The emerging storm

Rebecca Cretney flags how emerging markets may soon face huge difficulties due to the coronavirus pandemic as any health systems buckle and the economy stops.

Published 4 May
10 mins

He allowed himself to be swayed by his conviction that human beings are not born once and for all on the day their mothers give birth to them, but that life obliges them over and over again to give birth to themselves.

― Gabriel García  Márquez, Love in the Time of Cholera

What might these headwinds be?

It is no secret that, during times of crisis, there is a flight to safety from emerging markets to perceived safer havens, such as the US. Foreign investment outflows from emerging market bonds and shares are in the region of US$100 billion since January. Capital is flowing out of some of the countries that need it most, at a time when they needed it most. Why? Because the risk premium (i.e. the level of return expected due to the increased risk associated with these investments) cannot be quantified.


This, along with other factors, such as tourists not requiring local currency to enjoy local goods, and a slump in exports, puts downward pressure on emerging market currencies. For instance, the Russian rouble and Mexican peso have depreciated 20% versus the US dollar, which could lead to inflation in these countries.  In countries where the currency is pegged to the US dollar, this has resulted in decreasing international reserves, as central banks have had to intervene on foreign exchange or sovereign debt markets. The Federal Reserve’s swap lines to 14 central banks (South Korea, Brazil and Mexico among others) have prevented a global dollar shortage.


Commodity prices have collapsed. Many of these countries are large producers of commodities, which the rest of the world needs to manufacture goods. That need has dried up. We recently covered the collapse of oil prices, but this deserves another look using the Middle East to illustrate the variance of reliance on liquid gold, even within the same region.


In Iraq, the whole country is affected at the most basic level: oil is the biggest source of wealth in a nation where there is limited social security and which is already in the midst of a humanitarian disaster because of the war, with displaced people living in camps.


The Gulf, which is perhaps of more interest to western investors, is able to better withstand a drop in oil prices on a short-term basis, but long term this represents an existential crisis. The Cooperation Council for the Arab States (which used to be known as the Gulf Cooperation Council or GCC) economies operate on a high oil price. Their break-even point to cover the cost of government and financial obligations to their populations range between US$44 and US$108 a barrel, with the average sitting at around US$80. There has been an effort to bring this reliance down, by diversifying economies and reducing employment in the public sector, but they are far away from achieving these goals.


The COVID-19 pandemic also sets them back because some of the industries they are diversifying into are heavy industries or tourism, which have been completely destroyed. Worldwide trade has been severely damaged by the pandemic and travel has completely stopped. When export levels fall, countries typically bridge the gap between these and their imports by borrowing from other countries. But now these countries face higher borrowing costs, because they represent a higher risk. Emerging economies may need at least US$2.5 trillion to combat the effects of the pandemic, either from foreign sources or their own reserves. As a response, the G20 group has granted a period of grace in debt servicing arrangements for the world’s poorest 77 countries, but private investors have yet to do the same.


The Middle East also serves to highlight another headwind prevalent in both emerging and developed markets – that of pre-existing political tensions. When the pandemic first broke out, the UN’s Secretary General, Antόnio Guterres, called for peace, saying “The fury of the virus illustrates the folly of war” and the world appeared to listen. But sadly, while some factions have announced a ceasefire, the pandemic could exacerbate tensions between or within societies, or be used for political manoeuvring, especially when the most powerful job in the world is up for grabs this year.


The tensions between the US and China over the origins of the virus and the role of the World Health Organization perfectly illustrate this point and the dangers these pose, not only to economic prosperity, but also to peace. Other nations will argue about access to health services or jobs. One only has to look at the 2014 Ebola outbreak in Africa.  Tensions can create a vicious circle that leads to even greater fragility in poorer nations. We have all seen footage of protests in Iran, Iraq, Lebanon and Venezuela, all of which were already in the middle of economic and humanitarian crises. In these countries, the pandemic is having the effect of suppressing political dissent. On a human rights level, this is very concerning: it is giving authoritarian governments a lot of power to do whatever they want without a populous push back.


Fiscal and monetary manoeuvring is more difficult. Emerging market economies have limited space for increased spending. Many emerging economies may be forced to take a “whatever it takes” approach, despite their budget constraints, and non-internationalised currencies. In many cases they will face policy trade-offs. For example, central banks will buy government bonds to provide financial lifelines that support smaller firms and households. Alternatively, central banks can use their balance sheets more flexibly to support bank lending to small and medium-sized companies through risk sharing with the government. Most emerging market nations, in particular in Africa and Latin America, have limited room in their budgets to increase to the spending necessary to control the spread of the disease and prop up their economies. Tighter global financial conditions limit access to finance, and development projects will suffer substantial delays or won’t get off the ground. For countries with flexible exchange rate regimes, the exchange rate should be allowed to act as a shock absorber.


