Emerging markets have been mostly absent from the global conversation about special measures to combat coronavirus-induced recession. This makes little sense, because they are uniquely vulnerable in the pandemic. Greater efforts must be made to help them.
Rich nations can tap their central banks. Poor nations can benefit from the G20’s debt relief initiative. But the 106 countries in the middle, accounting for three-quarters of the world’s population, cannot count on debt forgiveness or central bank largesse to fund big spending programmes. Yet it is precisely these countries which stand to be hardest hit by coronavirus.
Seven of the 10 nations with the highest number of Covid-19 infections globally are developing countries. The lockdowns which have contained infection in richer countries are far less effective in emerging markets. Several have in effect given up trying to contain the virus. Middle-income nations entered this crisis in poor shape. Pre-existing conditions included high debt levels, stagnating economies, struggling public health systems and serious inequality. Latin America was worst off, but parts of the Middle East, south Asia and Africa were also far from fit.
Now Covid-19 threatens to push tens of millions of people in emerging markets back into poverty. It also risks exacerbating inequality and triggering a fresh wave of social unrest, giving a fresh boost to anti-incumbent populists. So far, most middle-income nations have preserved access to international capital markets, but the calm is deceptive: as virus-induced recessions hit emerging markets with full force, budget deficits will blow out, triggering a wave of downgrades by ratings agencies and scaring away investors. A stress test by Absolute Strategy, a London research firm, found that up to 37 per cent of the benchmark JP Morgan emerging market bond index could be at risk of default over the next year or so.
The IMF has been exceptionally active in this crisis, lending $25bn in funds to developing countries and making available flexible credit lines to many more. Some 72 nations have benefited so far and more are in the queue. But the sums committed do not come anywhere near meeting the $2.5tn financing needs forecast by the IMF for emerging markets.
Some rich countries are considering loaning out their IMF SDRs to hard-hit island nations in the Pacific or the Caribbean, a commendable move. Much more needs to be done; G20 finance ministers meeting at the end of next week should, for example, put back on their agenda a proposal made earlier this year to increase IMF firepower with a new $1tn issue of SDRs.
Even that is unlikely to suffice: the private sector and China, too, in some cases, must be involved. Ecuador and Argentina are already restructuring their debt; other nations will surely follow. Debt restructurings have become messy affairs: in the past, syndicated loans by a small number of banks predominated, but today’s emerging market bonds are owned by a myriad funds, often with competing priorities, and there is no agreed mechanism for managing sovereign restructurings.
Here, the IMF’s role as lender of last resort gives it unique leverage. If it were to lend into arrears, the leverage of private creditors over the country in question would be greatly reduced. It would be far better for the country in difficulties and creditors to reach a deal that ensures debt sustainability. In its absence, however, the IMF should support any nation with a credible programme. Today more than ever, this will be a moral and practical necessity.
Source: Economy - ft.com
