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Economic recovery: Emerging markets likely to face an uphill battle - IMF

Emmmerging Markets.jpeg?fit=1000%2C512 IMF says economic impact of the COVID-19 on emerging market economies is dire

Tue, 11 Aug 2020 Source: laudbusiness.com

The International Monetary Fund, latest June World Economic Outlook update has projected that emerging markets are likely to face an uphill battle as far as the economic recovery in the wake of the Coronavirus pandemic is concerned.

The IMF noted that the economic impact of the COVID-19 pandemic on emerging market economies far exceeded that of the global financial crisis.

Unlike previous crises, the response has been decisive just like in advanced economies.

Yet, conventional policies are reaching their limit and unorthodox policies are not without risks. COVID-19 is still to play out fully in the emerging market universe, posing risks to both people and economies. While countries such as China, Uruguay, and Vietnam have managed to contain the virus, others such as Brazil, India, and South Africa continue to grapple with a rise in infections.

The economic impact has been even more severe as emerging market economies were buffeted by multiple shocks. Compounding the effects of domestic containment measures has been a decline in external demand. Particularly hit are tourism-dependent countries due to a decline in travel and oil exporters as commodity prices plummeted. With global trade and oil prices projected to drop by more than 10 percent and 40 percent respectively, emerging market economies are likely to face an uphill battle. This is even as capital outflows have stabilized and sovereign spreads retreated compared to the sharply volatile market conditions seen in March.

Not surprisingly, the IMF’s latest June World Economic Outlook Update projects emerging market economies to shrink by 3.2 percent this year—the largest drop for this group on record. By way of comparison, in the global financial crisis, growth for the group took a significant hit but still bottomed out at a positive 2.6 percent in 2009.

The crisis would have been worse still without the extraordinary policy support. For sure, decisive policy actions in advanced economies led to a turnaround in market conditions that allowed emerging market economies to resume external financing efforts in April and May, which contributed to record levels of bond issuance so far this year—to the tune of $124 billion as of the end of June. But not all countries have seen improved fortunes. 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.

Policy support by advanced economies provided emerging market economy policymakers with wiggle room to soften the economic blow. Unlike previous episodes, where emerging market economies tended to tighten policy to avoid rapid capital outflows and the inflationary effect of exchange rate depreciations, the current crisis has seen emerging market economies’ policy reaction more in line with that of advanced economies.

Most emerging market economies used reserve buffers more sparingly and allowed exchange rates to adjust to a larger extent, while many countries injected liquidity as needed to ensure market functioning. Countries like Poland and Indonesia further eased macroprudential policies to support credit.

Like their more advanced peers, many emerging market economies, including Thailand, Mexico, and South Africa, eased monetary policy during this cycle. In a few cases, limited room to cut policy rates further and distressed market conditions induced use of unconventional monetary policy measures for the first time. These included purchases of government and corporate bonds, although the amounts remain modest so far compared to the larger advanced economies. Conversely, the use of capital flow measures to deter capital outflows has been quite limited so far.

A similar picture is evident on the fiscal policy front. Emerging market economies have relaxed their fiscal stance in an attempt to tackle the health crisis, support people and firms, and offset the economic shocks. While more modest than that of advanced economies, these efforts were significantly greater than during the global financial crisis.

Source: laudbusiness.com
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