Financial support packages by international lenders such as the International Monetary Fund (IMF) are likely to be of little help to emerging economies, which are already reeling from huge debt piles, a global trade credit insurer said.
The IMF has received more than 100 requests for support from member countries including SA, whose economies have been battered by the Covid-19 crisis. In SA, measures to curb the spread of the virus, including the lockdown, which came into force at the end of March, are set to lead to a jobs bloodbath and have put government's finances under severe strain. Economists have predicted that SA's budget deficit for 2020 could be double the 6.8% tabled in the February budget.
According to the French-based trade credit insurer Coface, emerging economies, already indebted before the Covid-19 crisis, will suffer the effects of three shocks: lockdown, fall in oil prices, and reduced tourism revenue.
Coface is listed on the Paris Euronext, is located in 66 countries and provides cover for clients in more than 200 countries.
It said countries affected by the pandemic and whose governments have decided on mandatory containment measures will have to face an increase in indebtedness, resulting from the decrease in revenue linked to the health crisis, as well as an increase in healthcare spending and spending to mitigate the economic consequences on the population. As of April, 87 countries were in this situation.
The insurer said while the focus so far has been mainly on China, Europe and the US, the consequences of the Covid-19 pandemic are likely to be even more severe for emerging economies, including SA.
Coface said the additional financing planned by international organisations notably the IMF and the debt adjustments announced by creditor countries will help many low-income countries but will likely be of little help to the major emerging countries.
“Even though their [major emerging countries] degree of vulnerability to this shock depends on many factors, the starting point of their public finances is a key issue, as it determines their capacity to respond to the crisis’ many economic consequences. However, their public debt was already at an all-time high in 2019,” Coface said.
Even before the health crisis, SA’s government was struggling to stabilise its debt, with the sovereign credit rating already in junk territory. The 2020 budget shows that SA’s debt as a percentage of GDP is expected to reach a staggering 62% in 2019/2020, rising to 65.6% in 2020/2021, to 69.1% in 2021/2022 and 71.6% in 2022/2023. With debt service costs now gobbling 15.2% of tax revenue, the government has been forced to slash spending in other critical areas such as education and social services.
Factoring in the Covid-19 shocks, the IMF projects that the gross government debt-to-GDP ratio will reach 85.6% of GDP by the end of 2021.
Coface said capital outflows as a result of the economic uncertainty brought by the health crisis will hurt many emerging economies.
“Capital outflows on a never-before-seen scale are the most immediate effect of rising global uncertainty in emerging markets,” the company said.
During March, sales by foreign investors of bonds and equities from 24 emerging markets exceeded $80bn, a fourfold increase over the last quarter of the previous crisis of 2008. During the first quarter, currencies of countries with strong fundamentals depreciated. More generally, emerging country currencies with liquid financial markets were the most penalised. During this period, the strongest currency depreciations against the dollar were recorded in SA, Brazil, Russia and Mexico (more than 25%), followed by Colombia and Indonesia, Coface said.
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