Thursday
June 11
2020

Preventing an Emerging-Market Meltdown

By Andrés Velasco

In his novel Chronicle of a Death Foretold, Gabriel García Márquez describes a tragedy that everyone anticipates but no one will stop. The same is true of the perilous plight of emerging markets today: the international community could prevent imminent macroeconomic disaster, but seemingly lacks the will to do so.

For emerging and developing countries, COVID-19 represents five shocks, not one. To the initial health shock, add a sharp drop in commodity prices, a massive contraction in export volumes (the World Trade Organization expects global trade to decline by as much as one-third in 2020), loss of remittances, and unprecedented capital outflows in March. And although the latter were partly reversed in April and early May as a result of record bond issuance by emerging-market governments, this was less an indicator of stability than the equivalent of households drawing on their credit lines to have cash on hand during the coming storm.

The upshot is that many emerging markets will soon experience deep recessions and massive job losses, which risk pushing tens of millions of people back into poverty. The debt shock of the early 1980s caused a “lost decade” for Latin America. COVID-19 could cause a lost decade for the developing world.

Photo courtesy of congerdesign.

Source: Preventing an Emerging-Market Meltdown (link opens in a new window)

Categories
Coronavirus, Finance
Tags
capital, coronavirus, crisis, emerging markets, global economy