Many developing states followed the example of China.  They asked their banks to exercise forbearance — the deferral of payments for loans granted to small- and medium-size businesses and for mortgages. Some CBs even relaxed the capital requirements for banks.[1]  A few countries had more fiscal space to absorb the shock caused by the pandemic (Singapore, Hong Kong) but others, such as India, were more constrained.[2]  Africa’s largest economy, Nigeria, a top oil producer, was severely hit by the crisis due to the  collapse of the oil prices caused by the lock-downs. With no buyers in sight, Nigerian companies competed with each other for storage space. Many companies used oil tankers to store oil at sea, hoping to sell that oil supply in better days.[3]

Emerging-market economies, including Brazil, Turkey and South Africa, used their FX reserves to support their currencies.[4] The subdued inflation, made it possible for states to cut interest rates, driving their real rates below zero. Some countries 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. That law amended the constitution to give Brazil’s 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 — the currencies of developing states fell rapidly. Dollar’s rally in March and April of 2020 made the dollar-denominated debt of many states look unsustainable. When the dollar becomes stronger versus their currencies, developing states needed more units of their currency to service the dollar 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]

In the summer of 2020, though, the sell-off of stocks and bonds of some emerging-market economies went into reverse. Foreign investors started to pour money back into the least risky countries. Investors who pulled $90 billion out of the emerging markets in March 2020 brought back $60 billion between April and June of that year. This, in conjunction with a falling dollar, attributed to the United States’ inability to put an end to the spread of the pandemic, boosted the markets of many emerging-market states.

As the dollar plunged, gold reached $2 000 per ounce on August 4, 2020, for the first time in history. This dash for gold, the ultimate safe-haven asset, encompassed conflict gold: gold plundered from Congo, laundered through Uganda and destined for major international markets: the Middle East (Dubai), Asia (Mumbai) and Europe (Antwerp).[9]

The G-20 governments offered a moratorium on debt repayment to impoverished countries. The moratorium applied a common term sheet for the suspension of debt payments. The G-20 encouraged private creditors to defer private debt as well.[10] States touted the debt moratorium as demonstrative of their commitment to global solidarity during a pandemic that was decimating the economies of many states. In reality, the moratorium was just a way to postpone the economic crises likely to eventually hit the most highly-indebted states.  Given the widespread economic slow-down caused by the pandemic, most developing states needed more than debt deferral.  They needed debt relief.

Yet only a few of developing states asked for a moratorium on their debt payments.  This was because taking advantage of the G-20 offer could be considered a default by private creditors. Moody’s, a credit-rating agency, announced that it was considering downgrading Cameroon, Pakistan and Ethiopia because they had taken advantage of the G-20 moratorium offer. As it turned out, the moratorium on the debt owed to official creditors was of little help when countries’ worst fear was being locked out of the capital markets.[11]

[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 Ratings, 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, WSJ, 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, WSJ,  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] Nicholas Bariyo and Joe Parkinson, Under Cover of Coronavirus Lockdown, a Booming Trade in Conflict Gold, WSJ, July 7, 2020, https://www.wsj.com/articles/under-cover-of-coronavirus-lockdown-a-booming-trade-in-conflict-gold-11594285200.

[10] Virtual meeting of the G-20 finance ministers and central bank governors, Riyadh, Saudi Arabia, April 15, 2020, http://www.g20.utoronto.ca/2020/2020-g20-finance-0415.html.

[11] African Governments Face a Wall of Debt Repayments: A Borrower’s Catch-22, Economist, June 6, 2020, https://www.economist.com/middle-east-and-africa/2020/06/06/african-governments-face-a-wall-of-debt-repayments.