Governments and central banks in some emerging markets are reaching the limit of conventional monetary and fiscal tools to support their economies as the pandemic continues to spread, posing serious risks to their economies.
The impact of the Covid-19 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 counter the impact of the outbreak 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.
Martin Mühleisen, the fund's director of the strategy, policy and review department, Hélène Poirson Ward, the department’s deputy division chief and Tryggvi Gudmundsson, an IMF economist, said “much policy room has already been used up by actions undertaken in recent months”.
Two thirds of governments so far have pumped about $11 trillion (Dh40.37tn) into their economies. That has improved market conditions and allowed emerging market countries to raise a record $124 billion debt in the first half of 2020.
The policy support from advanced economies has provided emerging nations wiggle room to soften the economic 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," 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 global economy is set to contract 4.9 per cent this year, the deepest recession since the Great Depression, before making a sluggish recovery in 2021, according to the IMF. The fund projects emerging market economies to shrink by a record 3.2 per cent this year. These economies as a group took a major hit during the financial crisis, but they still grew 2.6 per cent in 2009.
With global trade and oil prices projected to drop by more than 10 per cent and 40 per cent respectively, emerging market economies are likely to face an uphill battle in recovery, IMF officials wrote.
Policy reaction of emerging market governments and central banks during the pandemic has been more in line with that of advanced economies. They used reserve buffers sparingly and allowed exchange rates to adjust to a larger extent, while many injected liquidity to boost financial markets. They also increased spending to support people and businesses to cushion the economic impact.
“Despite these actions, the outlook for emerging market economies remains clouded by considerable uncertainty,” they wrote.
The dwindling conventional policy capacity may force some countries to employ unorthodox measures including price controls and trade restrictions. Some of these measures — which are also being implemented by some advanced and low-income economies — have significant costs, if used intensively, IMF 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 virus remains present, financial conditions are still fragile, and policy space is lower, particularly for those countries facing high risks to debt sustainability.”
