Coronavirus recovery: emerging markets facing toughest test yet in pandemic

Name: Six months after WHO declared Covid-19 a public health emergency, what more do we know now?
Uploaded: 2020-08-06T13:15:07.000Z
Duration: 7 min 54 s
Description: Six months after WHO declared Covid-19 a public health emergency, what more do we know now?

The pandemic has forced central banks to cut interest rates aggressively, and the whiff of a fiscal crisis hangs over several major developing economies

Even China’s impressive rebound is being called into question because of the severity of the global recession and the resurgence of the coronavirus

Reading Time:3 minutes

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An activist holds a Brazilian flag painted with crosses symbolising people who have died from Covid-19, during a protest against Brazilian President Jair Bolsonaro in Brasilia on July 14. Brazil is second only to the United States in Covid-19 cases and deaths, and like the rest of Latin America its struggle to contain the virus is weighing on its economy as well. Photo: Reuters

Nicholas Spiro

Published: 9:15pm, 6 Aug 2020Updated: 10:23pm, 6 Aug 2020

On the face of it, the financial markets of developing economies have performed remarkably well in the past several months. Since March 23, the MSCI Emerging Market Index – the main gauge of stocks in developing nations – has surged 31 per cent, leaving it 3.7 per cent below its peak on January 12, just before the Covid-19 pandemic sent global markets into a tailspin.

Sentiment has also improved significantly in bond markets. The average yield on local currency emerging market government bonds has fallen to a record low of 4.3 per cent, down from 6 per cent at the end of March, according to data from JPMorgan. US dollar-denominated corporate debt has also enjoyed a strong rally, with spreads falling sharply since late March.

However, a cursory glance at data on fund flows – a more accurate gauge of sentiment – shows the extent to which the fallout from the pandemic has shaken confidence in developing economies. Data from JPMorgan reveals emerging market equity and bond funds have suffered outflows this year amounting to US$65 billion, putting the funds on course for their second-worst year since data on portfolio flows became available in 2004.

Many of the most actively traded emerging market currencies have suffered dramatic declines. The Brazilian real is down a whopping 31 per cent against the US dollar this year, while the South African rand and the Turkish lira have dropped 23 and 18 per cent respectively.

This may seem odd given all the talk about the sharp fall in the US dollar. The dollar index – a gauge of its performance against a basket of other major currencies – has lost 8 per cent since May 14. However, much of the dollar’s decline has been against the euro, which accounts for nearly 60 per cent of the index.

07:54

Six months after WHO declared Covid-19 a public health emergency, what more do we know now?

As Robin Brooks, the chief economist of the Institute of International Finance, has pointed out in numerous tweets during the past month, the US dollar remains significantly overvalued versus emerging market currencies. Since late March, the Bloomberg JPMorgan Asia Dollar Index – a gauge of the performance of Asia’s most actively traded emerging market currencies versus the US dollar – has risen nearly 4 per cent.

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