The UN has warned that over 1.6 billion people work in the informal economy – part of the economy that is neither taxed nor monitored by any government – and most of these are in emerging markets, although that is not always the case, as we have seen in southern Italy. Here, if you don’t work you simply don’t get paid. The informality of this economy makes understanding and helping the needs of the most vulnerable an even greater task. It is estimated that in the first month of the crisis, the income of informal workers fell 60% globally and by over 80% in Latin America and Africa. Because this economy is informal, governments might be unable to reach vulnerable households through traditional transfers, and particularly where there are no extensive social assistance systems already in place. The informality rate in Latin America is close to 40%, compared to 10% in advanced economies. Countries will need to create fiscal space in their budgets by reducing non-priority expenditure and increasing the efficiency of spending.


Added to this, many of these economies were already on the edge of a precipice, with significant reliance on humanitarian aid, which is drying up to compound the problem, and charitable organisations are crying out for additional funding. Not only this, delivery of aid is hampered by restrictions on movement of people.

What effect is the coronavirus already having on growth?

In Asia, which has already suffered at least a first wave of the pandemic, growth is expected to be at its worst level in almost 60 years. Pacific Island countries are among the most vulnerable given the limited fiscal space, as well as comparatively underdeveloped health infrastructure. A synchronised slowdown of Asia’s main trading partners and the effects this has on growth is indicative of what is already happening in other nations.

The last time China’s economy contracted was during the cultural revolution of the 1960s and 1970s. From 1976 until now, China has seen an economic boom which we will never see again – it’s a one-time event. China’s stimulus is around 10% of GDP, on top of which additional stimulus is being pushed through the banks, which are controlled by the government. There were some additional downward pulls to China’s growth even before the coronavirus broke out. These included the anti-corruption campaign the government was running, which affected overall consumption, and a communist recentralisation of power, which discouraged business expansion, and the trade war with the US, which by no means has ‘gone away’. The collapse in the price of oil also has a deflationary effect on China.

Latin America is facing the worst recession since its countries started producing national accounts statistics in the 1950s, according to the IMF.  In the region, 16 countries have already requested emergency funding from the IMF. Although, in time, a sharp recovery can be expected from the region, it still faces the possibility of a lost decade (2015-2025). Government actions vary by country, including direct cash injections to vulnerable households, relaxation of unemployment insurance schemes, employment subsidies, temporary tax breaks and deferrals and credit guarantees. Countries with better credit quality (Peru, Brazil and Chile), as reflected in market spreads, have generally been more aggressive in their response to the pandemic  Regulators have lowered bank reserve requirements, for instance, and central banks have expanded the size of their liquidity provisions, sometimes also allowing the participation of non-bank financial intermediaries. Several central banks (Brazil, for example) have also intervened in foreign exchange markets.

How is the pandemic projected to spread?

It is perhaps pertinent to conclude by considering the human cost of the pandemic. Throughout some of the world’s emerging economies, we could see up to 1 billion coronavirus cases and up to 3.2 million deaths, based on epidemiological modelling and data produced by the Imperial College London and the World Health Organization. In these poorer nations, there are two factors to consider:

  • First, in lower-income contexts, there are population health risks which drive infection rates up (overcrowding, malnutrition, pre-existing conditions, such as respiratory diseases from polluted air, tuberculosis and HIV)
  • Second, the population age structure may drive mortality rates down.

However, the data that forms the basis of the projections assumes that there is the same medical care in some of these countries, as there is in China, which is not necessarily the case. In many countries, the need is far greater and more basic, ranging from hygiene kits and protective gear to access to medical staff. In Venezuela, for instance, nearly half the medical staff had already left the country before the crisis.

Additionally, social distancing is often simply not possible. Refugee camps are some of the most densely populated areas in the world. One slum in India is home to over 800,000 people in a quarter mile stretch. Here, the virus will spread significantly faster than figures seen for developed market economies.

As we have seen already, the economic impact on emerging economies could be substantially higher than to developed nations due to the additional headwinds these countries face. In countries which are already impoverished, households will suffer a devastating blow on their income levels and ability to work, and there is often no universal social security system in place. What can we do about this? I will answer in the words of a fellow countryman: “Too much sanity may be madness and the maddest of all, to see life as it is and not as it should be.” Miguel de Cervantes (1547-1616)

Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand how we manage money, or call +44 (0)1624 645000 to speak to our client services team.


If you would like to find out more about how we can help clients manage their investments, please contact us on the same number as above, or complete a form using the links towards the end of the page.

Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rates also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned may be included in clients’
portfolios. They are referred to for information only and are not intended as a recommendation, not least as they may not be suitable. You should always seek professional advice before making any investment decisions.

about the author

Rebecca Cretney

Rebecca Cretney

Rebecca joined Nedbank Private Wealth in May 2004 having moved to the Isle of Man from Barcelona to pursue a course in Business Studies with the Isle of Man Business School. Rebecca was appointed to the role of investment counsellor in March 2019 to focus exclusively on the company’s discretionary investment management services.


She works closely with our teams of private bankers to provide support in advising our clients with integrity, and to give additional technical investment expertise where more complex portfolio requirements exist.


Rebecca is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Chartered Wealth Manager.

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