World, Economy

Emerging economies face acute threat from COVID-19 crisis

Despite relatively effective monetary, fiscal tools to tackle crisis, many emerging economies face harder road amid crisis

Aysu Biçer   | 02.04.2020
Emerging economies face acute threat from COVID-19 crisis

ANKARA

Although most emerging countries are equipped with sound macroeconomic policies and financial tools for dealing with normal economic tremors, in the face of a worldwide pandemic, they have evidently fallen short.

The coronavirus pandemic has thrown the entire world into an age of uncertainty unseen in living memory.

Last month saw a host of governments scramble to draw up economic rescue packages, along with central banks stepping in with expansionary monetary plans to plug sinking world markets.

To many economists, the coronavirus crisis now facing the world is quite different from the 2008 economic crisis at its very roots.

While the earlier crisis originated from weak spots in the U.S. financial system, the trigger for the current turmoil was the rapid spread of the novel coronavirus – an unprecedented global health concern.

The destructive effects of the 2008 crisis also unfolded over more than a year, first in America and then in other world financial centers.

But the coronavirus crisis has taken less than four short months to wreak havoc across at least 178 countries and territories, according to data compiled by U.S.-based Johns Hopkins University.

As of early Thursday, nearly 940,000 cases have been reported worldwide, with a death toll over 47,000 and some 195,000 recoveries.

The novel coronavirus does not play favorite among nations, engulfing East and West, North and South, everywhere triggering an economic crisis never before seen.

Biggest emerging market crisis ever?

These are among the reasons why historians such as Adam Tooze of Columbia University call what we are facing now "the biggest emerging market crisis ever."

Writing in U.S.-based Foreign Policy magazine, he said in some big emerging markets such as Brazil, Argentina, sub-Saharan Africa, India, Thailand, and Malaysia, the microscopic contagion itself has yet to show its full presence.

In these countries, he argued, the shockwaves sent by the coronavirus have spread faster than the outbreak itself.

Despite having fewer confirmed cases and deaths compared to many advanced economies, emerging countries are considered the group most at-risk in terms of handling the virus.

As in the 2008 crisis, these emerging economies are feeling the full force of the storm, since their contribution to global economic output is bigger than ever now.

They also have larger populations than most Western countries, as well as facing much more complex economic woes, making them more vulnerable in efforts to weather the economic fallout.

The World Bank on Tuesday warned that developing economies in East Asia and the Pacific still recovering from trade tensions and struggling with COVID-19 now face the prospect of a global financial shock and recession.

"Countries must take action now – including urgent investments in healthcare capacity and targeted fiscal measures – to mitigate some of the immediate impacts," it said.

With very limited public resources, combined with financial markets in turbulence, emerging economies have entered a new era fraught with multiple hardships.

Creating additional financing or opting to seek foreign help in this case could be a tough road, given how advanced economies such as the U.S. and EU are having trouble saving even themselves.

Policy responses to virus

Recently the IMF launched a policy tracker which summarizes the key economic responses governments are taking to limit the human and economic fallout of the pandemic.

The tracker found that developing countries such as Turkey, Mexico, India, South Africa, and Brazil have taken more or less similar measures to rescue their economies.

All of them opted for expansionary monetary and fiscal policies, yet their packages notably differed in size.

Turkey gets out the big guns

"Looking at the rescue packages revealed by these countries, we see Turkey has a relatively larger relief economic program than others," Ceyhun Elgin, an economics professor at Columbia University, told Anadolu Agency.

Turkey announced a package totaling 100 billion Turkish lira ($15.4 billion), including 75 billion liras ($11.6 billion or 1.5% of GDP) in fiscal measures, plus 25 billion liras ($3.8 billion or 0.5% of GDP) to double the credit guarantee fund.

"While the ratio of South Africa's economic package to GDP is 0.2%, the equivalent figure for Turkey is 2%," he noted.

The Turkish Central Bank also slashed its policy rate from 10.75% to 9.75%, a 9% overall reduction.

The central banks of South Africa and Mexico also made respective interest rate cuts of 16% and 7.14%, while India's Central Bank has so far left rates unchanged.

Turkey, along with South Africa, seems to have taken aggressive moves on their monetary policies, among other steps, said Elgin.

But South Africa is considered by many economists to have the greatest vulnerability to the crisis, as it lacks some financial wherewithal.

According to the IMF, South Africa’s net capital outflows (bonds and equities) in February amounted to $6.2 billion (2% of GDP), with the value of the rand falling 19.5% to the U.S. dollar.

Packages' content matters

"The content of financial packages is also important," Elgin added, pointing to concerns over how the packages will concretely benefit members of the public bearing the brunt of the crisis.

Informal employment, for instance, is one area which countries should put more focus on, he urged.

In the current crisis, the situation in the informal sector, which makes up a significant portion of the economies in developing countries, is set to face further hardships, Elgin warned.

This means the poor will grow more vulnerable, edging closer to the economic precipice, in the coming days amid the continuing crisis.

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