The financial fallout from the coronavirus is spreading rapidly and that's ugly news for many developing countries. The risk of contagion, where the collapse of one currency triggers a global panic, is very real.
Outflows from emerging market funds totaled more than $83 billion in March ($53 billion in bonds, $31 billion in equities), according to data from the International Institute of Finance. The last thing the world needs is an emerging markets crisis, yet all the conditions are there: collapsing commodity prices, a sudden economic shock, over-indebtedness and fragile currencies.
The persistent strength of the dollar, despite plentiful liquidity, has pushed major emerging currencies such as the Mexican Peso, the Rand and the Brazilian Real to depreciate by about 25% this year.
The US Federal Reserve has acted swiftly to extend dollar swaps, which give foreign central banks the capacity to deliver US dollar funding to their institutions, but the attractiveness of dollar cash outweighs all in a crisis.
The oil price crash couldn't have come at a worse time as it drags down commodity prices (on which many developing economies rely) generally and halts business investment. The G20's energy ministers may meet this week to discuss the slump. They might want to encourage their finance ministers and central bank colleagues to try to find a mutual response for pegging back the dollar as well.
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One radical approach would be joint action from central banks to sell dollar reserves in favor of other currencies. The G7 countries did something similar to halt the rise of the yen after Japan's earthquake and tsunami in 2011. More important is that the developed world has a financial response at the ready if this pandemic causes havoc among the weaker developing countries.
A global safety net is needed to keep funding available for low-income countries. The International Monetary Fund will need a major injection of capital. Its existing $1 trillion firepower is inadequate with more than 80 countries already sounding it out for help. Confidence is low in the IMF after last year's failed $57 billion bailout of Argentina, but it remains the best vehicle for the G20 to use in a 2009-type response to a global financial crisis.
This might require new issuance of the only truly global currency, the IMF's so-called "special drawing rights" (an international reserve asset whose value is based on the price of a basket of currencies: the dollar, the euro, the yuan, the yen and the pound). Wealthier countries could help by forgoing some of their own quota to let the IMF roll out much more comprehensive aid to countries that need it.
Speed and flexibility will be critical if the virus and its economic effects hit vulnerable markets as hard as they have major western economies. More than half of the world's lowest-income countries were in distress before the pandemic. But borrowing has been rising fast with dollar debt in the "frontier markets" (the tier below emerging markets) now exceeding $200 billion.
More than one-quarter of local currency debt in emerging markets is owned by foreigners, so it's especially vulnerable to capital flight. Emerging market corporate debt has ballooned to more than $2.3 trillion.
China propped up much of the developing world during the last financial crisis but it doesn't have the same firepower now with so much more credit leverage in its own financial system. The stability of the Yuan to the dollar is paramount for Beijing. It cannot risk another capital outflow crisis as happened in 2015 and 2016.
Oil and Natural Resources
Countries without oil and other big natural resource assets have also seen their currencies plunge, including those with large current account deficits (such as Turkey) or those that rely heavily on dollar funding (many Asian countries). Angola (oil), Ecuador (oil) and Zambia (copper) are close to defaulting. Argentina and Lebanon have already. South Africa, which relies heavily on overseas funding, lost its last investment-grade rating recently.
Its already stricken state-owned power company Eskom is facing a big hit to revenue from the coronavirus lockdown.
Indonesia - whose virus death toll has surged to become the highest in Asia after China - managed to raise several billion dollars in a record bond sale on Monday at interest rates of between 3.9% and 4.5% (compared to 2.5% a month ago), showing that the debt capital markets remain open for at least the stronger emerging nations. Being able to fund yourself is always better than relying on international support.
But not all countries are as fortunate as Indonesia. The G20 needs to think now of a joined-up financial response for the rest of the world before it's too late.