The impact of COVID-19 on emerging market economies
by Paula Vilelas Aristizabal, Administrative Assistant at Boodle Hatfield LLP, LLB Graduate from the City, University of London & Aspiring Solicitor
Before diving into the topic of the impact of COVID-19 on emerging market economies, we must first understand what emerging market economies are and why investors may wish to invest in such markets.
Emerging market economies are classified in different ways by different observers but for this blog post, it will be defined simply as the economy of a developing nation that is becoming more engaged with global markets as it grows. Countries classified as emerging market economies are those with some, but not all, of the characteristics of a developed market. Such characteristics may include: increased liquidity in local debt and equity markets increased trade volume and foreign direct investment, and the domestic development of modern financial and regulatory institutions.
Although these economies are still in the process of becoming developed, they are increasingly being sought after, as these economies can offer greater returns to investors due to rapid growth. However, investors need to be cautious as these markets also offer greater exposure to some inherent risks due to their status and political policies.
The current pandemic has considerably impacted these markets as governments have imposed protectionist measures in an attempt to avoid their public health systems collapsing. Although protectionist measures such as export restraints on medical supplies, equipment and medicines providing many developed countries in Europe as well as the emerging economies of the Middle East; India; China; Brazil and Russia some relief in terms of 'flattening the curve'. These same protectionist measures have led to a significant amount of investment withdrawal in emerging market economies, and according to the Institute of International Finance, foreign investors have withdrawn roughly $100 billion from emerging-market bonds and shares since January.
Unfortunately, there are many financial burdens to overcome for these emerging markets with the increasing debt acquired from the International Monetary Fund and World Bank lending facilities. However, this doesn't mean that emerging market economies will not continue to grow and bloom. Instead, the impact of this pandemic may, in fact, spark the innovation which policymakers need in order to have greater certainty and economic security in the future, both for developed and emerging markets. As was pointed out in a World Bank seminar I attended recently regarding the impact of COVID-19 on Latin American and Caribbean emerging markets, it is not the first crisis we've faced in our lifetime. Many of us have experienced or seen a global or national crisis approximately every 10 years. So why aren't policymakers thinking pre-emptively? Perhaps this pandemic is exactly what governments need, particularly those of emerging market economies, to better prepare themselves for unprecedented times.
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