Dubai: As economies and countries worldwide battle a renewed COVID-19 outbreak, albeit at a slower rate of spread in some parts, there is increasing evidence that developing markets are falling behind further.
“COVID-19 is still to play out fully in the emerging market universe, posing risks to both people and economies,” cautioned economists at the International Monetary Fund (IMF).
“The economic impact has been even more severe as emerging market economies were buffeted by multiple shocks, the economists wrote in a blog, while adding that the effects of domestic containment measures worsened with a decline in external demand.
Tourism-dependent EMs hit
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 per cent and 40 per cent respectively, “emerging market (EM) economies are likely to face an uphill battle”, the IMF further noted.
Capital outflows stabilize
This is even as capital outflows have stabilized and sovereign spreads retreated compared to the sharply volatile market conditions seen in March.
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.
Infection rate spikes
“Emerging markets (EMs) account for the majority of new global coronavirus cases each day and, while containment measures may be tightened sporadically, these are generally likely to be targeted and localized,” economists at Capital Economics wrote in a note.
“The spread of the virus is, of course, extremely unpredictable,” the economists added. “But the risk of prolonged severe lockdowns similar to those seen in March and April – which would cause much greater economic damage – generally seems to be concentrated in parts of Latin America.”
Economic data for second quarter revealed widespread drops in GDP, but the extent of the damage varied markedly depending on the length and severity of lockdowns, data analysts indicated.
“Recoveries since then have followed the same pattern,” Capital Economics economists added. “Looking ahead, Asian economies including China and Korea should continue to outperform given their success containing the virus. But uncontrolled outbreaks in India and Latin America will see them lag behind.”
Meanwhile, the economists forecasted that developed market (DM) “risky” assets will make further ground over the next couple of years as the global economy continues to recover from the coronavirus shock and both monetary and fiscal policy remain extremely accommodative.