The impact of coronavirus on emerging market economies
At the head of the list of vulnerable countries is South Africa. The virus count in South Africa is heading rapidly towards a tipping point. Its health system is stretched at the best of times with a population of 7.7 million living with HIV. A lockdown has been declared. The military are being called out. Meanwhile, the rand is collapsing and South Africa’s sovereign debt has been cut by the ratings agencies to junk status. In Brazil, another of the superstars of the globalization era, President Jair Bolsonaro’s inner circle are infected. The currency was reeling even before Bolsonaro decided to discard any strategic approach to the virus. Chile, Thailand, Turkey have all been knocked back. Argentina’s much-needed debt restructuring has been blown off course. India’s stock market is plunging, its exchange rate has slumped and its banks are under pressure. Meanwhile, its booming tech industry and call centers are paralyzed.
The Coronavirus Is the Biggest Emerging Markets Crisis Ever
By: Adam Tooze – Columbia University
Policy recommendations
One option would be to broaden access to the dollar (and other hard currency) swap lines, so as to redistribute liquidity more efficiently in times of massive one sided fly-to-quality flows to a few issuers of reserve assets. [An announcement by the Fed along these lines was made yesterday] This could be done, for example, by adding countries to the aforementioned Fed list. However, there are good reasons to expect the Fed to continue to be selective: its goal is not to assist countries in distress, but rather to ensure that a there is sufficient dollar liquidity to contain an excess increase in dollar strength abroad that could deepen the contraction at home. This explains the selection of ‘systemically important’ emerging economies with deep currency markets as the choice recipients of the swaps.
An alternative, more natural option to enhance access to central bank swaps would be to use the IMF as a bridge– money broker + credit risk assessor + risk retainer– between the Fed and other central banks.
COVID, Fed swaps and the IMF as lender of last resort
By: Eduardo Levy Yeyati – Universidad Torcuato Di Tella
