The Economist 04Apr2020

64 Finance & economics The EconomistApril 4th 2020

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1

gency” of a government’s response to the

pandemic. But unlike their richer counter-

parts, few emerging-economy govern-

ments can match this stringency with an

equally generous fiscal response, accord-

ing to numbers collated by Sherillyn Raga

of the Overseas Development Institute, a

think-tank (see chart on previous page).

Malaysia may be one exception. It has

unveiled a relief package with a face value

of over 16% of gdp, including loan guaran-

tees, wage subsidies and even free internet

during the period of social distancing. Not

many other emerging economies can enact

anything similar. India, for example, has

announced a plan to help the poor worth

1.7trn rupees ($23bn), only about 0.8% of

gdp. Even that includes previously budget-

ed outlays that will merely be spent sooner.

South Africa’s fiscal response has been in-

hibited by rising borrowing costs. Last

week Moody’s became the last of the big

three credit-rating agencies to strip it of its

investment-grade status, calculating that

the government’s budget deficit this fiscal

year would exceed 8% of gdpand that its

debt, including its guarantees to state-

owned enterprises, would rise from 69% of

gdpto 91% by 2023.

Central banks have been a little more

adventurous, cutting interest rates despite

the slump in emerging-market currencies.

Some, including those in Colombia and

South Africa, will emulate America’s Feder-

al Reserve by buying government bonds in

the open market to reduce volatility. Indo-

nesia will cut out the middleman: new

rules allow its central bank to, in extremis,

buy bonds directly from the treasury.

But no emerging market, almost by de-

finition, can afford to ignore its exchange

rate entirely. Russia’s central bank, for ex-

ample, recently refrained from cutting in-

terest rates because the rouble has tumbled

so dramatically in the wake of the country’s

oil-price war with Saudi Arabia. The tussle

caused oil prices to dip below $20 a barrel

this week, according to America’s bench-

mark, for the first time since 2002.

In some countries (such as Argentina),

governments still have substantial for-

eign-currency debt. In others, companies

do (Turkey). And in still others (South Afri-

ca), a large share of local-currency debt is

held by foreigners, who will be reluctant to

roll over their holdings if the currency be-

comes unmoored.

In order to measure countries’ vulnera-

bility, analysts at Morgan Stanley, a bank,

have calculated the amount of hard curren-

cy emerging economies would need to ser-

vice their foreign debt this year and cover

their trade balance, if oil prices remain low,

remittances from overseas workers drop by

25%, export earnings from tourism and tra-

vel disappear, and foreigners dump a third

of their holdings of shares and bonds. They

then compare this amount to these coun-

tries’ foreign-exchange reserves (see

chart). Many emerging economies would

lack enough reserves to meet their needs,

leaving them reliant on further foreign

borrowing in hostile markets.

In such circumstances, some emerging

economies will turn to the imf. Indeed the

fund says over 80 countries have already

asked for some form of help in recent

weeks. Others may extend their lockdowns

into the financial realm. In a report pub-

lished on March 30th the United Nations

Conference on Trade and Development ar-

gued that some countries should impose

capital controls, with theimf’s blessing, to

“curtail the surge in outflows”. Having pre-

vented labour from moving freely within

their borders, some overstretched emerg-

ing markets may now be tempted to stop

capital moving freely across them. 7

Under strain

Foreign-exchange reserves as % of

external-financing needs* in a stress scenario†

March 2020

Source:

Morgan Stanley

*Current-account deficit plus external-debt service due in 12

months †Low oil prices, no international-tourism

earnings, 25% fall in remittances, 33% drop in

foreign holdings of shares and bonds

Tu r ke y

Pakistan

Argentina

South Africa

Indonesia

Mexico

Brazil

Thailand

China

India

Russia

0 100 200 300

T

o most workingAmericans, the first

of the month brings both joy and sor-

row. It is payday, but also when rent and

mortgage payments—their biggest bills—

are due. Businesses must shell out wages

and rent from revenues earned over the

past month. This April 1st is likely to have

been even crueller than usual. The govern-

ment’s efforts to contain the spread of co-

vid-19 have forced retailers to close shop

and led to millions of workers losing their

jobs. Many households and firms will

struggle to pay what they owe. If rent and

mortgage payments stop, the financial sys-

tem risks seizing up.

The bill is huge. Around two-thirds of

America’s 120m households own their

homes. Together they owed around $11trn

in mortgages at the end of 2019. Their

monthly payments depend on their depos-

its and their interest rates, but using na-

tional averages as a guide suggests that

around $52bn might have been due on

April 1st. Another 43m households rent.

Zillow, a property firm, estimates that they

paid $43bn a month to landlords in 2019.

Few firms own their offices or shops, in-

stead renting from commercial landlords.

Green Street Advisors, a property-research

company, estimates that total office rent

exceeds $10bn a month. Monthly retail

rents are worth another $20bn, according

to Marcus & Millichap, a commercial-prop-

NEW YORK

What missed mortgage payments mean

for the financial system

Squeezed incomes in America

Bills, bills, bills

Through the roof

United States, mortgage debt, $trn

Source: Federal Reserve

*Non-financial

†Mortgage-backed securities

15

10

5

0

2000 05 10 1915

By debtor

Other businesses* Others

Small businesses

Households

15

10

5

0

2000 05 10 1915

By creditor

Private MBS† Others

Government-held or

sponsored MBS†

Banks

Doom and gloom

Economists’ forecasts* for GDP, 2020

% change on a year earlier

Sources: The Economist; 18 investment

banks and economics consultancies *Made in March 2020

China

Japan

United States

Britain

Euro area

-6-9 -3 630

Low Median High

Economists cannot revise down their

forecasts of gdpgrowth for the effects of

the coronavirus pandemic fast enough. All

agree that 2020 will be dreadful, but some

expect recovery to take longer than

others, making for a much grimmer year.

Projecting uncertainty