If left unchecked, the catastrophe descending upon countries such as South Africa, Brazil, India and Lebanon could shake the industrialized world.
Disorderly defaults on government debt would cause stock and bond prices to gyrate on Wall Street. A torrent of illegal migrants fleeing poverty and sickness could demand refuge. And countries in chaos might serve as a haven for the coronavirus, enabling waves of infection that would hamstring the global economy for years.
“Trouble travels. It doesn’t stay in one place,” Kristalina Georgieva, managing director of the International Monetary Fund, told The Washington Post. “This pandemic will not be over until it’s over everywhere.”
That’s a lesson that may be easy to overlook as record numbers of Americans stream into unemployment offices and economists compete to offer the most alarming projections of a collapsing economy.
But in the weeks since the novel coronavirus stormed out of China, an unprecedented 90-plus countries have petitioned the IMF for assistance. Emerging and developing countries require at least $2.5 trillion this year to cover their bills, according to the fund.
After multiple financial shocks beginning in the 1990s, many of these countries stocked up on foreign currency reserves. But they still are expected to run short this year by “hundreds of billions of dollars,” Georgieva said. And that number could rise as the recession deepens, imperiling affected countries’ ability to pay for imported goods and to repay foreign debts.
This week, finance ministers and central bank chiefs will gather by videoconference for the annual International Monetary Fund and World Bank spring meeting to battle the deepening crisis.
Georgieva — a Bulgarian economist who commands roughly $1 trillion in lending — already has secured the IMF board’s approval to double one emergency funding program. And she has IMF experts racing to develop new short-term credit channels.
Much of this aid will be designed to be fast and will carry few conditions — unlike traditional IMF rescues that required poor countries to undertake wrenching reforms and often left a legacy of acrimony and distress. One new initiative would allow a country to tap a short-term credit line, repay the borrowed amount and then borrow again
On Monday, the IMF said its Executive Board had approved grants from a $500 million “catastrophe containment and relief” fund to cover six months of debt service payments for 25 impoverished countries including Afghanistan and Sierra Leone.
Together with the World Bank, the IMF has proposed allowing the poorest nations to defer billions of dollars in debt payments this year that they owe to richer countries. The aim is to spare countries having to choose between paying doctors or foreign bankers.
But some experts say even these stepped-up efforts will not be enough. The Group of 20 nations, which led the response to the global financial crisis, should spur additional joint action, some say.
“We don’t have sufficient international resources,” said Maurice Obstfeld, former chief economist of the IMF. “I think we should be very worried.”
Added Nathan Sheets, chief economist of PGIM Fixed Income: “The IMF should be the first line of defense. … But what we really need is the G-20 to step up.”
Even before the crisis, the emerging markets had lost their sheen as investor darlings. As globalization flourished after the Cold War, developing countries with a surplus of inexpensive labor attracted enormous investments and became key cogs in global capitalism.
But more recently, the rise of automation, climate change concerns and trade tensions eroded the investor appeal, according to Robin Brooks, chief economist of the Institute of International Finance, an industry group.
The pandemic only accelerated that shift. Fleeing risky assets, investors over the past month pulled roughly $100 billion out of emerging markets, a record withdrawal that was three times the capital flight at the same point in the 2008 financial crisis, according to the IMF.
Many of these countries also have been hurt by plummeting prices for the commodities they produce, such as oil and copper, as well as by the disruption of global supply chains.
Global trade volume this year will fall by 13 to 32 percent, the World Trade Organization said last week. The higher figure would equal in one year the total three-year decline suffered in the 1930s.
“These numbers are ugly and there’s no way around that,” said Roberto Azevedo, director general of the World Trade Organization. “Comparisons with the global financial crisis and even the Great Depression are inevitable.”
This crisis comes with developing countries much more integrated into the global financial system than in the past. Encouraged by advisers — including from the IMF — to lower their trade barriers to join the global economy, they now face U.S. and European export restrictions on critically-needed medical supplies.
Amid the crisis, some self-correcting economic mechanisms are not working as they normally do. Typically, a weak economy will see its currency lose value. That in turn makes its exports more attractive for foreign buyers and helps the economy heal. But now, countries that have slumping currencies, such as Brazil, see little interest from foreign buyers whose economies are closed for business.
Likewise, even as falling oil prices punish producing nations like Saudi Arabia, Brazil and Russia, consuming nations should benefit. But that advantage is muted now because factory orders are sluggish and air travel is depressed.
“The growth picture now is really quite bad,” Brooks said. “Everyone is getting hit simultaneously.”
China will grow this year by 2.1 percent, according to Brooks, its worst performance since 1976. All other major emerging markets, including India, Brazil, Mexico and Russia, will shrink, the IIF expects.
Fighting the pandemic also is far more difficult in countries where the idea of social distancing seems like a bad joke or where the only source of water is communal. The cost of caring for coronavirus patients and helping the unemployed is adding to budget shortfalls.
The coronavirus outbreak is expected to overwhelm the rickety health systems in parts of sub-Saharan Africa, Southeast Asia and Latin America, meaning that the toll of illness and death there could eventually dwarf the grim tallies in the United States and Europe.
Years of ultralow interest rates encouraged governments in the developing world to load up on debt. By the end of this year, emerging markets must pay off or refinance $4.3 trillion in bonds and loans, according to the IIF.
That amount includes $730 billion in foreign currency debt, a particular problem for countries such as Mexico, Brazil and Indonesia that have seen their currencies plummet against the dollar. Those declines mean that Mexican, Brazilian or Indonesian borrowers suddenly require more dollars to repay their foreign loans.
To help alleviate the shortage of greenbacks, the Federal Reserve has agreed to swap dollars for foreign currencies held by several other central banks. Among those benefiting from the swap lines, which were also used in 2008, are Mexico, Brazil and South Korea.
Credit rating agencies already are betraying concern about some emerging markets, downgrading countries such as Mexico, South Africa and Argentina. S&P Global Ratings acted on Argentina after it announced on Monday that it was postponing payments on almost $10 billion in dollar-denominated bonds that were issued under local law.
Another sign of growing investor unease: Since Jan. 1, the share of emerging market bonds that carry double-digit yields has doubled, according to ING Group, a Dutch financial services company.
Borrowers such as Angola, Argentina, Ecuador, Gabon, Lebanon, Sri Lanka, Suriname, Tajikistan and Zambia show signs of “debt distress,” ING said in a recent report.
As global financial leaders prepare for this week’s meetings, the initial focus of the debt standstill talks is a 76-nation group of the world’s poorest countries. The IMF and World Bank want rich country governments to agree to allow countries such as Rwanda, Cambodia and Haiti to delay their debt payments.
“Going into this crisis, the low-income countries had high levels of debt. … Now this is likely to push a number of them over the edge,” said Nancy Lee, a senior policy fellow at the Center for Global Development.
By rescheduling debt service payments due by the end of 2022, almost $33 billion could be made available for these countries to devote to battling the pandemic. If private bondholders and banks also were brought on board, the total would swell by an additional $18 billion, according to Lee.
At the IMF, Georgieva is the rare economist who can boast of having studied at both the Karl Marx Higher Institute of Economics and MIT. As the pandemic gathered steam, she overhauled the fund’s sometimes lethargic procedures and ordered a halt to nonessential activities.
“Everything that is not critical for fighting this crisis is set aside,” she said. “ … We have to eradicate [the pandemic] everywhere for the world to breathe a sigh of relief.”