Beset by weakening local currencies, dwindling foreign reserves, capital flight and slower global growth, emerging markets (EMs) have for long been at pains to contain the financial turmoil that struck them even before the virus hit them hard.
As of now, the Covid-19 recession starts with a pandemic most EMs ill-equipped to deal with. They still carry the baggage of the 2008 global demand shock, the 2014 collapse in commodity prices, and the 2018 capital flight episode.
In a base case, EMs are expected contract 3.1% on aggregate this year, down from a forecast for 4.7% expansion at the start of the year, according to Bloomberg Economics (BI).
For sure, China stands out among EMs for its effective containment of the virus, relatively abundant space for fiscal stimulus, and immunity from risks related to weak commodity prices and capital outflows. Even then, China’s growth for the year to is seen to limp in at 2.1%, the lowest of the reform era, according to BI.
BI expects India to shrink 10.6% in the fiscal year ending March 31, 2021, compared with the previous projection of -4.5%; Russia will probably shrink around 6% this year; Brazil will shrink 6.4%, a deeper contraction than the previous expectation of 3.2%.
In South Africa, the BI’s 2020 growth projection is -9% from -5.6% previously as the economy is weaker amid a stringent lockdown.
As governments stare down the humanitarian and economic shocks of the pandemic, some EMs with weak financial positions are at greater risk of defaulting on their debts.
At least 102 nations have already asked the International Monetary Fund for help, and the Institute of International Finance is co-ordinating an effort to offer some relief to the poorest countries.
EMs owe more than $8.4tn in foreign-currency debt, or about 30% of the developing world’s gross domestic product. At least $730bn is coming due through the rest of this year.
The fear is that weaker currencies and falling foreign reserves – compounded by lower oil prices – will make it harder for some developing countries to keep up on their external debt payments.
The decline in commodity prices has reduced the income of exporters. Russia, Brazil, Mexico and Colombia have seen their economies contract in nominal terms compared with 2014.
China’s continued slowdown and the escalation of trade wars have contributed to the contraction in commodity demand and hurt export-dependent economies, such as those in South East Asia. The virus outbreak is compounding these forces, and the post-pandemic world promises to be an even more hostile place.
Isolationism, protectionism, localised supply chains, reduced tourism and lower remittances mean the route to prosperity will be a lot more rugged.
The deeper problems in the EMs stem from the excessive financialisation of the global economy that has occurred since the 1990s. The resultant policy dilemmas – rising inequality, greater volatility, reduced room to manage the real economy – are seen continuing to preoccupy policymakers in the decades ahead.
In a wider sense, the EM growth story is now becoming less convincing with the virus re-enforcing the stagnation that was already in place. Instead of risky returns, EMs are merely offering return-free risks, says BI.
from Gulf Times https://ift.tt/37VjbDB
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