PHOTO CREDIT TKhealth system cannot cope with. With infections
now topping three million, lack of support for
households and businesses has compounded the
distress.
“Relative to potential, the recovery will be the
weakest amongst major economies,” says Glossop.
“Real GDP will contract by over 5% this year, the
worst performance since records began.” Already-
high levels of nonperforming loans could also lead
to a banking crisis, he warns.
RIPPING UP THE FISCAL RULE BOOK
By contrast, the outlook for Central Europe and the
rest of Asia looks comparatively positive. The former is expected
to bounce back in 2021, aided by pragmatic handling of Covid-
19, including giving fiscal support to businesses, and close inte-
gration with the EU supply chain. Asia will be helped—it is
hoped—by China’s recovery and relatively high confidence
in the Covid response by other governments including South
Korea, Taiwan, Thailand, Vietnam, Malaysia and Singapore,
which is expected to feed into a stronger and more sustainable
economic recovery for these countries going forward. Both
regions will benefit from the fact that—China aside—debt levels
were comparatively low going into the pandemic, which means
they had more fiscal space.
“The outlook for 2021 depends considerably on the extent
and nature of money spent now,” says ING’s Carnell. “The richer
countries which have spent most to protect their economies will
pull away fastest, opening up a gap with the poorer countries.”
The pandemic will create a permanent loss of output for most
if not all economies in the region, he argues. “The question is,
has it also weighed on the potential for future growth?”
All emerging markets would have benefited from a morato-
rium on ratings-agency downgrades, Carnell says, which would
have freed sovereigns to spend without fear of being penalized
or put on negative watch. “The right policy response was to
spend as hard as you could to protect your economy’s productive
capacity, and that has meant ripping up the fiscal rule books,”
he says. “No point in remaining ‘prudent’ if you end up with
no economy at all.”
Conventional spending policy will lead to a weaker post-crisis
growth trajectory and fiscal position, Carnell argues. The best
outcomes will accrue to countries that spend liberally and wisely
to protect jobs, businesses and long-term economic potential.
An unprecedented crisis requires a similarly extraordinary
response from emerging market authorities, with the most agile
and imaginative being rewarded, Beata Javorcik, chief economist
at the European Bank for Reconstruction and Development
(EBRD), argues. “Every crisis creates opportunities, and this
is true here,” she says. “It is up to enlightened governments to
seize them and make the best of the situation.”
Good government matters now more
than ever, Javorcik adds. Besides using
the opportunity posed by the pandemic
to encourage companies to act more
responsibly and transparently, she says,
governments should also look to fill gaps
left in the global value chain by China,
which could become more numerous if
tensions with the West continue to rise.
“Many countries can produce as well
and as cheaply; and if they signal they
are open for business, they stand to ben-
efit,” says Javorcik, adding that the same
principle applies to remote working. If more people are working
from home, companies can extend the practice across borders to
benefit from lower wages prevailing in other countries.LOOKING AHEAD
In the longer term, Javorcik anticipates a shift to green, with
climate change mitigation becoming a priority where it was pre-
viously seen as unimportant or just costly. Many close observers
argue that the pandemic was caused, at least in part, by human
encroachment on the animal world, highlighting the importance
of caution in the expansion of human economic activity.
Other important but subtle changes in attitudes, with far-
reaching consequences, may be in the works. The pandemic
may engender greater respect for state-owned enterprises,
which have been more-reliable employers during the crisis.
Despite debt levels likely to be much higher going forward,
political winds may shift to a more favorable view of state
spending to mitigate the crisis. Likewise, the chaos wrought
by the Covid upheaval may spark stronger support for more-
flexible labor markets. Public sentiment may encourage gov-
ernments to take decisive action to close international tax
loopholes that have allowed large companies to exploit oppor-
tunities in emerging markets without adequately supporting
the host nation.
IMF managing director Kristalina Georgieva explained in a
July 30 webcast that the global recovery is likely to be partial
and uneven, happening in “different countries; different sec-
tors, at different times.” That uncertainty will be most pro-
nounced among emerging and developing markets. While Asia
and emerging Europe look set to come through in better shape
than other developing regions, that could change.
History shows that pandemics, like wars, accelerate many
trends already underway as well as helping to initiate new
ones. The post-Covid world will look different in ways we
can’t predict. For emerging and developing economies, it
will require navigational skill to avoid the deepest potholes,
coupled with imagination and agility to make the most of any
opportunities it may present. ■Carnell, ING: No point in
remaining “prudent” if you end up
with no economy at all.18 | Global Finance | September 2020
COVER STORY | EMERGING MARKETS