The COVID-19 pandemic’s economic impact on emerging market economies has surpassed that of the international financial crisis. This time, the response has been decisive, similar to that of the advanced economies. It enabled businesses to resume their emerging markets sourcing activities. However, conventional policies are reaching their limit, and innovative ones pose certain risks.
The Ongoing Pandemic’s Impact on the Emerging Market Economies
In the emerging market universe, COVID – 19 still poses risks to both people and economies. While nations like Vietnam, Uruguay, and China have been able to contain the virus, others like India, South Africa, and Brazil are still struggling to cope with it.
The economic impact has been quite severe, and the emerging market economies have received multiple shocks. Domestic containment measures have led to a decline in external demand. The tourism-dependent nations have suffered the most due to a decline in travel, while oil exporters too received a blow as commodity prices saw a sharp fall.
The emerging market economies will face a big battle further as oil prices and global trade are estimated to drop by 40% and 10%, respectively. These may considerably hinder the product sourcing activities for a while. But, the markets are trying different ways to survive and flourish amidst these challenging times.
A Decisive Policy Response
Decisive policymaking in advanced economies caused a turnaround in market conditions. It facilitated the emerging market economies to resume their external financing efforts in the middle of 2020. It led to record levels of bond insurance that year, reaching the $124 billion figure by the end of June. However, not all nations have witnessed improvements. Frontier countries, nations with high debt, and fuel exporters have experienced a tremendous financial shock that increased borrowing costs and denied them access to markets.
Eventually, the emerging market economy policymakers were able to soften the economic blow and facilitate activities like emerging markets sourcing. During earlier crises, the emerging market economies used to tighten policies to prevent fast capital outflows as well as the inflationary effect of exchange rate depreciation. This time, their policy reactions were quite similar to that of the advanced economies.
Plenty of emerging market economies leveraged reserve buffers more sparingly and let exchange rates adjust to a greater extent. Some countries injected the necessary liquidity to ensure market functioning. Nations like Indonesia and Poland removed macroprudential policies and supported credit.
Many countries like South Africa, Mexico, and Thailand let go of their monetary policies during this phase. In some cases, distressed market conditions and limited room to erase police rates further induced the use of unorthodox financial policy measures, like purchases of corporate and government bonds. However, the amounts remained modest when compared to the developed and advanced economies.
A similar picture was also seen on the fiscal policy front. The emerging market economies decided to relax their fiscal stance to handle the health crisis, offset the economic shocks, and support people and firms. Though these efforts were more modest than that of the advanced economies, they were vastly greater than during the international financial crisis of 2008. All these suggest that it will be a good idea to continue your product sourcing works.
A Shift Towards Unconventional Policies
Despite such steps, the outlook for the developing economies still stays clouded by considerable uncertainty. Among the numerous risks, the major one is the possibility of an extended health crisis. It would not only hurt more lives but could have terrible economic consequences.
Confronting a more disastrous downturn will be quite challenging as most emerging markets entered the present crisis with limited room for orthodox external policy, fiscal, and monetary support. Also, much policy room has already been taken up by their recent actions.
Limited policy space may compel a few nations to go for unconventional options. Like, from trade restrictions and price controls to a more unorthodox financial policy and ways to ease credit and monetary regulation. These may aid firms who are considering emerging markets sourcing in 2021.
A few of these options, that some advanced and low-income economies are also implementing, have significant costs when used intensively. For instance, export restrictions can seriously damage the multilateral business system. Also, price controls may affect the flow of goods to needy people.
The effectiveness of other similar policies will depend on the institutions’ credibility. For example, whether a nation has a track record of strong financial policies. As the world navigates the current global crisis, there is little time available to analyze the risks and benefits of these steps.
The Future for the Emerging Market Economies
The emerging market economies have navigated the initial crisis phase quite well. However, the next one could pose even more challenges. The COVID-19 virus remains present, monetary conditions are still fragile, and policy space is lower, especially for those countries facing high risks to debt sustainability. About a third of all emerging market economies had entered the phase with high-debt levels. Currently, they cannot undertake additional discretionary fiscal policy.
As the crisis expands, there is also a grave risk that liquidity issues will transform into solvency problems. Apart from sovereign debt stresses, corporate default risks are significantly high in various emerging market economies. Also, the crisis has had a severe impact on poor people, and this rise in inequality will lead to policy changes in several countries.
These challenges are complicated, and they require a multifaceted policy response. First, domestic policies must be designed in a way that facilitates more durable and inclusive growth. Next, there is a need for increased support from bilateral and multilateral lenders in markets that are hard to access. Also, for nations with unsustainable debts, there is a need for durable and timely resolution of these issues. It can happen through broad burden-sharing across creditors.
The emerging markets are responding quite intensely to the COVID-19 crisis. These viable policy-making and actions will aid businesses that look forward to product sourcing in 2021 and beyond.