The End of Emerging Markets?
Economies such as Brazil, Indonesia, India, Russia, and Turkey face a daunting new reality.
The story of the coronavirus has so far been told mostly from the perspective of rich countries, but its harshest effects will still likely be felt by the world’s poor. Africa’s cases rose by nearly half in a single week in April, while India’s numbers continue to tick up. Some of the world’s worst outbreaks are taking place in nations such as Brazil, Ecuador, and Turkey. The pandemic’s epicenter could easily return to Asia or move onward to Latin America.
Beyond this public health emergency lies a devastating economic threat. Only bold action from the U.S. Federal Reserve has staved off what would almost certainly have been a rolling series of financial crises for emerging markets in the aftermath of March’s record $83 billion in capital flight. But the pandemic now threatens a more profound shift, bringing an end to the very idea of emerging markets—namely fast-growing poorer countries able to make rapid strides towards development, becoming the darlings of financial investors in the process.
Some hopes remain that these poorer countries might stage some kind of a miraculous collective coronavirus escape. India’s official data, although far from reliable, suggests just over 1,000 deaths so far—a small amount when compared to more than 63,000 in the United States. Southeast Asia has been hit relatively mildly too. A clutch of theories, ranging from early lockdowns to youthful populations and warm weather, have attempted to explain this resilience. Sadly, the low caseload thus far may come down to a mix of little testing and much luck, a phenomenon that is unlikely to last. Even if they manage to avoid the virus, poorer nations will be hard hit by the global economic fallout. The World Food Programme warned recently that more than 30 poorer countries, many of them in Africa, were on the brink of famine, while the International Rescue Committee predicted as many as 1 billion infections in conflict-affected and fragile states.
Just as troubling will be the process of long-term pandemic management. Richer countries are only now puzzling through how to restart economic activity while avoiding further waves of infections through mass testing and contact tracing. A task of this complexity will be hard even for countries such as Denmark and Singapore. Nations with limited state capacity and patchy health systems will find it nearly impossible. Further outbreaks are therefore likely, and with them will come a destructive cycle of reopenings and lockdowns.
Even if a public health calamity can somehow be avoided, developing nations must now deal with two further pressing challenges: the short-term threat of recession and financial panic, and then the longer-term problem of sustained weaker economic performance.
The latest International Monetary Fund (IMF) projections suggest emerging markets will contract by 1 percent this year. This looks far better than the 6 percent decline predicted in richer countries. But it almost certainly also disguises the true extent of the slowdown, because the emerging-market group includes China, whose giant economy is set to recover relatively quickly. The picture elsewhere looks dire. Commodity exporters are being hit as global demand collapses. Those reliant on tourism are suffering badly too. Remittances are plunging. Economies in Latin America look especially fragile. The likes of Brazil, Russia, and South Africa—all lauded until recently as part of the superstar BRICS group—will decline by 5 percent or more. Still weaker figures are likely if outbreaks spread, which in turn are likely to undermine more hopeful projections for 2021 from bodies like the IMF.
Worse, almost no emerging markets have the resources to fund the level of emergency fiscal support, such as income guarantees and small-business grants, seen in countries such as the United States and Britain. Some will cut back in other areas, as Thailand did in April by reducing defense spending, or seek emergency loans from bodies such as the World Bank. But countries such as India or Indonesia have little fiscal headroom for huge increases in spending, and are also not able to ramp up borrowing as richer countries have done. Nor can their central banks risk adventurous monetary policy, for fear of spooking already anxious investors, prompting further capital flight and currency depreciation.
Most alarming of all is what happens if the present period of market buoyancy in advanced economies collapses. Global markets have risen over recent weeks, in part because of what investment strategist Mohamed El-Erian has called a “massive cognitive failure” to appreciate the severity of the pandemic, much of it powered by blind faith that the Fed will continue to pump in round after round of new stimulus.
Emerging markets therefore find themselves reliant on the largesse of Fed Chairman Jerome Powell and his willingness to keep money flowing. This has been best seen through new swap lines—meaning guaranteed access to U.S. dollars— for countries such as Brazil, Mexico, and South Korea. How long Powell will be willing or able to continue his run of recent balance sheet expansion is anyone’s guess. But if he gives even a hint of running out of ammunition, the flight from developing economies will be rapid and destructive.
