Some of the largest emerging economies — including India and Mexico — have suffered the most from coronavirus-related lockdowns, highlighting their limited policy options as the pandemic continues and wealthier countries start to consider reimposing restrictions in the face of a second surge in infections.
India’s economy, the world’s fifth-largest, shrank by about a quarter in the three months to June, when Prime Minister Narendra Modi imposed severe curbs on business activity and movement to contain the disease. In the same period, Mexico lost 17 per cent of its output from the first quarter. Peru, whose output contracted by 27 per cent, was hardest hit.
The list may yet get bleaker as more data come in: South Africa is expected on Tuesday to report a sharp fall in gross domestic product of about 13 per cent in the three months to June, the darkest months of the pandemic.
While China, where the pandemic began, and some advanced economies, including the UK, Australia and South Korea, have reintroduced lockdowns at local level and may do so nationally if infection rates rise again, for many poor countries this approach is not an option, say analysts.
“India and South Africa, along with Latin America, have shown that in the main, low-income countries just can’t win against the virus,” said Charles Robertson, chief economist at Renaissance Capital, an emerging market investment bank. “They will have to give up on lockdowns — they just don’t work and they are not worth the economic pain.”
Some economists say there is a chance the worst might be over and that, in a world of low interest rates, governments will be able to borrow their way back to growth. But many underline the risks that some emerging economies are descending into stagnation, a path that would be hard to correct without a globally co-ordinated action.
“Developing countries have been exposed to manifold shocks in a context of anaemic global growth,” said Stephanie Blankenburg, head of debt and development finance at the UN Conference on Trade and Development. “The international response has been extraordinarily hesitant — way too little, way too late.”
There have been exceptions — such as Vietnam, where output barely changed in the second quarter — and analysts have looked to them for lessons.
“One thing that has emerged is a close correlation between economic performance and the stringency of any lockdown and the length of time it was in place,” said William Jackson, chief emerging market economist at consultancy Capital Economics. “India and Peru had very severe lockdowns, while parts of east Asia and central Europe locked down quickly and got the virus under control.”
Past experience of dealing with epidemics such as Mers and Sars has helped countries in Asia to respond to coronavirus. Mr Robertson said another possible explanation was high-capacity bureaucracies, able to swing into action to deliver on government demands, a legacy of cold war-era communist governments shared by parts of Asia and central and eastern Europe.
But while the economic damage to former eastern bloc states in Europe has been relatively mild — the Czech Republic and Poland suffered “only” single-digit contractions in the second quarter — those countries may not be over the worst. The Czech Republic and Hungary have recorded sudden rises in infection rates since late August. South Korea, hailed as a model in combating Covid-19, has had fresh outbreaks.
If governments do switch their strategy from containing the virus — and the death toll — to spurring growth, they will be helped by a global environment of low interest rates, say economists.
Ultra-loose monetary policy in the US and other advanced economies has been mirrored in the developing world. Interest rates in Brazil and Russia are at their lowest-ever level. Many emerging market central banks have cut rates to historic lows, while some have embarked on quantitative easing-style bond-buying programmes.
This has driven a boom in bond issuance by governments in the developing world, of about $90bn between April and July. Much of the foreign capital that rushed out of bond and stock markets in emerging economies during the bout of selling in March has since flowed back in, especially to bond markets.
“The point is that market access is there,” said Mr Robertson. “Borrowing costs should be low from here on and the opportunity is there for emerging economies to grow faster than ever in the 2020s on the back of cheap finance.”
However, the amount of support available from markets is not endless, analysts warn. In Brazil, which officially entered recession after a 9.7 per cent quarterly GDP drop in the second quarter, some government officials are toying with the idea of removing the country’s constitutional cap on public spending. Such a decision would deter investors, causing more capital outflows, weighing down on the currency and fuelling a rise in interest rates — a disastrous recipe for any debt-reliant economy.
Robin Brooks, chief economist at the Institute of International Finance, an industry group, said the capacity for fiscal and other policy action across the developing world was much more constrained than in advanced economies.
Foreign cash inflows slowed sharply in August, Mr Brooks said. Growth in emerging markets outside China and India was already trending down to advanced economy levels before the pandemic, he added.
“The real issue is macroeconomic divergence, which is what the IMF and others are supposed to be all about,” he said. “For the international community, this should be a call to action.”