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As risks rain down on emerging markets, unrest grows

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When global economic watchers talk about the outlook for so-called emerging markets these days, they use alarming terms: they see a toxic cocktail of risk, warn of a train crash, and brace for a potential stunt. of disasters. It is the fallout from a mix of external shocks and growing financial problems that is sweeping through low- and middle-income countries, creating perhaps the greatest confluence of challenges since the 1990s, when a series of successive crises sank economies and overthrew governments. Unrest fueled by rising food and energy prices is already gripping countries such as Sri Lanka, Egypt and Peru.

1. What triggered the concern?

A post-pandemic inflation spurt is a source of tension in countries that need US dollars for energy, medicine and food imports. Food costs account for around 40% of consumer spending in places like sub-Saharan Africa, more than double the share in advanced economies. To rein in rising prices, the US Federal Reserve is embarking on its most aggressive round of interest rate hikes in two decades, which is helping to push the dollar higher and other currencies lower. So debt servicing costs are rising – hot on the heels of developing countries borrowing billions in foreign currency to fight Covid-19.

2. Did the pandemic cause this?

The health crisis has certainly created a backdrop of social tension, which is one reason economists are beginning to suspect a broader trend in the upheavals hitting some of the poorer corners of the globe. Peru, which had one of the highest Covid death rates in the world, was rocked by weeks of violence in March and April as farmers and truckers protested rising fuel and fertilizer costs.

The current dynamics may trigger panic attacks among international investors and sudden capital outflows from the most exposed countries. These are places like Egypt, the world’s largest wheat importer and one of the IMF’s biggest borrowers in recent years. After Russia’s invasion of Ukraine sent global commodity prices soaring, the country’s central bank let the Egyptian pound weaken by more than 15% in a matter of hours and raised the rate of benchmark interest for the first time in five years in a context of hard currency flight.

4. Where else are problems brewing?

Sri Lanka is seen as a prime example of how food and fuel shortages can turn into violent street protests and destabilize an unpopular government. The South Asian nation defaulted on its foreign debt in May for the first time since gaining independence from Britain in 1948. A handful of other nations, including Pakistan, Tunisia, Ethiopia, Ghana and El Salvador, were likely to follow suit, according to Bloomberg. Economy. By mid-May, about a dozen emerging countries had government bonds trading with yields at least 10 percentage points higher than US Treasuries, a distress benchmark. This compared to six a year earlier. While the direct effect of a series of defaults on the global economy would be small, explosions in the developing world have a habit of spreading far beyond their starting points. This happened in 1997, when a devaluation of the Thai currency triggered a wider Asian crisis and eventually led to Russia defaulting on its local debt.

In some ways, the surge in global commodity prices has been a boon for resource-rich regions like Latin America. Beef and copper exports have grown rapidly in places like Brazil and Chile. But with much of the region’s fuel and fertilizer imported, the concern is that higher prices may still feed off each other. In Brazil, where tensions are high ahead of October elections, President Jair Bolsonaro’s government has used the commodity windfall to expand aid to the poor after a spike in gasoline prices contributed to push inflation above 12% in April.

6. What is the answer?

The World Bank mobilized a $170 billion crisis response program in April, more than the $157 billion spent on its initial Covid-19 response. More countries have started bailout talks with the IMF. And while many rich countries have given developing countries a free pass to pay down their debt while they deal with the virus, progress has been slow on a plan to help debt-ridden countries restructure this that they must. A collective $35 billion bill is due this year. Time is running out: Oxfam International, a charity group, has warned that the impact of Covid-19 and soaring food prices are set to push more than a quarter of a million people into extreme poverty this year.

More stories like this are available at bloomberg.com

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