PHOTO CREDIT TKfallout inflame[s] unrest over preexisting grievances.”
Widening inequality—of income, opportunity and gen-
der—represents a time bomb, aggravated by the Covid cri-
sis, says Ian Bremmer, president and founder of political risk
research and consulting firm Eurasia Group. “We urgently
need to invest in people,” he said in a recent webcast, “or face
levels of social disruption that will be unlike anything we’ve
seen in our lifetime.”
THE HARDEST HIT
Sub-Saharan Africa is widely expected to be the hardest hit
region, followed by India, the Middle East and Latin America,
but China and the other BRICs (Brazil, Russia, India and
China) continue to command the greatest concern.
“China looks set to return to its pre-virus growth path by
year end, whilst other parts of Asia and emerging Europe will
experience solid rebounds too,” says Edward Glossop, emerg-
ing markets economist at Capital Economics. “Recoveries else-
where will be disappointingly weak, with output well below its
pre-virus path by the end of 2022.”
Bremmer is less sanguine about rebound prospects. China will
emerge in bad shape, he argues, because it extended billions in
credit to countries least able to repay it and because growing
geopolitical tensions will lead it to be excluded from the area of
its greatest comparative advantage, IT and data industries. “An
insecure China is a problem for us all globally,” says Bremmer.
For some, like Nigeria and the Gulf countries, the crisis has
been mitigated by a slight recovery in energy prices and access
to international markets, enabling currencies to recover some-
what against the US dollar. But for those “with weaker balance
sheets, lots of dollar debt and poor access to markets, there is no
magic bullet,” Parker warns.
With the virus still spreading, most emerging economies
have seen a falloff in exports and a rise in government debt,
with the Middle East and North Africa (MENA), Sub-Saharan
Africa and Latin American regions most affected. Fitch has put
11 Latin American countries on negative outlook, and of the
four emerging countries that have defaulted so far in 2020—
Lebanon, Suriname, Ecuador and Argentina—three are in that
region.
“Many had fewer buffers and were fundamentally weak, with
problems that predate the virus shock,” Parker says, adding that
Brazil and Mexico were also impacted by weak growth and poor
governance, while Peru and Chile are buffeted by the drop in
commodity prices.
Turkey has generally performed well through the pandemic.
A swift lockdown followed by effective track and trace mea-
sures allowed its key tourist industry to at least partially reopen.
However, the country’s precarious dependence on international
capital flows coupled with rising inflation (both a consequence
of the recent collapse in the lira) have raised concerns. So have
President Recep Tayyip Erdoğan’s increasingly assertive foreign
policy and growing illiberalism, which have antagonized tradi-
tional allies like the US, Britain and France, and could impact
FDI.
For most analysts, however, MENA and Sub-Saharan Africa
are the regions to watch most closely. The jury is still out on
how hard Iran has been impacted; but Lebanon this year is
expected to see an unprecedented contraction of 11% to as
much as 24%, reflecting its dire situation made much worse by
the explosion of 2750 tonnes of ammonium nitrate in Beirut’s
dock area on August 4.
The Lebanese pound, for many years stable at the officially
pegged rate of around 1,500 to the US dollar, fell to around
8,000 after the central bank lost its ability to prop up the cur-
rency. The devaluation, coupled with the financial implications
of the August 4 blast, has hit households, businesses and the
banks. A restructuring of the banking sector is likely, given that
the Bank of Lebanon is currently unable to repay the loans it
took from it. But first, Lebanon would need to put an economic
restructuring plan in place, which will not be possible without
a fully functioning government.In Sub-Saharan Africa, the larger economies of South Africa
and Nigeria face unprecedented hits to GDP despite the fact they
have locked down against the virus only partially. In March and
April, Fitch and S&P variously issued downgrades for Nigeria,
Angola, Gabon and Cameroon, with other countries put on
negative watch—in some cases despite receiving IMF emergency
funding to aid debt servicing and other key outgoings.
Many Sub-Saharan countries “were already operating in a dif-
ficult environment, with high levels of sovereign debt, prior to
Covid-19,” says Jan Friederich, head of Middle East and Africa
sovereign ratings at Fitch. “The question is how they can get
debt back to a sustainable trajectory.”
India’s mishandling of Covid-19—a draconian shutdown
that left millions stranded miles from home and cutting remit-
tance payments overnight—followed by a too-rapid reopening,
has produced spiraling infection rates that the underresourcedJavorcik, EBRD: Every crisis creates opportunities. It is up to
enlightened governments to seize them.16 | Global Finance | September 2020
COVER STORY | EMERGING MARKETS