Five channels of vulnerability
- The turmoil in the markets has led to enormous capital outflows, five times greater than in 2008, resulting in large depreciations of emerging market currencies (the Indonesian Rupiah, for example, has lost more than 15% of its value). Which, in turn, severely impacts countries with a lot of dollar debt and a lack of international reserves. Moreover, the World Bank has warned that remittances to the countries of origin could fall by 20% this year. A real concern, as they remain a crucial source of income for many emerging countries such as the Philippines and Egypt.
- Export-driven emerging markets are now facing a collapse in demand for their products and services. According to the World Trade Organization, the volume of international trade could fall by 32% this year. Many emerging countries also much depend on tourism, which has come to a complete standstill. The closing of borders is catastrophic for countries like Thailand, Mexico or even Cambodia and will likely have lasting effects beyond the pandemic. Also, supply chain disruptions could lead many companies in developed markets to restore economic activity.
- An unprecedented fall in prices has led to a significant loss of income for commodity exporters including Russia, Algeria and Ecuador. These countries could see their oil and gas revenues fall by 85% this year. Of course, others such as China, the largest oil importer, or Turkey, where inflation remains too high, will instead benefit from lower import prices.
- Emerging market vulnerability also results from weaker health systems. It's also far more challenging to implement restrictions and containment measures efficiently. The reasons could be economic or purely practical. For example, how can we ask millions of Indians or Brazilians living in shantytowns to follow the guidelines on social distancing and hygiene strictly?
- Most emerging countries cannot implement the same amount of emergency measures as those seen in developed countries, not only from budgetary but also from a monetary point of view. Even if some emerging countries are experimenting with 'quantitative easing' (central bank purchases of government and corporate debt), these monetary support measures remain relatively limited. After all, if their currencies were to depreciate too much against the US dollar, this would further aggravate the external debt position of several emerging markets
More support is needed
Multilateral organisations have been rolling out support measures to fight this pandemic. The G20 suspended debt payments for 76 countries, the World Bank allocated 14 billion dollars (only?), and the IMF established financing programs for more than 40 countries. Besides, the Federal Reserve set up bilateral swap agreements with a few lucky ones (Brazil, Mexico or South Korea) to ensure access to dollars. Importantly, however, these measures will not prove sufficient. Also, multilateral cooperation is far from optimal. For example, US efforts remain below potential and China decided that debt relief would not apply to commitments made under the Belt and Road Initiative. More support is needed. Helping the most vulnerable countries is also in the interest of the developed world. Indeed, for global economic activity to recover as smoothly as possible, we also need emerging market economies to bounce back strongly.