Central banks around the developed world are using expansionary monetary policy and co-ordinated liquidity actions to alleviate the impact of the coronavirus outbreak on the global economy. While these are welcome, we think they are insufficient, as they leave out most emerging and low-income countries.
It is clear that the outbreak will have a significant impact on the global economy. Tourism is coming to a halt and international trade will take a serious hit. Commodity-producing countries, particularly of oil, will see export earnings plunge.
The increase in asset purchases and liquidity funding is the right approach, as financial conditions are likely to tighten. But it is being implemented only by G7 central banks, buying the same safe assets that the private sector is buying as a shield against risk, and leaving out most of the rest of the world economy.
This crisis finds developing countries in a much weaker position compared with the global financial crisis of 2008-09. Without the “China put” that brought commodity prices up in early 2009, this time it will be more costly to limit the downside on emerging markets and other developing countries.
The fiscal space has all but disappeared. In 2007, 40 emerging market and middle-income countries had a combined central government fiscal surplus equal to 0.3 per cent of gross domestic product, according to the IMF. Last year, they posted a fiscal deficit of 4.9 per cent of GDP.
The deterioration is not new — they have been posting deficits of this magnitude since 2015. Nor is the phenomenon restricted to a few countries. The deficit of EMs in Asia went from 0.7 per cent of GDP in 2007 to 5.8 per cent in 2019; in Latin America, it rose from 1.2 per cent of GDP to 4.9 per cent; and European EMs went from a surplus of 1.9 per cent of GDP to a deficit of 1 per cent. Only in the Middle East has the situation barely changed, but countries there had large deficits in both periods, hardly a source of relief.
So the ability of EMs to implement countercyclical fiscal policies will be limited this time around.
Their capacity for expansionary monetary policies is also significantly more constrained. For once, policy interest rates are already quite low in many EMs and their currencies are weakening fast against the US dollar.
Currency weakness is not unjustified. In Latin America, our analysis of terms of trade, financial market volatility measured by the Vix index, the exchange rates of other EM currencies and the spreads over US Treasuries of bonds in the benchmark JPMorgan Emerging Market Bond Index, shows that such factors explain most of the recent moves in the region’s currencies.
The problem is that Latin American currencies are already between 20 and 30 per cent undervalued compared with their historical mean in real effective terms, while they were overvalued compared with their means in 2008. This may spark inflation concerns and limit the capacity of some central banks to act.
On top of this, the level of EM corporate hard currency debt is significantly higher now than in 2008. According to the IMF’s October 2019 Financial Stability Report, the median external debt of emerging market and middle-income countries increased from 100 per cent of GDP in 2008 to 160 per cent of GDP in 2019.
Corporate debt has increased significantly across the EM universe, leading to worsening credit fundamentals. Foreign currency private sector debt maturities will put pressures on EM central bank reserves and on their currencies.
The IMF should alleviate these pressures by injecting liquidity into the global economy, as it did in 2009, through an expansion of the Special Drawing Rights (SDRs) of its shareholders. The SDR is an artificial currency built from a basket of currencies that include the US dollar, the euro, the renminbi, the yen and the British pound. In August and September 2009, the IMF expanded the stock of SDRs tenfold compared to the previous level, by the equivalent of $283bn.
The allocation of SDRs is made as a percentage of a member’s quota, which in turn hinges on the size of its economy, so a measure like this would benefit all member countries. SDRs, importantly, can be exchanged for hard currencies, thus bringing much-needed (hard currency) liquidity to developing economies.
Timing is of the essence to limit the economic impact of the coronavirus outbreak on the global economy, including the weaker developing countries. Their fiscal and external debt positions are weaker now than in 2008, so the measures taken will have to be bolder this time. With a similar SDR expansion to that of 2008, countries such as India and Mexico would receive the equivalent of $7.8bn and $5.3bn, respectively. That might help but is clearly not enough at this juncture.
The IMF’s recent announcement that it stands ready to mobilise up to $1tn of lending is good news, but it is not enough. First, only $50bn can be deployed to emerging markets and only $10bn to low-income members. Second, such facilities often end up not helping those who most need it.
What the world needs now is helicopter money at the global level.
Marcos Buscaglia is a founding partner of Alberdi Partners.
beyondbrics is a forum on emerging markets for contributors from the worlds of business, finance, politics, academia and the third sector. All views expressed are those of the author(s) and should not be taken as reflecting the views of the Financial Times.
