Emerging-Market Economies Brace for Coronavirus Hit
After slamming developed economies in Asia, Europe and North America, the coronavirus pandemic is coming for economies across the developing world.
Economic output in emerging markets is forecast to fall 1.5% this year, the first decline since reliable records began in 1951, according to research firm Capital Economics. In Mexico, the U.S.’s largest trading partner, the economy could contract by up to 8%, its steepest decline since the Great Depression, Bank of America Corp. has estimated.
Even if some developing nations manage to avoid catastrophic coronavirus infection rates, the lockdowns and expected recessions in industrialized countries will take a heavy economic toll. They likely will dent demand for beach holidays in Thailand, clothing stitched together in Bangladesh and auto parts and avocados from Mexico. One-third of Mexico’s economy depends on exports to the U.S.
If the forecasts prove accurate, the toll across emerging markets as a whole could be more severe than in the global financial crisis of 2008, the Asian one of the late 1990s and the Latin American debt implosion of the 1980s. In those cases, economies such as China’s and India’s continued to grow robustly.
Poorer countries have far fewer tools than rich ones to cushion such blows. Their economies are less diversified, relying more on volatile commodities such as oil, remittances from workers abroad and services like tourism. They have less money to spend to ease the burden on companies, and weaker social safety nets. Brazil and Mexico, for instance, have no unemployment insurance for laid-off workers.
“Unemployment may become an even bigger problem than the virus,” said John Rodgerson, chief executive of Brazil’s low-cost airline Azul Linhas Aéreas Brasileiras SA, which has grounded all but 20% of its fleet.
Unlike in many industrialized ones, when central banks in emerging-market nations print money they can stoke fears of a return to past episodes of inflation. Borrowing becomes far harder as investors flee to the relative safety of markets like U.S. Treasurys.
Cutting interest rates often leads to weaker currencies. The Mexican peso, Russian ruble and South African rand have tumbled about 20% against the U.S. dollar in recent weeks, followed closely by the Brazilian real.
“It’s always unpleasant to be an emerging market in a crisis,” says Benjamin Gedan, a South America expert at Washington think tank Wilson Center. “Just when you need capital, it flees to safer harbors. Just as you rely more on export earnings, the price and volume of your commodities exports fall. Just as your tax revenue drops, your currency depreciates and your dollar debt skyrockets.”
The downturn follows a difficult 2019 for many emerging markets hit by a wave of civil unrest and protests, including Algeria, Lebanon, Iraq, Ecuador, Chile and Colombia.
A record $82 billion has been pulled from emerging markets since Jan. 21, according to the International Monetary Fund. That will raise the costs of borrowing and may push debt-laden countries such as Ecuador and Argentina to default. Stocks in emerging markets have fallen 20% in the past six weeks, wiping out all gains since 2017.
Some 80 nations have asked the IMF for emergency assistance, the IMF says.
Many developing nations don’t have the financial firepower they had during the 2008 global financial crisis, when commodities, tourism and remittances were booming.
In Brazil, the administration of President Jair Bolsonaro has far fewer resources than the government did in 2008, when it spent freely to spur recovery. Brazil’s government debt-to-GDP ratio reached 75.8% at the end of last year, compared with 58.6% in December 2008. Brazil’s economy is now expected to slide about 4.5% this year, according to data firm IHS Markit.
South Africa’s credit rating was downgraded to “junk” status on March 27, meaning many U.S. and European pension funds won’t be able to buy its debt anymore. Mexico’s rating was dropped to two notches above junk, and the country’s state-oil firm Petróleos Mexicanos, which has more than $100 billion in debt, may face a debt crisis this year.
South Africa’s large state-run enterprises also are groaning under debt, including $30 billion at power utility Eskom, a level that represents almost 9% of the country’s economic output. Many South African businesses already have stopped paying workers.
In China and India, growth is expected to be the slowest in a generation. Japan’s Nomura bank forecasts India’s economy will shrink by 0.5%. Unemployment there is already at 6.5%, its highest in three decades.
Although crude prices rose late last week after President Trump said he expected Saudi Arabia and Russia would agree to new oil-production cuts, prices are still sharply lower year to date. They are likely to remain relatively weak amid falling demand, which bodes ill for producers including Russia, Colombia and Nigeria. BCS Global Markets forecasts that Russia’s economy will contract by 2.7% this year, mostly because of falling oil prices.
Oil accounts for 65% of Nigeria’s federal budget and 86% of its export earnings. The government of President Muhammadu Buhari has slashed some $5 billion from the budget already.
Argentina entered the year as one of the world’s most vulnerable economies, set to endure its third consecutive year of recession and locked out of credit markets. Tourism and investment in the country’s vast shale deposits were seen as the only possible bright spots. Now both look dead in the water.
“It’s hard to imagine Argentina avoids default,” said Mr. Gedan.
Tourism accounts for nearly 12% of Thailand’s economic output, but a sharp decline in global travel will hit the Caribbean region even harder. In Jamaica, tourism accounts for 34% of the economy, and one in three jobs.
“Jamaica is in for a massive negative economic shock,” Finance Minister Nigel Clarke said last week.
Many countries depend on a diaspora of workers who send home part of their paychecks. Low-wage workers in the U.S. and Europe are suffering mass layoffs, leaving them with far less money to send back home. For tiny El Salvador, remittances account for 20% of GDP. In the Philippines, it is 10%.
Mexico, which has a more diversified economy, faces a quadruple whammy: less U.S. demand for its manufactured exports, a drastic decline in oil income that makes up one-fifth of government revenues, a falloff in tourism revenue, and a decline in remittances. Those are the country’s top four sources of foreign-currency earnings.
Mexico’s Cinépolis, the world’s second-largest cinema chain, has closed all 6,700 theaters it operates around the world as countries order residents to stay at home. Its revenues evaporated virtually overnight. But the company still has fixed costs, including some 44,000 employees in 17 countries. In Mexico, where the company has a staff of 26,500, Cinépolis is giving them two-thirds pay to stay home.
“We’re not prepared for a massive economic halt for many weeks,” said Chief Executive Alejandro Ramírez.
Cinépolis has drawn on credit lines, as have Grupo Bimbo, the world’s largest baking company, and Grupo Televisa, Mexico’s dominant television broadcaster.
Mexican President Andrés Manuel López Obrador has so far said his government won’t offer tax breaks or other incentives to large companies. He said he wants to focus the country’s limited resources on helping the poor, who either work in the informal economy or run mom-and-pop shops.
The ruling party head of Mexico’s Lower House, Mario Delgado, last week called on industrialized nations to forgive the foreign debt of Mexico and other developing countries.
Mexico’s government debt levels are moderate — about 55% of GDP — but that figure will grow. The government said last week it will run a bigger-than-expected fiscal deficit this year of 4.4% of economic output, up from 2.6%. The deficit will grow because of lower revenues such as tax income, the government said.
Complicating matters for Mexico is a loss of confidence among foreign investors, already spooked by the president’s nationalistic economic policies.
Because of that lack of confidence, “Mexico will have more difficulties than other countries to issue more debt,” says Sergi Lanau, deputy chief economist at the Institute of International Finance in Washington.
Source: Dow Jones