Can the Coronavirus Crisis Bring Positive Change to Emerging Markets?
Emerging markets (EM) are at a crossroads. The impact of COVID-19 aggravates pre-existing challenges. But it also enables those EM economies that respond effectively to create better conditions for the future.
EM authorities face critical policy decisions. Certain growth-dampening secular trends under way before the COVID-19 crisis are now set to accelerate. Faster deglobalization and even greater debt accumulation seem inevitable. These global trends might be unstoppable, but the speed and quality of EM responses will, in our view, be critical in shaping the medium-term trajectory of the asset class and in separating the winners from the losers.
EM Economies Could Reopen Swiftly
The unpredictable nature and magnitude of this economic shock justify unprecedented policy support. The coronavirus crisis directly affects lives and livelihoods. And for many poorer EM countries with limited ability to cushion the economic impact of COVID-19, these two concepts are inevitably very closely related.
So for EM, the point at which the costs of economic lockdown potentially outweigh the benefits of flattening the COVID-19 curve arrives more rapidly than for advanced economies. As a result, we think it is possible that EM countries could reopen their economies relatively swiftly. While this approach may be risky, it could put EM countries in a relatively strong economic growth position.
In the early phases of the crisis, the combination of a deep global economic recession and an unprecedented global pandemic wrong-footed EM and placed them in the crosshairs of criticism. Some early proposals to alleviate the liquidity crunch made matters worse: they were vague, unconventional and/or impractical. But soon after, liquidity improved because of rapid multilateral support, short-term official bilateral debt relief, enhanced dollar availability via swaps and idiosyncratic policy responses.
And now, encouragingly, high-yielding sovereign-debt issuers have started to return to international capital markets. Short-term risks remain as EM economies emerge from lockdown. Overall, we think emerging markets’ medium-term value proposition is now quite compelling, but each country will follow a different path and require specific analysis.
Debt Relief Can Be Managed Effectively
In response to COVID-19, the International Monetary Fund (IMF) stepped up its support for EM sovereign debtors by granting numerous large rapid financing programs. The G20 bilateral debt relief agreement gives eligible low-income countries an additional short lifeline.
But the G20’s appeal to private creditors to provide comparable relief has unnerved investors somewhat. Not only are there legal and practical complexities, but there’s also the risk of unintended consequences. From the debtors’ perspective, those consequences could include credit-rating downgrades and loss of market access. This probably explains why by late May, only about 30% of the countries eligible for official bilateral debt payment forbearance requested it.