COVID-19 Response in Emerging Market Economies: Conventional Policies and Beyond

IMF Blog, August 6, 2020

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COVID-19 is still to play out fully in the emerging market universe, posing risks to both people and economies.
Country examples:
- Managed to contain the virus: China, Uruguay, Vietnam.
- Continuing to grapple with a rise in infections: Brazil, India, South Africa.

Emerging market economies were buffeted by multiple shocks, compounding domestic containment measures with a decline in external demand.
Particularly affected sectors/countries:
- Tourism-dependent countries: hit by a decline in travel.
- Oil exporters: commodity prices plummeted.
Projections and comparative outcomes:
- Global trade and oil prices projected to drop by more than 10 percent and 40 percent respectively.
- IMF’s June World Economic Outlook Update projects emerging market economies to shrink by 3.2 percent this year—the largest drop for this group on record.
- By comparison: in the global financial crisis, growth for the group bottomed out at a positive 2.6 percent in 2009.
Financial markets and external financing:
- Capital outflows have stabilized and sovereign spreads retreated compared to March’s sharply volatile market conditions.
- Record levels of bond issuance so far this year—to the tune of $124 billion as of the end of June.
- But fuel exporters, frontier countries and those with high debt face greater financial shock, higher borrowing costs, or denied market access.

Broad characterization:
- Policy support by advanced economies provided emerging market economy policymakers with wiggle room to soften the economic blow.
- Emerging market economies’ policy reaction has been more in line with advanced economies than in previous episodes.
Monetary and market measures:
- Most emerging market economies used reserve buffers more sparingly and allowed exchange rates to adjust to a larger extent.
- Many countries injected liquidity as needed to ensure market functioning.
- Poland and Indonesia eased macroprudential policies to support credit.
- Many emerging market economies, including Thailand, Mexico, and South Africa, eased monetary policy during this cycle.
- In a few cases, limited room to cut policy rates further and distressed market conditions induced use of unconventional monetary policy measures for the first time, including purchases of government and corporate bonds (amounts remain modest so far compared to larger advanced economies).
- Use of capital flow measures to deter capital outflows has been quite limited so far.
Fiscal response:
- Emerging market economies relaxed their fiscal stance to tackle the health crisis, support people and firms, and offset economic shocks.
- These fiscal efforts were more modest than those of advanced economies but significantly greater than during the global financial crisis.

Drivers and constraints:
- Dwindling policy space may force some countries to take recourse to more unorthodox measures.
- Most emerging markets entered the crisis with limited room for traditional fiscal, monetary, and external policy support; much policy room has already been used.
Examples of unorthodox measures and risks:
- Price controls and trade restrictions.
- More unconventional monetary policy.
- Steps to ease credit and financial regulation.
- Potential significant costs if used intensively:
- Export restrictions could seriously distort the multilateral trading system.
- Price controls could hamper the flow of goods to those who need them most.
Effectiveness considerations:
- Depend on the credibility of institutions and track record of credible monetary policy.
- Little time is available to properly analyze risks and benefits of unorthodox actions.

Persistent risks:
- The virus remains present; financial conditions are still fragile; policy space is lower—particularly for countries facing high risks to debt sustainability.
- Approximately one third of all emerging market economies entered the crisis with high-debt levels and are assessed to have no space for undertaking additional discretionary fiscal policy, or as having that space significantly at risk.
- High risk that liquidity problems morph into solvency concerns.
- Corporate default risks are alarmingly high in a number of emerging market economies.
- The crisis has hit poor people much harder, increasing inequality and amplifying policy challenges.
Multi-faceted policy response needed:
- Domestic policies to allow for more durable and inclusive growth.
- Increased support from bilateral and multilateral lenders where market access remains precarious.
- To date, the IMF has provided 22 emerging market economies with approximately $72 billion (SDR 52 billion) in financial assistance.
- For countries where debts prove unsustainable, timely and durable resolution will be needed, seeking broad burden sharing across creditors including the private sector.
Follow-up analysis:
- The IMF indicates that the latter two policy angles (IMF lending and the IMF’s role in debt resolution) will be analyzed in two subsequent blogs on IMF lending and the IMF’s role in debt resolution.

IMF Blog: "COVID-19 Response in Emerging Market Economies: Conventional Policies and Beyond" — August 6, 2020