Over $100 billion leaves developing economies due to pandemic crisis
By Anna J. Park
Since the COVID-19 pandemic hit the global economy, capital has flowed out of emerging countries over the last 100 days, sending a warning that emerging markets could spark another economic crisis.
According to recent data from the Institute of International Finance (IIF), there has been an estimated outflow of $100.07 billion from emerging countries between Jan. 20 and April 29. This is 4.2 times the $23.6 billion outflow during the 2008 financial crisis following the collapse of Lehman Brothers.
One of the key culprits behind the massive outflow is concerns over the aggravated debt of emerging countries as well as their weakened currencies.
For instance, Brazil's real has depreciated 27 percent against the dollar since the the end of 2019, while South Africa's rand fell 25 percent, and Turkey's Lira, 15 percent.
The International Monetary Fund (IMF) predicted that emerging countries' fiscal deficits for this year would be 8.9 percent of their total GDP. This figure is about 1.8 times higher than the outlook six months ago, reflecting growing concerns over the finance situation in these countries.
Credit rating agency S&P has also downgraded over a dozen countries since January ― 10 of which were African states including South Africa and Nigeria ― as emerging markets' fiscal situation is expected to deteriorate amid the COVID-19 crisis.
Institute of International Finance (IIF) economist Jonathan Fortun said that capital outflows from emerging markets present a virtual sudden stop in funding to these countries, as virus-led economic uncertainty and foreign exchange (FX) pressure on their currencies loom large on their fiscal situation in the near future.
"This translates to greater pressure for emerging markets (EMs) to finance their current accounts and highlights the need for fresh hard currency funding," Fortun told The Korea Times.
"In recent weeks, we have seen a slight improvement from the record-breaking outflows in March. However, we still believe that EMs are not in the clear yet, as uncertainty surrounding the impact of COVID-19 plus the limited policy space for some Ems. And FX pressures are still challenges for EMs in the near future," the economist added.
Hwang Sei-woon, a research fellow at the Korea Capital Market Institute, also warned of a possible liquidity crisis in emerging economies.
"While developed countries have a well-devised response system to deal with deteriorating fiscal debt, emerging market countries have a much higher chance of going through a liquidity crisis due to their weakened currencies and hiked debt ratios," Hwang told The Korea Times.
Hwang predicted that the situation will improve when the COVID-19 crisis stabilizes. However he explained that emerging countries' situations haven't yet passed the apex of the pandemic spread in their countries, while most developed countries seem to have reached their apex.
"As major banks in developed economies mostly own government bonds of the emerging markets, at least the financial institutions' results would be impacted, increasing market volatility in developed countries," he added.
By Anna J. Park
Since the COVID-19 pandemic hit the global economy, capital has flowed out of emerging countries over the last 100 days, sending a warning that emerging markets could spark another economic crisis.
According to recent data from the Institute of International Finance (IIF), there has been an estimated outflow of $100.07 billion from emerging countries between Jan. 20 and April 29. This is 4.2 times the $23.6 billion outflow during the 2008 financial crisis following the collapse of Lehman Brothers.
One of the key culprits behind the massive outflow is concerns over the aggravated debt of emerging countries as well as their weakened currencies.
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For instance, Brazil's real has depreciated 27 percent against the dollar since the the end of 2019, while South Africa's rand fell 25 percent, and Turkey's Lira, 15 percent.
The International Monetary Fund (IMF) predicted that emerging countries' fiscal deficits for this year would be 8.9 percent of their total GDP. This figure is about 1.8 times higher than the outlook six months ago, reflecting growing concerns over the finance situation in these countries.
Credit rating agency S&P has also downgraded over a dozen countries since January ― 10 of which were African states including South Africa and Nigeria ― as emerging markets' fiscal situation is expected to deteriorate amid the COVID-19 crisis.
Institute of International Finance (IIF) economist Jonathan Fortun said that capital outflows from emerging markets present a virtual sudden stop in funding to these countries, as virus-led economic uncertainty and foreign exchange (FX) pressure on their currencies loom large on their fiscal situation in the near future.
"This translates to greater pressure for emerging markets (EMs) to finance their current accounts and highlights the need for fresh hard currency funding," Fortun told The Korea Times.
"In recent weeks, we have seen a slight improvement from the record-breaking outflows in March. However, we still believe that EMs are not in the clear yet, as uncertainty surrounding the impact of COVID-19 plus the limited policy space for some Ems. And FX pressures are still challenges for EMs in the near future," the economist added.
Hwang Sei-woon, a research fellow at the Korea Capital Market Institute, also warned of a possible liquidity crisis in emerging economies.
"While developed countries have a well-devised response system to deal with deteriorating fiscal debt, emerging market countries have a much higher chance of going through a liquidity crisis due to their weakened currencies and hiked debt ratios," Hwang told The Korea Times.
Hwang predicted that the situation will improve when the COVID-19 crisis stabilizes. However he explained that emerging countries' situations haven't yet passed the apex of the pandemic spread in their countries, while most developed countries seem to have reached their apex.
"As major banks in developed economies mostly own government bonds of the emerging markets, at least the financial institutions' results would be impacted, increasing market volatility in developed countries," he added.
