What the pandemic means for already-fragile emerging markets
Stimulus efforts ‘are largely insufficient to deal with a prolonged crisis, and it is crucial that current measures suffice to contain the pandemic globally’
Hong Kong/Singapore — Cracks are appearing across the emerging-market landscape like never before.
As most nations brace for a likely surge in coronavirus cases, the signals from the developing world could hardly be more worrying for investors. Indices of stocks, bonds and currencies may have risen last week as countries from India and Brazil to SA enacted unprecedented measures to buttress their economies, but Friday’s retreat was a reminder the turmoil is far from over. Trading on Monday started poorly, with emerging equities and currencies under pressure and crude oil sliding to a 17-year low.
“We find it too soon to sound the all-clear,” Deutsche Bank strategists led by Drausio Giacomelli in New York wrote in a note to clients. Stimulus efforts “are largely insufficient to deal with a prolonged crisis, and it is crucial that current measures suffice to contain the pandemic globally. This remains unknown,” they said.
Asian policymakers are piling on further measures to counter the effects of the virus. The People’s Bank of China on Monday lowered the interest rate it charges on loans to banks by the most since 2015, while Philippines central bank governor Benjamin Diokno said over the weekend he’s ready to support the economy with further rate cuts and purchases of government securities.
More regions went on lockdown this week, including the Thai tourist island of Phuket, while Indonesia and Vietnam prepared possible quarantines of their largest cities.
The rand slumped to a record low in early Monday trading after Moody’s Investors Service cut SA’s debt rating to junk on Friday. SA may approach the International Monetary Fund for the first time for funding to fight the virus, finance minister Tito Mboweni said. The Mexican peso led declines after S&P Global Ratings lowered the nation’s rating to BBB, the second-lowest investment grade score.
Emerging-market stocks last week had their biggest rally since 2018 and currencies strengthened on the back of global stimulus measures. But a sense of foreboding lingers. JPMorgan Chase’s gauge of expected price swings in developing-nation currencies is headed for its biggest monthly jump since the height of the global financial crisis in October 2008. Equities are poised for their worst month since the crisis, too.
“In the large emerging markets of the world economy — the likes of Brazil, Argentina, Sub-Saharan Africa, India, Thailand, and Malaysia — the virus has yet to arrive at full strength,” Adam Tooze, a Columbia University economic historian and the author of Crashed, an account of the 2008 crisis, wrote in Foreign Policy. “With their populations at risk, their public finances stretched, and financial markets in turmoil, many emerging-market states and developing countries face a huge challenge.”
Action taken by central banks this week includes:
- Singapore’s monetary authority kicked off the week by recentering its currency band downwards and reduced the slope to zero, as economists predicted;
- China swiftly followed, with a 20 basis point in the seven-day repo rate;
- Bank of Korea will provide $12bn to banks in its first round of dollar injections using a currency swap line with the Federal Reserve;
- Investors will watch Chile’s central bank meeting on Tuesday for signs of additional monetary easing after an emergency rate cut earlier in March; and
- The Bank of Egypt will probably keep its benchmark deposit rate on hold on Thursday after cutting rates by a record 300 basis points at an emergency meeting earlier in March, according to Bloomberg Economics.
China’s PMIs likely bounced back in March from record-low levels as the economy slowly restarted after a prolonged virus shutdown. The numbers are due this week.
PMI readings from other emerging markets will provide early data on the effect of the coronavirus on economies stricken by lockdowns and a slump in global trade. These include Poland, the Czech Republic, Hungary, Russia, Turkey, Nigeria and Ghana.
- South Korea reports industrial production on Tuesday and trade data Wednesday, which will give an early picture of global demand in March.
- Inflation data are due in Indonesia on Wednesday and in South Korea on Thursday.
- Brazilian unemployment data for February due Tuesday will be watched for early signs of the coronavirus’s impact on the economy. The primary budget balance is also due Tuesday, and industrial production Wednesday.
Argentina and Lebanon
- Argentina is unlikely to meet its original, self-imposed debt restructuring deadline on March 31, while January economic activity figures on Monday are likely to flag a stagnating economy. The government will report tax revenue on Friday
- Lebanon kicked off talks to restructure its $90bn debt pile on Friday with a promise to present a comprehensive recovery plan for its “broken” economy before the end of this year.
“My preference is Asia emerging-market currencies, equities and bonds, primarily because of their healthy balance-of-payment positions, impressive management of the Covid-19 outbreak,” said Nader Naeimi, head of dynamic markets at AMP Capital Investors in Sydney. “Latam is attractive from a valuation standpoint, but given the rapid acceleration of the contagion and huge reliance on government backstop, the region is in a precarious position due to its large current-account and budget deficits”