Emerging markets out of options to support economies as virus spreads, IMF says
Governments and central banks in some emerging markets are approaching the limits of conventional monetary and fiscal tools to support their economies as the coronavirus pandemic continues to spread, posing serious risks to their economies.
The impact of the outbreak on emerging markets has far exceeded that of the global financial crisis and the pandemic has yet to “play out fully in the emerging market universe”, according to the International Monetary Fund.
Unorthodox policy tools available to mitigate economic damage are “not without risks”, three senior IMF officials said in a joint blog post.
“Confronting a more severe downturn will be challenging because most emerging markets entered the current crisis with limited room for traditional fiscal, monetary, and external policy support,” they wrote.
Director of the fund’s strategy, policy and review department Martin Muhleisen, the department’s deputy division chief Helene Poirson Ward and economist Tryggvi Gudmundsson said “much policy room has already been used up by actions undertaken in recent months”.
Two out of three governments pumped in about $11 trillion (Dh40.37tn) into their economies and that improved market conditions, allowing emerging market countries to raise a record $124 billion in debt in the first half.
The policy support from advanced economies has provided emerging nations with enough wiggle room to soften the blow of the pandemic. However, countries such as Brazil, India, and South Africa are still struggling with rising infection rates.
“The crisis would have been worse still without the extraordinary policy support. But not all countries have seen improved fortunes,” the IMF officials said.
“Fuel exporters, frontier countries and those with high debt are experiencing a greater financial shock that pushed up borrowing costs or, even worse, denied them further access to markets.”
The world economy is set to contract by 4.9 per cent this year, its deepest recession since the Great Depression, before making a sluggish recovery next year, according to the fund. The fund expects emerging market economies to shrink by a record 3.2 per cent this year. These economies took a major hit during the 2008 financial crisis but still grew by 2.6 per cent in 2009.
With global trade and oil prices set to drop by more than 10 per cent and 40 per cent, respectively, emerging markets are expected to face an uphill battle in their bid to recover, the fund’s officials wrote.
The policy reactions of emerging market governments and central banks during the pandemic was more in line with that of advanced economies.
They used reserve buffers sparingly and allowed exchange rates to be adjusted to a large extent, while many injected liquidity to boost financial markets. They also increased spending to support people and businesses from the economic damage.
“Despite these actions, the outlook for emerging market economies remains clouded by considerable uncertainty,” the IMF officials wrote.
The dwindling capacity of conventional policy tools may force some countries to employ unorthodox measures such as price controls and trade restrictions.
Some of these measures, which are also being enforced by some advanced and poor economies, pose a significant risk if they are used intensively, the officials said.
“Emerging market economies have navigated the first phase of the crisis relatively well, but the next phase could be much more challenging,” they wrote.
The IMF said the impact of the outbreak on emerging markets has far exceeded that of the 2008 financial crisis