This risk is compounded by a further worry, namely how to fund poorer countries’ precarious new stocks of debt. The 30 largest emerging nations owed $73 trillion last year, an IOU pile that has grown by more than one-and-a-half times during a decadelong recent debt acquisition binge, according to the Bank of International Settlements, a grouping of central bankers. Those who have large quantities of debt denominated in U.S. dollars, like Argentina, are especially vulnerable if the U.S. dollar continues to shoot up—as it did in March when panicked investors fled to the relative safety of dollar assets.
Some countries will withstand the blow better than others. Emerging markets in Asia hold trillions of dollars worth of reserves, a lesson learned from their experience in the 1997 Asian crisis. Some, like Vietnam, have weathered the coronavirus crisis relatively well thus far. Even so, as the gravity of the coming global shock sinks in, some kind of emerging-markets financial crisis remains alarmingly likely.
While global bodies have taken some action, it’s far from enough to prevent a crisis. The IMF has provided debt relief to more than two dozen of its poorest member countries. The G-20 group of large economies announced in mid-April that it would suspend debt payments until the end of the year. Other bodies such as the World Bank have offered aid, too. But together such measures don’t come close to the $2.5 trillion the United Nations says is needed to help developing economies cope—a target that requires debt cancellations and unconditional aid on a far greater scale. The burden of debt cancellation must fall broadly too, not just on multilateral bodies such as the IMF and World Bank. Individual countries must play their parts, with China a particular focus, given it has lent huge sums to emerging economies, including about $150 billion to Africa since 2000. But while China has so far said it will offer a pause in debt repayments, so far cancellations have been off the agenda.
Even if immediate health and fiscal crises can be avoided, emerging-economy leaders must also grapple with the second, longer-term change the coronavirus will bring to their growth prospects. This pandemic is quickly unpicking many of the patterns of commercial and financial integration that powered three decades of rapid globalization, helping to lift hundreds of millions out of poverty. Global trade and investment levels are already falling, perhaps never to recover to the levels they reached before the pandemic. Much the same is true for international business travel and tourism.
Some of these trends predate the pandemic, as does a gradual decline of developing-nation economic performance. If you take out China and India, emerging markets as a group have barely grown more quickly than developed markets since 2013, according to Robin Brooks, chief economist of the Institute of International Finance. The coronavirus is set to accelerate their decline.
In short, this may be the end of emerging markets in the sense meant by author Ruchir Sharma in his 2012 book Breakout Nations, when he suggested that countries such as Indonesia, the Philippines, Nigeria, or Thailand could deliver eye-catching spells of above-par expansion. For years after the virus, almost no emerging economy is likely to produce the kind of sustained 7 or 8 percent growth that such markets once promised. True, some emerging markets might grow at close to this rate next year: the IMF, perhaps hopefully, suggests China will post growth of 9.2 percent in 2021. But this will be a one-off bounce-back effect, as countries climb back out of the pit of the deep coronavirus recession. After this, their growth outlook is likely to be below what would have been expected prior to this crisis.
This is clearly an alarming prospect for emerging markets themselves, whose leaders’ legitimacy has long flowed from promises of sustained, rapid rises in incomes. The model of development pioneered by many in emerging Asia, with its emphasis on rapid export-powered manufacturing, will be much less potent in a world of post-pandemic deglobalization. Poor countries’ financial positions will grow more complex too, given that all that new debt was taken on the assumption of growth that no longer looks realistic.
But these trends should alarm the rest of the world too. Emerging economies make up around three-fifths of global output, up from one-fifth in 1990. They have generally acted as responsible stakeholders within the global system too, given so many have benefited from its operation. That may no longer be the case. Facing slower growth and angry domestic populations, it is entirely plausible that countries such as India and Turkey will show the same sour, nationalistic recalcitrance more common from Russia, as it seeks to undermine existing multilateral institutions and bully smaller neighbors. Even if they don’t, the idea that developing nations will lead the global economy out of its current malaise looks increasingly improbable. Most coronavirus patients stage a full recovery. Emerging markets are unlikely to be so lucky.