Emerging

Triple whammy

EcoEmerging// 2nd quarter 2020  
2
economic-research.bnpparibas.com  
Editorial  
Triple whammy  
Emerging countries have been severely affected by the COVID-19 pandemic even though the official number of confirmed cases and  
deaths (excluding China) is still low compared to the figures for the developed countries. A wave of slowdowns and recessions is  
only just beginning, and the economic fallout will probably spread beyond 2020, because the real shock (shutdown of business due  
to confinement measures) is compounded by a financial shock and commodity price shock. Capital outflows and the freeze on bond  
issues in international markets increases refinancing risk in US dollars. Preventative safety nets are being set up to reduce defaults,  
but the solution for the most vulnerable countries is probably a sovereign debt moratorium or a debt relief.  
Multiple shocks hit the emerging countries  
At the same time, most governments have announced economic  
stimulus plans. Of course, the amounts are not comparable since  
they comprise a wide range of solutions, from fiscal measures and  
effective spending (which will add to fiscal deficits) to the set-up of  
credit lines and guarantees (which are potential expenditures or  
debt). These are not budgetary impulse but measures aimed at  
maintaining activity. Multiplier effects are thus expected to be limited.  
The entire planet has been hard hit by the COVID-19 pandemic.  
According to the OECD, for a selection of nearly 50 developed and  
emerging countries, the supply-side shock generated by  
confinement measures could result in a loss of activity of at least  
1
5% (the median is -25%). This is an unprecedented shock,  
surpassing even that of the 2008-2009 Global Financial Crisis  
GFC), when no country reported more than a 5% decline in GDP  
(
Towards a sovereign debt moratorium?  
from peak to trough. Granted, the periods of confinement will be  
followed by a rebound, like the one in China in March. But unlike the  
The shutdown of the international bond market has raised fears of  
USD refinancing risk. In 2020, many countries will have to face up to  
debt servicing charges on international debt representing at least  
2
008-2009 crisis, the recoveries will not be synchronised. Asia will  
be the first to recover, followed by the countries of central Europe  
and then Latin America. Growth in the main emerging countries will  
be about 1% this year (0% excluding China), vs 4% in 2019. Latin  
America will be hit hardest, with a contraction of at least 2.5%.  
20% of their foreign reserves: Bahrain (47%), Turkey (30%), Ghana  
(
(
27%), Nigeria (23%), Chile (22%), South Africa (21%), and Ukraine  
21%). A priori, the risk of default is low for these countries. With the  
exception of Chile and Turkey, however, these countries have  
fragile economic structures that make them susceptible to  
protracted recessions. Investors will be keeping a close eye on them.  
Of these countries, Ghana and Senegal have officially requested  
IMF assistance.  
For the emerging countries, the supply-side shock is coupled with a  
financial shock. Portfolio investment funds specialising in the  
emerging countries have reported massive withdrawals, which are  
also unprecedented compared to previous periods of financial stress.  
According to IIF (Institute of International Finance) estimates, there  
has been a cumulative outflow from portfolio investments of USD  
Preventative safety nets are being set up to reduce defaults. For the  
moment, only a few of the emerging countries are covered by the  
swap lines announced between the Fed and other countries (Brazil,  
South Korea and Mexico). But the IMF is providing USD 100 bn in  
accelerated emergency financing, including USD 10 bn in the form  
of zero interest loans for the most vulnerable countries.  
9
5 bn since the beginning of the pandemic, compared to outflows of  
USD 20 bn during the GFC and Taper Tantrum. In March, there  
were no sovereign bond issues in foreign currencies.  
Commodity producing countries will be especially hard hit because  
the dollar’s appreciation will not offset the decline in global  
commodity prices. OPEC and Russia stroke a deal to reduce  
production by 10% but global demand has already reduced by 20%  
and oil stocks reached a record high, which suggests prices will  
remain low in the short term. World trade growth will probably be  
structurally lower because of industries relocation and the  
shortening of global value chains. This may have a negative impact  
on commodity prices.  
Another more radical option would be a sovereign debt moratorium  
or debt relief. The IMF has already approved a temporary debt flow  
relief (i.e. up-front grants to cover debt repayments) for 25 countries.  
G20 countries are expected to offer a moratorium on bilateral loans  
to end-2021. It is a first step that should be amplified. A moratorium  
would allow priority to be given to channelling funding towards their  
healthcare needs, and it would prevent the rating agencies from  
downgrading their sovereign ratings, which would only pour oil on  
the fire.  
Like in the developed countries, the governments and monetary  
authorities have reacted rapidly and in multiple ways. The central  
banks immediately sent strong signals of support for domestic  
liquidity, including key rate cuts, lower required reserve ratios and  
easier refinancing terms for banks. These support measures are all  
the more important for the emerging countries since domestic  
interest rates could come under pressure simply due to the drying  
up of external liquidity.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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