When it comes to imposing lockdowns that halt all economic activity, some countries have it easier than others. The UK government tapped financial markets to borrow £62bn in April alone, the ECB has ensured that all euro area ten-year bond yields are below 2%, and the Federal Reserve has committed to unlimited amounts of QE. This allowed developed nations to replace people’s incomes, effectively paying them to stay at home. Emerging markets such as Brazil, India and Mexico have less fiscal space. The trade-off between economic and physical health is steeper. By the end of March however, many developing economies had followed the lead of the advanced ones, imposing strict lockdowns despite having lower prevalence of the virus.
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As the economic damage begins to bite, emerging market governments are easing restrictions despite increasing infection rates. Higher borrowing costs, lower tax revenues and a large informal sector with minimal state contact make it harder for these countries to replace income streams and provide grants to businesses as is being done elsewhere. Policy rates have been cut to below inflation, contributing to the capital flight that began when the crisis hit the West, as investors now receive negative real rates of return. In particular, President Bolsonaro’s lackadaisical approach to handling the crisis has been painful for the Brazilian real.
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With weak demand in the US and Europe, and concerns about the speed of recovery, emerging markets may be unable to use currency depreciations to increase exports. As seen in the chart below, developed economies hit the hardest by the virus, many of which are important sources of demand for emerging markets, have reduced imports by around 15% year-on-year. Leaders are calling for citizens to accept the virus as part of life and return to work. Whether domestic demand bounces back remains to be seen.
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