WASHINGTON • The world’s ability to check the coronavirus contagion and fully recover from the worst peacetime recession since the Great Depression may depend on what international economic policymakers decide this week.
With emerging markets and developing nations facing health emergencies, collapsing demand and cash crunches, the guardians of the global economy are under the gun to ease the strains at this week’s International Monetary Fund (IMF) and World Bank meetings.
“It’s a make-or-break moment,” said former IMF chief economist Maury Obstfeld. “This may be the greatest global crisis we’ve faced in the post-war period.”
Having all taken steps to support their own economies, failure by the Group of 20 (G-20) countries to now act together could consign the world to “reservoirs of disease” and trigger outward migration from poor countries on “a biblical scale”, said Professor Obstfeld from the University of California, Berkeley.
A lack of forceful action could set the stage for damaging debt defaults and throw a roadblock in the way of any sort of robust recovery of the world economy.
The dollar’s surge has been particularly painful for countries that ran up borrowing in greenbacks and which will now struggle to cover the loans, especially as their exports tumble.
If the emerging markets lag behind, “it means more of a U-shaped or an L-shaped kind of recovery for the United States and global economies”, said former US Treasury official Nathan Sheets, who is now chief economist for PGIM Fixed Income.
TRILLIONS OF DOLLARS NEEDED
While the US, Europe and Japan have opened up the monetary and budgetary spigots to fight Covid-19 and its economic after-effects, many emerging economies lack the scope to do so.
Morgan Stanley economists predict that emerging markets, excluding China, will shrink 4.1 per cent in the current quarter, a deeper dive than the 3.1 per cent of the first quarter of 2009 when the world was last in crisis, though shallower than what is expected in richer economies. They also estimated in an April 3 report that the peak rate of growth during the recovery for those economies will be 6 per cent in the second quarter of next year versus 7.7 per cent in the same period of 2010.
The problem is even more acute in the poorest nations, where many denizens cannot easily practise the social distancing and regular hand washing that has become de rigueur in rich countries.
Such an environment leaves the IMF reckoning that emerging market and developing countries will need trillions of dollars in external financing to fight the virus, only part of which they can cover on their own, leaving gaps of hundreds of billions of dollars. Half of the IMF’s 189 members are already looking to it for aid.
4.1% Estimated contraction for emerging market economies, excluding China, in the current quarter, according to Morgan Stanley economists. This would be a deeper dive than the 3.1 per cent of the first quarter of 2009 when the world was last in crisis.
IMF managing director Kristalina Georgieva is trying to rally the world into a unified display of support at the fund’s semi-annual meeting, which starts tomorrow.
“Today, we are confronted with a crisis like no other,” she said last Thursday. “The actions we take now will determine the speed and strength of our recovery.”
There are questions, though, about whether the fund has enough to counter the crisis, especially if it proves protracted.
While the IMF says it has a US$1 trillion (S$1.4 trillion) war chest, Dr Ted Truman of the Peterson Institute for International Economics says the maximum amount available for new lending is US$787 billion, after taking into account existing commitments and other factors.
“The IMF will need more” from the US and the rest of the G-20, he said.
And it is not just the amount of resources that are at issue. It is what kind they are. The crisis has exposed a gaping hole at the centre of the global economy. There is no ultimate lender of last resort that can provide the liquidity that is demanded in a financial emergency.
Some US$62 billion was yanked out of emerging markets in the first quarter in a global dash for cash by investors, twice the size of outflows at the peak of the world financial crisis, according to the Institute of International Finance.
The Federal Reserve has moved to partly fill the void, including opening up dollar liquidity swap lines with Brazil, South Korea and Mexico. Dr Sheets said it should do the same with India, Indonesia and Chile.
The IMF also has to step up and be willing to set aside its traditional playbook for dealing with countries in trouble, in which it demands economic reforms in return for financial assistance.
“This is much more of an exogenous shock,” said former US Treasury official Mark Sobel, now at the Official Monetary and Financial Institutions Forum, a think-tank focused on economic policy and central banking. “There needs to be some recalibration by the IMF to provide far more liberal and fast liquidity to members.”
The fund seems to be trying to do just that. It is looking at the use of precautionary short-term loans to get cash to countries, as well as other funding options like the increased use of reserve assets called special drawing rights, steps that would require the approval of rich nations.
As for the poorest countries, a plan championed by Dr Georgieva and World Bank president David Malpass calls on wealthy governments to place a temporary pause on debt repayments. The World Bank estimated last month that US$14 billion in service payments are due this year.
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