PHOTO CREDIT TKPHOTO CREDIT TK
Emerging and developing economies will likely be hardest hit by
Covid-19. Rebuilding will require addressing preexisting conditions as
well as the new ones.PHOTO CREDIT TK
C
ovid-19 is cutting a devastating swath
through most parts of the global
economy, exacerbating protectionism,
worsening trade disputes, contributing
to the fall in foreign direct investment
and devastating the health and liveli-
hoods of millions. In the June update
of its World Economic Outlook, the
International Monetary Fund (IMF)
projected a contraction in the world economy in 2020 of 4.9%,
1.9% more than it had forecast in April, with advanced econo-
mies suff ering an average 8% loss in output and Europe generally
aff ected even more. The cost of the crisis will exceed $12 trillion
over 2020-2021, Gita Gopinath, director of the IMF research
department, predicted in June.
But the hardest hit will be emerging and developing mar-
kets where savings are low, government resources are few and
practical measures to mitigate the virus—such as social distanc-
ing—are diffi cult. Because of the additional healthcare and social
spending outlays needed, developing countries are looking at
signifi cant fi scal gaps for 2020.
“The short-term growth outlook for 2020 is in tatters every-
where—even in countries where the Covid-19 response was
superb, like South Korea and Taiwan, where there were no
lockdowns and which have had a very strong test-trace-isolate
response,” says Rob Carnell, Asia-Pacifi c chief economist at
ING Bank.
Carnell adds that it is hard to predict which countries will
turn out to have had “the best pandemic” experience because
there are still too many uncertainties, but it is clear that many
central banks are maxing out on mitigation eff orts.
“This is especially true where the constraints on fi scal policy are
more severe–poorer countries, especially–where monetary policy
is having to make up for the shortcomings of fi scal policy,” he says.
Covid-19 spending coupled with maturing debt obligations
have left countries as far distant as Egypt, South Africa and Brazil
with massive budget caps, according to Oxford Economics.
Tourism, a critical income generator for many emerging markets,
has collapsed. Economies dependent on energy, natural resource
export and remittances are also struggling, the last severely
impacted by border closures and service job losses.
As of late August, IMF projections are for a contraction of 3%in 2020 for emerging markets/developing economies’ GDP, or
minus 5% excluding China, the only major economy expect-
ing any growth this year. Recovery in 2021 again depends on
China; expected growth of 5.9% for emerging/developing
economies would be much lower without a boost from China.
Uncertainties include foreign investor appetite, the extent to
which trade recovers and the state supply chains next year.
The greatest economic uncertainty remains the pandemic fac-
tor; any signifi cant uptick in Covid cases later in 2020 or early
2021 will render all of these already highly conditional forecasts
obsolete. All emerging markets have come under signifi cant
stress, says Ed Parker, head of Europe, Middle East and Africa
sovereigns at Fitch Ratings. His group has downgraded a record
20 sovereigns so far this year.
Indeed, no numbers fully capture the crisis facing emerging
markets. As of midyear, the IMF had received 102 separate
requests for emergency funding and approved 75, with most
funds designated for Sub-Saharan Africa and South America.
The eventual cost of these and additional fl exible credit lines
is estimated at $250 billion. Even middle-income developing
economies are at a tipping point, says Richard Kozul-Wright,
director of globalization and development strategies at the UN
Conference on Trade and Development, suggesting that govern-
ments need more policy space and a more coordinated interna-
tional response to get through the Covid-19 crisis.Thirty-seven countries could face major unrest as populations
turn on governments they perceive as incompetent, corrupt or
both, Verisk Maplecroft, a global risk analysis fi rm, cautions in a
July report. “Economies facing a ‘perfect storm’ of risks are mostly
concentrated in Africa and Latin America, including Nigeria,
[the Democratic Republic of] Congo, Ethiopia, Venezuela and
Peru,” the fi rm says. “But investors, companies and insurers in
key emerging markets such as Bangladesh, Turkey and Egypt will
also need to brace for an explosive end to the year,” it warns, sug-
gesting that the biggest risks lie where “the pandemic’s economic“An insecure China is a
problem for us all globally.”
—Ian Bremmer, Eurasia GroupSeptember 2020 | Global Finance | 15