Advertise Here
Icon

Directory

IconActuaries
IconAdministration Outsourcing
IconAsset Managers
IconAssociations & Institutes
IconAuditors
IconBanking
IconBBBEE Consulting and Verification Agencies
IconBusiness Chambers
IconBusiness Process Management
IconBusiness Process Outsourcing
IconCompliance
IconConsumer Protection
IconCorporate Governance
IconCredit Bureaus
IconCurrencies
IconDebit Order Collection Facilities
IconEducation and Training
IconFAIS
IconHuman Resources
IconInformation Technology and Software Partners
IconInvestment Consulting
IconInvestment Fund Managers
IconLegal
IconLISPs
IconListed Equities
IconOmbud
IconParticipation Bond Managers
IconPolicy Administration
IconPolicy Trading
IconProperty Unit Trusts (PUTS)
IconPublications
IconRegulatory Authorities
IconStock Exchange
IconSurveys and Research
IconTraining Courses & Workshops
IconUnit Trust Fund Managers
IconWellness Programs
Image
  Subscribe To »

COVID-19 Swings the Spotlight Back onto Emerging Countries’ Debt

Published

2020

Mon

01

Jun

While the focus so far has been mainly on China, Europe and the United States, the consequences of the COVID-19 pandemic are likely to be even more severe for emerging economies, says International credit insurer, Coface.

Even though their degree of vulnerability to this shock depends on many factors, the starting point of their public finances is a key issue, as it determines their capacity to respond to the crisis’ many economic consequences. However, their public debt was already at an all-time high in 2019. Coface assesses the direct risks (economic and sectoral) of the pandemic on the development of emerging countries.

Capital outflows and increased sovereign risk go hand in hand, even for local currency indebted economies

Capital outflows on a never-before-seen scale are the most immediate effect of rising global uncertainty in emerging markets. During March, sales by foreign investors of bonds and equities from 24 emerging markets exceeded USD 80 billion, a four-fold increase over the last quarter of previous crisis of 2008.

During the first quarter, currencies of countries with strong fundamentals depreciated. More generally, emerging country currencies with liquid financial markets were the most penalized. During this period, the strongest currency depreciations against the US dollar were recorded in Brazil, South Africa, Russia and Mexico (more than 25%), followed by Colombia and Indonesia.

 

It is important to note that capital outflows were less significant in the first half of April. These led to a rise in sovereign rates in local currency, whose issues certainly hedge the issuer against exchange rate risk but generate an additional rise in interest rates. Countries that thought they had freed themselves from the "original sin" – i.e. the inability to issue bonds in local currency –  are ultimately not immune today.

Many smaller emerging or developing economies have not been able to issue in their countries’ local currency. They have taken advantage of the very abundant global liquidity in recent years to issue bonds, but in foreign currency. Today, however, these obligations are also penalized by rising sovereign interest rates, which are particularly strong in Ecuador, Angola, and Sri Lanka.

In order to limit the scale of these capital outflows, the central banks of emerging countries have decided to intervene on the foreign exchange market. Other organizations, such as the European Central Bank and the US Federal Reserve, have launched asset purchase programs involving some country's sovereign bonds (Philippines, Colombia, South Africa and Poland).


Emerging economies, already indebted before the crisis, will suffer from the effects of 3 shocks: lockdown, fall in oil prices, and reduced tourism revenue

In addition to the risk to public finances and currency depreciation, Coface considers the exposure of emerging countries to the risks associated with Covid-19 when assessing country risk. First of all, countries affected by the pandemic and whose governments have decided on mandatory containment measures will have to face an increase in indebtedness, resulting from the decrease in revenue linked to the coronavirus crisis, as well as an increase in healthcare spending and spending to mitigate the economic consequences on the population. As of April 10, 2020, 87 countries were in this situation.


Countries dependent on tourism revenue (with a threshold of 15% of GDP) will also be affected by international travel restrictions. In order to avoid a deterioration of the health situation, many of these countries have implemented containment measures and closed their borders to travelers. The tourism sector accounts for at least 15% of GDP in 45 countries, including Morocco, Tunisia, Mexico, Thailand, the Philippines, Croatia, and Cambodia.

Emerging countries dependent on revenues from the export of non-agricultural raw materials will also be affected. Despite a rebound in prices anticipated in the second half of the year by Coface, the forecast (average Brent barrel cost in 2020 expected at 45 dollars) is insufficient for the main exporting countries to balance their budgetary and current balances.

All the more so as, in addition to this "price" effect, there is also a "volume" effect for the countries (including Saudi Arabia), who have agreed to drastically reduce their production in order to limit the extent of the fall in prices caused by the fall in demand. Commodity exporting countries are those whose budget balance is expected to deteriorate the most this year (respectively -15% and -16% of GDP for Algeria and Oman according to IMF figures).


Today, nine countries are affected by 3 of these 4 sources of vulnerability: South Africa, Algeria, Angola, Ecuador, Lebanon, Mauritania, Oman, Tunisia and Venezuela. 31 are affected by two of them and 71 by one.


The additional financing planned by international organizations (notably the IMF) and the debt adjustments announced by creditor countries will help many low-income countries but will likely be of little help to the major emerging countries.

 
Source: Coface
 
« Back to previous page Print this page » |
 

Breaking News »

Coface reports a positive net income of €11.3m for the second quarter 2020 and continues to implement its strategic plan

Turnover for the first semester: €725m, down 0. 6% at constant FX and perimeter Client retention and new business achieve record levels, with a positive net production of €33m First effects of ...
Read More »

  

Liberty Drives Hope - and places the needs of ordinary South Africans at the core

                                    It was a desperate cry ...
Read More »

  

Is the Covid-19 e-commerce boom here to stay?

The Covid-19 pandemic has accelerated the adoption of e-commerce in a way no company could have imagined. In fact, in many instances, it has brought 3-5-year sales projections forward in just a matter of months ...
Read More »

  

Art as a store of value in times of crisis

During times of crisis, the appeal of collectible assets like art can intensify. Nervous of the present risks in investment markets, investors will look to include assets with a more consistent store of value in ...
Read More »

 

More News »

Image

Healthcare »

Image

Life »

Image

Retirement »

Image

Short-term »

Advertise Here
Image
Image
Advertise Here

From The Glossary »

Icon

FINDI:

Financial and Industrial Index in South Africa.
More Definitions »

 

Advertise

 

eZine

 

Contact IG

 

Media Pack

 

RSS Feeds

By using this website you agree to the Terms of Use.
Copyright © Insurance Gateway (Pty) Ltd 2004 - 2020. All Rights Reserved.