Europe: Emerging Markets in the Post-Covid19

Emerging and developing economies will likely be hardest hit by Covid-19. Rebuilding would need both pre-existing conditions and new ones to be tackled.

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In certain areas of the global economy, Covid-19 is slashing a destructive swath, exacerbating protectionism, escalating trade tensions, leading to the decline of foreign direct investment, and devastating the welfare and livelihoods of millions. In its World Economic Outlook report in June, 2020, the International Monetary Fund ( IMF) expected a downturn in the global economy of 4.9%, 1.9% more than it had estimated in April, with emerging economies experiencing an overall decline of 8% in production and Europe typically suffering even more. Gita Gopinath, head of the IMF 's research branch, estimated in June that the cost of the crisis will reach $12 trillion between 2020 and 2021.

But developed and developed economies where savings are limited are the hardest hit, government budgets are limited, and realistic steps to reduce the virus are difficult, such as social distancing. Developing countries are looking at substantial budget deficits for 2020 due to the additional healthcare and social spending costs expected.

“The short-term growth outlook for 2020 is in tatters everywhere—even in countries where the Covid-19 response was superb, like South Korea and Taiwan, where there were no lockdowns and which have had a very strong test-trace-isolate response,” says Rob Carnell, Asia-Pacific chief economist at ING Bank.

Carnell continues that, while there are already so many complexities, it is impossible to determine which nations would turn out to have had "the best pandemic" experience, but it is clear that many central banks are maxing out on contingency efforts.

According to Oxford Economics, Covid-19 deficits along with maturing debt commitments have left countries as far apart as Egypt, South Africa and Brazil with massive budget caps. A vital revenue driver for many developing markets, tourism has collapsed. Energy-dependent economies, exports of natural resources and remittances are all suffering, the latter of which is seriously affected by border closures and employment cuts in services.

As of late August, IMF estimates are that emerging markets/developing economies' GDP will contract by 3% in 2020, or minus 5% excluding China, the only major economy projected to expand this year. Recovery in 2021 relies again on China; without a boost from China, projected growth of 5.9 percent for emerging / developing economies will be much smaller. Uncertainties include the appetite of international buyers, the degree to which trade will rebound and the supply chains of the state next year.

The pandemic aspect remains the biggest economic uncertainty; any substantial increase in Covid cases later in 2020 or early 2021 will make all these already extremely conditional predictions obsolete. Important stress has been placed on all emerging markets, says Ed Parker, head of sovereigns for Europe, Middle East and Africa at Fitch Ratings. So far this year, his party has downgraded a whopping 20 sovereigns.

Looking Ahead

Javorcik predicts a transition to green in the medium term, with climate change mitigation being a concern when it has traditionally been regarded as unimportant or simply expensive. Many close analysts claim that, at least in part, the pandemic was triggered by the human invasion of the animal kingdom, stressing the importance of vigilance in the growth of human economic activity.

Other major yet incremental shifts in perceptions may be in the works, with far-reaching effects. The pandemic may create greater respect for state-owned companies who, during the crisis, were more trustworthy employers. While debt levels are likely to be much higher in the future, to alleviate the problem, political winds will change to a more favorable view of state spending. Likewise, the uncertainty created by the upheaval in Covid-19 could spur greater enthusiasm for more competitive labor markets. Public opinion may urge policymakers to take concerted action to close foreign tax loopholes that have allowed large corporations to take advantage of emerging market opportunities without offering adequate support to the host country.

In a July 30 webcast, IMF Managing Director Kristalina Georgieva clarified that the global recovery is likely to be partial and incomplete, unfolding in "different countries, different industries, at different times." The instability among developed and developed markets will be most pronounced. Though Asia and emerging Europe tend to be in better shape than other developed areas, that could shift.

History indicates that, like revolutions, pandemics intensify certain developments already happening and help to launch new ones. In ways that we do not predict, the post-Covid universe will look different. It would take navigational skills for emerging and developing economies to avoid the deepest potholes, combined with ingenuity and resilience to make the most of any possibilities it may present.

#Europe #EmergingMarket #Covid19

References

https://voxeu.org/article/post-covid-19-exit-strategies-and-economic-challenges-emerging-markets

https://www.imf.org/en/Publications/REO/EU/Issues/2020/10/19/REO-EUR-1021

https://www2.deloitte.com/xe/en/insights/economy/emerging-market-economies-coronavirus-pandemic.html

Van Anh Nguyen