Poor countries likely to be hit hard by Corona, experts caution

Friday, April 24th, 2020 00:00 |
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The world is experiencing a sharp deterioration in economic performance, due to the continuing coronavirus pandemic.

Developing countries are certain to be hit hard by what the International Monetary Fund (IMF), and others, warn will be the worst downturn since the Great Depression of the 1930s.

Almost every country on the planet is being affected. The IMF expects 170 nations - rich and poor - to experience a decline in economic activity per person this year. That means falling average living standards.

Developing economies are being hit in distinctive ways by the pandemic:

Commodity prices

Many are exporters of commodities used by industry. The shutdown of many factories around the world means there is less demand for those commodities, so their prices have fallen, sharply in some cases. Oil is the starkest example. 

The loss of demand has been especially severe, as the crisis has led to a massive reduction in demand for transport fuels, more than 90 per cent of which are made from crude oil.

The situation was exacerbated for a period by what was in effect a price war between the two biggest exporters, Russia and Saudi Arabia. There has been an extraordinary situation where some oil prices have been below zero.

It is not a general feature of the oil market, but it does highlight the huge imbalance between supply and demand.

Other commodities have also seen sharp price falls, although not generally on the scale of oil. Copper, for example, is now about 18 per cent cheaper than it was in mid-January, and zinc’s price is more than 20 per cent lower.

These price falls are hitting businesses and government revenues in countries that export these commodities.

International investment

Developing countries have also had to contend with international investors pulling money out. The IMF’s chief economist Gita Gopinath says the appetite for risk among international investors has waned.

This means they are more inclined to sell investments seen as relatively risky, including bonds and shares in emerging markets, and pull money back to what they regard as safer bets, such as the US, Europe or Japan.

She says the result has been “unprecedented reversals in capital flows”.

In a blog published by the Brussels think thank Bruegel, Marek Dombrowski and Marta Domínguez-Jiménez set out a number of financial indicators showing the strains that have built rapidly in some emerging economies.

They show how the difference between bond yields - which are a measure of borrowing costs in financial markets - in the US and in developing nations has widened in many cases. 

This is often a sign that investors believe there is an increased risk of borrowers, including governments, defaulting on their debts.

Another sign of this is the increased cost of getting insurance against a default (that is, the price of financial instruments called credit default swaps).

And then there have been sharp declines in currency values for many countries. That is another sign of investors wanting to get their money out.

Foreign debt

That also raises another issue - foreign debt. A decline in the value of a national currency makes it more expensive to repay, or pay interest on, debts in other currencies. 

At a time when developing country government budgets are under pressure to deal with the health crisis and its economic consequences, debt payments could be a serious diversion of scarce resources.So there is a vigorous campaign to address developing countries’ debt problems.

The IMF and the world’s leading economies have taken some steps to ease this burden, by providing relief from the burden of debt interest and repayments over the next few months.

The IMF agreed to cover the payments due from 25 countries, mostly in Africa, over the next six months, from a trust fund financed by donations from member countries, including a recent pledge of $185 million by the UK. 

In effect those payments have been cancelled. The G20 leading economic powers agreed to defer - not cancel - debt payments from May to the end of the year for a larger group of the poorest nations. This decision covers debt payments to G20 governments from a total of 77 countries.  –BBC

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