The world’s largest and richest economies are already reeling from coronavirus. For emerging markets, the threat is even more devastating — both in health and economic terms. The scale of dollar outflows from the emerging world is greater than during the 2008 financial crisis. The plunge in oil and commodity prices is squeezing incomes. The combination of such pressures with health systems that are unprepared to deal with a pandemic at the best of times creates a real risk of social implosion.
When the global economy went into recession in 2008 it was accompanied by rocketing commodity prices. That provided a double blow, to the global economy generally and to those who lost jobs — leaving them facing both lower incomes and higher prices. It was, though, a boon for emerging markets that relied on selling raw materials to finance their overseas borrowing, helping them to weather the recession.
This time emerging markets are suffering from the twin shocks of a dollar funding squeeze and a collapse in commodity prices. A scramble for the greenback, as corporate and financial borrowers try to obtain the currency they need to meet their liabilities, has driven down emerging market currencies. The Indian rupee and Mexican peso fell to their lowest levels against the dollar last week. South Korea’s won fell to an 11-year low.
The collapse in commodity prices — copper hit a four-year low on Thursday — means emerging markets have fewer ways to get the foreign currency they need. The fall in mass tourism is also felt more keenly by poorer countries, particularly in parts of south-east Asia, Latin America and the Caribbean.
After a decade of borrowing growth, both public and private, the developing world is exposed to a sudden “stop” in capital flows that is driving up borrowing costs for businesses and governments. Investors have already begun to dump emerging market bonds: the Institute of International Finance says about $80bn of funds have left EM stocks and bonds since January 21.
Last week saw some positive steps. The Federal Reserve moved swiftly to broaden swap lines to boost US dollar funding markets that it had already set up with some rich-country central banks, to include large emerging markets such as Brazil, Mexico and Korea.
The IMF has also promised to provide $1tn of loans to help its members deal with the pandemic, including $50bn for emerging markets and $10bn for low-income countries, at zero interest rates. The World Bank pledged a further $14bn in fast-track finance for companies and governments.
The fund will, however, need to be ready to move fast to provide balance-of-payments support to the many countries likely to request it, potentially without sending missions. Support programmes must be designed so that they do not have the effect, even unintended, of limiting spending on health. Much of the money should be in grants; many emerging markets will not be able to handle additional loans in this situation without sizeable writedowns. Large IMF shareholders may need to be willing to take some risk on some of its capital.
Supporting emerging markets is not just about the moral imperative of caring for the world’s poorer populations. For richer countries, it is also a matter of self-interest. Economic disaster that stokes pandemic in, say, India, Indonesia or sub-Saharan Africa could rebound on the developed world if travellers from those regions cause additional waves of infection. The chain of defence against coronavirus is only as strong as the weakest link. Investing to bolster weak links will be money very well spent.
Source: Economy - ft.com
