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 policy makers 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 video-conferenced meetings of the International Monetary Fund and World Bank.
“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 postwar period.”
Having all taken steps to support their individual economies, failure by the leading Group of 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 Obstfeld, now a professor at 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.
G-20 finance ministers and central bankers will convene by conference call on Wednesday. They are planning to offer lower income countries a freeze on bilateral government loan repayments for six or nine months or possibly into 2021, the Financial Times reported, citing an official.
That fits a plan championed by IMF Managing Director Kristalina Georgieva and World Bank President David Malpass. The World Bank in March estimated that $14 billion in service payments are due this year.
The fear is that if the emerging markets lag behind, “it means more of a U-shaped or an L-shaped kind of recovery for the U.S. and global economies,” said Nathan Sheets, a former U.S. Treasury official who’s now chief economist for PGIM Fixed Income.
While the U.S., 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% in the current quarter, a deeper dive than the 3.1% of the first quarter of 2009 when the world was last in crisis, though shallower than what’s 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% in the second quarter of 2021 versus 7.7% in the same period of 2010.
The problem is even more acute in the poorest nations, where many denizens can’t easily practice 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 international lending organization’s 189 members are already looking to it for aid.
Georgieva is trying to rally the world into a unified display of support at the Fund’s semi-annual meeting, which starts Tuesday as a virtual gathering after the typical spring gathering in Washington was re-imagined.
“Today we are confronted with a crisis like no other,” Georgieva said in an April 9 speech. “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 $1 trillion war chest, Ted Truman of the Peterson Institute for International Economics calculates that the maximum amount available for new lending is $787 billion, after taking into account existing commitments and other factors. “The IMF will need more” from the U.S. and the rest of the G20, he said.
And it’s not just the amount of resources that are at issue. It’s what kind they are.
The crisis has exposed a gaping hole at the center of the global economy. There’s no ultimate lender of last resort who can provide the liquidity that’s demanded in a financial emergency.
Some $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.
While there are signs that pressure is easing — Indonesia, for example, sold $4.3 billion of dollar bonds last week to help finance virus relief measures — there are risks the outflows could resume as the hit to emerging market growth becomes more evident, IIF analysts said.
The Federal Reserve has moved to partly fill the void, including opening up dollar liquidity swap lines with Brazil, South Korea and Mexico. Sheets said it should do the same with India, Indonesia and Chile.
The IMF also has to step up and be willing to set its 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 U.S. 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’s looking at the use of precautionary short-term loans to get cash to countries, as well other funding options like the increased use of reserve assets called special drawing rights, steps that would require the approval of rich nations.
One problem with the IMF stepping up, said ex-IMF official Taimur Baig: Many countries don’t like turning to the organization because they fear being tarred as a nation in trouble.
“Drawing on to IMF resources has an element of stigma and it is still seen as the last resort of a crisis-hit nation,” said Baig, who’s now chief economist at DBS Bank in Singapore.
For some emerging economies with balance of payment challenges, the “more expedient” currency-stabilizing measure is to draw on swap lines or repurchase agreements, as Indonesia has done, said Baig, questioning why the IMF doesn’t also offer those facilities.
In the 2008-09 crisis, the G-20 banded together to come up with an action plan.
That’s been more difficult this time for a group riven by rivalries — the U.S. and China over trade, Saudi Arabia and Russia over oil, and the U.K. and the European Union over Brexit.
IIF President Tim Adams said the G-20 must rise to the occasion, nonetheless.
“There will be enormous attention and enormous expectations” focused on this week’s gatherings, he said. “Not meeting them could be detrimental for markets and for confidence.”