The spread of pandemic has led to spending by the governments of advanced and emerging economies in three key areas: health facilities in order to counter the spread of pandemic, granting short term loans on low interest rates to MSMEs so that they stay afloat and ensure that people who are employed on daily wages have enough money to pass through the crisis as many of these are out of work since the arrival of the pandemic. The emerging markets are especially faced with a lot of constraints in mounting the appropriate fiscal response required to sustain through the crisis and restart their economies once the crisis subsides. This includes a fall in commodity prices across the globe, drastic fall in tourism revenues and remittances, the flight of capital from developing countries towards safe dollar and euro-based assets, depreciation of their currencies, and mounting external debt and fiscal deficit.
Since the coronavirus pandemic has hit emerging markets across Asia, Africa and Latin America, the unemployment rate has spiked. With no unemployment insurance being available in these nations, most of the laid off workers would not be able to steer through the crisis without sufficient government help. It is important to provide economic assistance to workers as in most of these areas they will play a crucial role in stimulating demand once the economy starts opening up. Government spending is also required to save many of the small and medium scale firms which lack the capacity to retain workers and at the same time pay off their fixed operating costs. But providing economic stimulus in these nations would not be as simple as it is for developed nations.
The arrival of the Covid-19 pandemic meant that governments of emerging market economies which were especially dependent on commodity exports like oil and minerals would find it difficult to earn revenue. This is due to a sharp fall in commodity demand and prices across the globe.The fall in overseas remittances is also going to hit Africa hard as many of the nations like Nigeria and Ghana regularly issue diaspora bonds to finance their development projects and the continent got $82 billion last year in the form of remittances. Additionally, the tourism industry which contributes to about 8.5 percent of the continent’s GDP is not going to start on a full scale until the pandemic subsides and the world economy starts recovering.
Hence, in order to stage a recovery these governments would have to issue more sovereign debt bonds in international as well as domestic capital markets. \ foreign investors have been pulling their money out of emerging markets and investing them in safe dollar based assets like the US treasury bonds. According to the Wall Street Journal about $100 billion dollars have been pulled out by foreign investors from the emerging markets since the first week of March. Consequently, the capacity of the government of these countries to issue more debt is decreased precisely when it needs it the most.
The issue is further complicated by the fact that most of the external debt is undertaken by private business corporations based in emerging markets and most of it is held not by banks. Rather it is held by thousands of private investors, hedge funds, and pension funds. Hence, renegotiating and restructuring debt with so many private actors is going to be a big challenge for emerging economies especially in Asia which has seen the ballooning of corporate debt in the past two decades. Even before the pandemic the collective sovereign and corporate debt in emerging markets stood at 180 percent of the GDP, much higher than 110 percent of Asian financial crisis. With many of the currencies in emerging markets depreciating relative to the US dollar like the Turkish Lira and Brazilian Real, this burden would be especially high and would also decrease their capacity to borrow on reasonable interest rates. Many others are using up their foreign exchange reserves to maintain the currency peg which would be halted in case the lockdown of emerging markets extends for a long period of time.
While developed nations can drop helicopter money with little consequences, developing nations in doing so would have to take inflationary pressure upon their currency. While most of these nations’ foreign exchange reserves are dwindling, they struggle to maintain their currency pegs. Further inflationary pressure might cause the burden of foreign debt to increase upon both governments and corporations across the emerging markets. Hence, there is an urgent need for a multilateral response to this emerging situation to free up resources in developing countries so that they can spend more on their domestic healthcare facilities and manage the increasing unemployment crisis.
Therefore, with constrained fiscal options governments in emerging markets across Asia, Africa and Latin America will struggle in providing a large enough fiscal stimulus. The IMF estimates that about $2.5 trillion would be needed to save these economies. With the IMF being regarded as the international lender of last resort, about 100 nations applied for loans and grants for it. But it is beyond the IMF’s capacity to inject this amount into the emerging markets as according to the organisation’s own records the amount of available resources available with it for grants and lending amounts to $651 billion. Moreover the IMF does not directly engage with corporations based in emerging markets which would require help. Hence, any small assistance coming from the IMF would require setting up and negotiating an acceptable institutional mechanism by the respective governments of these economies.
While the coronavirus pandemic has wreaked havoc on health infrastructure across the world, it has also exposed the existing financial vulnerabilities of the world economy and how it may tie the hands of governments in the Global South. In the post COVID world we can expect emerging markets to be keen on reorganising and renegotiating the terms of globalisation. With the ongoing unemployment crisis across these economies, it can be fairly expected that the terms of economic reconstruction would be more inward looking and the ones that would enable governments to increase their welfare spending and fiscal flexibility.
Samarth Gupta is a third year student of Ashoka University studying Political Science and International Relations.