Emerging Economies

Many developing states followed the example of China.  They asked their banks to exercise forbearance — allowing for payment deferrals for loans to small- and medium-size businesses and for mortgages.  In addition, some CBs relaxed the capital requirements for banks.[1]  Certain emerging market economies had more fiscal space to absorb the shock caused by the pandemic (Singapore, Hong Kong) while others, including India, were more constrained.[2]  Africa’s largest economy, Nigeria, a top oil producer, was severely hit by the crisis.  This was because of the collapse of oil prices, as most modes of transportation were grounded and people were sheltering in place.  With no buyers in sight, Nigerian oil producing companies were competing to store oil in tankers at sea, hoping to be able to sell that oil in better days.[3]   

Other emerging-market economies, including Brazil, Turkey and South Africa, used their FX reserves to try to support their currencies.[4]   In addition, some emerging-market economies cut interest rates to the point of pushing their real rates into negative territory.  Their CBs introduced  bond purchase programs, in the secondary market, that resembled the Quantitative Easing (QE) programs adopted by the United States, Europe and Japan.[5]  In Brazil, the government passed the ‘war budget’ law, amending the constitution to give its CB more freedom to buy government bonds and other assets during the pandemic.[6]

As money rushed into safe havens — the United States, Switzerland, Germany and Japan — emerging countries’ currencies fell rapidly. Dollar’s rally made the debt of many developing states look unsustainable as they needed more units of their currency to service that debt.[7]     The yield on Angola’s government bond, that was maturing in 2025, jumped from under 7% in the beginning of March to nearly 30% in April 2020.  Fragile countries, including Zambia, Nigeria, Ghana and Ecuador, sought to restructure their debts.  More resilient states, such as Indonesia and Qatar, issued bonds carrying yields much higher than those before the pandemic.[8]  Overall, as government expenses piled up, due to the pandemic, global debt was expected to exceed $2.2 trillion.

The G-20 governments agreed to offer a moratorium on debt repayment to impoverished countries. The moratorium took place through a coordinated approach that applied a common term sheet for the suspension of debt payments.  The G-20 further encouraged private creditors to defer private debt.[9]  G-20 states touted the debt moratorium as demonstrative of their commitment to global solidarity in the midst of the pandemic.  In fact, the moratorium was just a way to postpone the economic crises likely to eventually hit the most indebted states.  Given the widespread economic slow-down caused by the pandemic, most developing states needed more than debt deferral.  They needed debt relief.


[1] S&P Global, Longer Lockdowns, Heightened Risks, Apr. 23, 2020, https://www.spglobal.com/_assets/documents/ratings/research/emerging-markets-ccc-longer-lockdowns-heightened-risks.pdf.

[2] S&P Global, Covid-19: Flatter Growth, Tougher Recovery, Apr. 22, 2020, https://www.spglobal.com/_assets/documents/ratings/research/apac-ccc-covid-19-flatter-growth-tougher-recovery.pdf.

[3] Joe Parkinson and Benoit Faucon, Oil Slump, Coronavirus Create a Perfect Storm for Nigeria’s Economy, Apr. 27, 2020, https://www.wsj.com/articles/oil-slump-coronavirus-create-a-perfect-storm-for-nigerias-economy-11588000761.

[4] Caitlin Ostroff and Avantika Chilkoti, Developing Countries Draw Down Reserves to Shield Currencies, WSJ, Apr. 29, 2020, https://www.wsj.com/articles/developing-countries-draw-down-reserves-to-shield-currencies-11588159630.

[5] S&P Global, Economic Rout Deepens, Policy Response Ramps Up: Emerging Markets Monthly Highlights, at 6, May 7, 2020, https://www.spglobal.com/ratings/en/research/pdf-articles/2020-05-07-emerging-markets-monthly-highlights-economic-rout-deepens-policy-response-ramps-up.

[6] Emerging Markets Launch QE Too: Getting on Board,  Economist, May 9, 2020, https://www.economist.com/finance-and-economics/2020/05/07/emerging-markets-launch-qe-too.

[7] Avantika Chilkoti and Caitlin Ostroff, Coronavirus Heightens Risk of Emerging-Market Defaults, Mar. 29, 2020, https://www.wsj.com/articles/coronavirus-pushes-some-emerging-markets-to-brink-of-default-11585388004.

 [8]Frances Yoon and Avantika Chilkoti,  Bond Investors Are Back, Even in Indonesia, WSJ, Apr. 7, 2020, https://www.wsj.com/articles/bond-investors-are-back-even-in-indonesia-11586263345.

[9] Virtual meeting of the G20 finance ministers and central bank governors, Riyadh, Saudi Arabia, April 15, 2020, http://www.g20.utoronto.ca/2020/2020-g20-finance-0415.html.