Emerging markets hindered by rising interest rates and COVID | Business | Economic and financial news from a German perspective | DW
The more intertwined a country is with the global economy – be it through industry, trade or tourism – the greater the potential damage from the COVID-19 pandemic. Germany and other rich countries have tried to mitigate this damage with the help of huge aid and stimulus packages.
But emerging countries around the world are mostly unable to mobilize the same resources.
“It lacks the resources,” says Klaus-Jürgen Gern, an expert on the economy and growth at the Kiel Institute for the World Economy (IfW). “Measured against macroeconomic performance, their government revenues are usually lower. They cannot borrow on the international capital markets to the same extent as the industrialized countries.”
The fear increases
When the COVID-19 pandemic spread in spring 2020, many feared a major economic disaster. But so far it has not happened. At that time, investors withdrew their capital from the emerging markets at record speed and threatened to bleed the countries financially. But after the first shock, the situation returned to normal.
Global financial institutions such as the International Monetary Fund (IMF) and the World Bank have provided large amounts of money and have played an important role in stabilizing the markets. “In doing so, they allayed investors’ fears that the crisis could lead to state bankruptcies,” Gern told DW.
Meanwhile, however, the fear is increasing again. With inflation rising in the United States, the Federal Reserve could hike rates anytime soon. “For emerging countries there is then the risk of sharply rising capital costs and capital flight,” says Clemens Fuest, head of the Munich Ifo Institute, the DW.
Interest rate concerns
This could already be observed several times in the years after the financial crisis of 2007-08, for example in 2012-13 or 2015-16. When capital is withdrawn from emerging markets, their currencies crash and there is a lack of money to invest.
Overall, however, these risks are lower today than in the past, also because the emerging countries now have more experience in dealing with the problem, said Fuest.
Nevertheless, IfW researchers like to point out that the emerging countries have “dramatically increased” their indebtedness in the last ten years. “Before the 2007-08 financial crisis, the national debt of the emerging countries averaged around 30% of economic output. Now it’s closer to 65%, ”he said.
When interest rates rise, an ever larger share of government revenue has to be used to repay debts.
Some emerging economies are already facing serious problems. The Argentine peso, for example, has lost around a third of its value against the US dollar since the beginning of the pandemic, and inflation is around 50%.
A big minus
The economies of important emerging countries such as India, Mexico and South Africa also contracted by around 7-8% in 2020.
Unlike in the past, most of these countries could not decouple themselves from the global trend and did not act as growth engines. According to estimates by the IMF, the economic downturn in the emerging economies excluding China was even more pronounced than in the industrialized countries.
The crisis has also shown that the once celebrated group of BRICS countries (Brazil, Russia, India, China and South Africa) have little in common. Of the group, only the Chinese economy grew last year.
Russia’s economy contracted 3%, while Brazil’s 4% decline was exacerbated by high infection and death rates from COVID and a populist president, Jair Bolsonaro, who is putting pressure on the country’s democratic institutions.
BRICS ‘star is fading
For the next year, the IMF estimates that the Brazilian economy will grow by less than 2%. It is a devastating number for a country that was once on the threshold of an industrial nation.
A lack of political stability and often a lack of legal certainty are the reasons why the star of the BRICS has faded, said Michael Hüther, head of the Institut der Deutschen Wirtschaft (IW), the Handelsblatt.
The days “when you just had to shout BRIC and investors jumped” are over, he said.
The prognosis is similar for South Africa, whose problems have been exacerbated by political unrest and severe lockdowns. “South Africa is deeply integrated into global value chains and is therefore just as vulnerable as the European economies,” says Christoph Kannengiesser, Chairman of the Association of German African Business.
Nevertheless, there is no reason for the German companies operating in the country to withdraw, the expert emphasized.
“The German industry, which is heavily invested there, is committed to South Africa as a business location and is fundamentally optimistic,” Kannengiesser told DW.
Recovery depends on vaccines
How quickly these economies can recover will depend on the ability of authorities to control the COVID health crisis.
However, due to the lack of vaccines, vaccination rates in Africa have so far been extremely low, while at the same time the USA and the EU are considering booster vaccinations for their populations. Kannengiesser thinks it is pointless to discuss whether this is fair.
Rather, the aim must be to make the African continent less dependent on foreign aid. “Africa must be put in a position to manufacture the vaccines it needs itself. That is not a question of patents, but of production capacities.”
However, the increase in production capacity cannot happen overnight. In the meantime, Germany should consider donating excess vaccines not only through the international COVAX initiative, but also bilaterally, the expert emphasized.
This article has been translated from German.