be very difficult to provide any kind of temporary income support or funding to small businesses due to fiscal pressures.
It is estimated that fiscal policy actions must amount to 5% of a country’s GDP in order to effectively mitigate the effects of COVID-19 shutdowns. For economies already crippled by the pandemic, this may be a challenge to meet. The IMF has announced a one trillion dollar “war chest” to help battle the effects of this coronavirus. However, with 90 countries already requesting emergency funding from IMF, nearly half of its members, that one trillion won’t go far enough. The IMF has also asked that the emergency aid be prioritized for health expenditures, leaving little for those suffering from economic turmoil. Other efforts such as the suspension of debt repayments will become essential for the recovery of countries and are likely to be discussed in the coming weeks by the G20, IMF and the World Bank. Calls have also been made for the IMF to issue relief through the Special Drawing Rights, an international reserve of assets that can essentially act as a global currency.
COVID-19 has devastated the global economy, but above all else, it is a humanitarian crisis. In the coming weeks, emerging nations must decide whether their people will suffer by the hands of ill-equipped welfare and public-health systems or by a catastrophic financial crisis brought on by increased borrowing. Unless more global action is taken to manage these impending disasters, it will likely be the case that they suffer from both.
Editor’s Note: All values mentioned are in USD unless stated otherwise.