“Third Wave” of Covid-19 Impact Exacerbates Emerging Market Crisis

By Chan Kung and Wei Hongxu

The spread of the Covid-19 pandemic in Europe and the United States tends to ease and some countries have begun to discuss about the issue of economic recovery. However, from a global perspective, the virus continues to spread in South America and Africa, forming a “third wave” impact on the global economy. This impact will exacerbate the crisis in emerging market countries and cause the global economy to fall into a quagmire of “depression”.

Affected by the situation in Europe, the number of confirmed cases in Russia in Eurasia has exceeded 80,000, and in Turkey it has risen to 110,000. According to data from the African Center for Disease Control and Prevention on April 26, the number of confirmed cases in Africa had exceeded 30,000, reaching 31,023 cases, 1,390 deaths and a surge of 47% within a week. The number of confirmed cases in South Africa, Egypt, Morocco and other countries has exceeded 4,000. The World Health Organization has previously warned that the African continent with a population of 1.3 billion and having the largest concentration of developing countries may become the next “epicenter” of the Covid-19 outbreak.

In South America, the number of confirmed cases in Brazil has exceeded 60,000. The number of confirmed cases in Ecuador, Peru and other countries also exceeded 20,000 and in Mexico it has reached 14,000. The overall trend for the spread is quite obvious. In Asia, Covid-19 continues to spread in India, Singapore, Indonesia and other countries. On the whole, the pandemic is entering the “version 3.0” along the path of “East Asia, Europe – the United States and Europe – Asia, Africa and South America” and this covers the whole world. The impact of the pandemic on the global economy has also begun to enter the “third wave of shock”. In this shock, emerging market countries will face even more severe challenges.

Due to some long-term economic structural problems, Brazil, Argentina, South Africa, Turkey and other emerging market countries are already in recession and economic slowdown. The arrival of the pandemic will exacerbate the economic slowdown and even put these countries into a “crisis” mode. Moreover, in the first two rounds of the impact of the disease on China, Europe and the United States, financial market turmoil and energy price fluctuations have already affected emerging market countries. Since the beginning of this year, the exchange rates of currencies of emerging market countries against the U.S. dollar have depreciated to varying degrees. Since the beginning of this year, the Brazilian real exchange rate has continued to deteriorate. On April 25, it once again set a historical low. On the same day, the Brazilian real was reported to 5.5905 against the U.S. dollar, which was more than 20% depreciated from the beginning of the year. The exchange rate of the South African rand against the U.S. dollar has been declining this year. As of the close of April 25, the South African rand was quoted as 19.0211 against the U.S. dollar and the exchange rate against the U.S. dollar has fallen by more than 30% as compared with the beginning of the year.

Turkish lira, Chilean peso, Mexican peso and other emerging market currencies depreciated against the U.S. dollar. On April 6, the Mexican peso’s intraday quotation against the U.S. dollar reached 25.7782, which was a depreciation of more than 30% from the beginning of the year, setting a record low. In the new IMF World Economic Outlook Report, it is predicted that the Mexican economy will shrink by 6.6% in 2020. The currency devaluation and capital outflows have brought about a sharp rise in the debt risk of emerging market countries. At present, Argentina may default again due to huge debts. At the end of March, the international rating agency Moody’s also downgraded South Africa’s sovereign credit rating from BAA3 to BA1, with a rating outlook of “negative”. The main reason is that the financial situation is deteriorating and structural growth is very slow.

Due to the large population and relatively weak medical system, the economic and social impact on emerging market countries will be even greater under the third wave of the pandemic. Emerging market countries will directly face the economic stagnation caused by “isolation” and “lockdown”. In particular, emerging markets are highly dependent on foreign countries and they need international markets and links with other countries like trade, commerce, and investment. Therefore, if customs and countries are closed, they will be more affected by the “closed” exchange of global personnel and goods and the energy economy and export-oriented economy will suffer even more severe losses. In this regard, Brazil and South Africa have a higher proportion of service industries; Thailand is heavily dependent on tourism; Saudi Arabia and Russia are more dependent on crude oil.

The crisis in emerging market countries will mainly manifest in several aspects. First, the imbalance between energy supply and demand will increase and commodity prices will fluctuate. Under the conditions of economic recession, global demand side shocks, contractions and economic pressure on some raw material and energy exporting countries continues to increase. Second, the currency depreciation of emerging countries has brought financial and trade shocks. As the pandemic spreads in emerging economies and external demand weakens, the balance of payments deficit pressure in emerging market economies will further increase. At the same time, this will accelerate the currency depreciation of emerging market countries and even lead to a larger currency crisis.

Third, the risk of debt defaults has risen sharply. The currency depreciation has brought about turbulence in the financial market and rising financing costs, which may further trigger chain debt defaults and even cause partial “debt crises”. Therefore, under the impact of the third wave of the pandemic, emerging market countries will be hit harder, the losses will be more severe and even a chain reaction will be formed.

Unlike the relatively complete and balanced economic system of developed countries, the economic ecology and mechanisms of emerging market countries are not very sound. So they will suffer more damage and will form a “third wave of shock” to the global economy. In terms of growth contribution in 2018, emerging markets and developing economies contributed 47.8% to global economic growth. If emerging market countries fall into a crisis, the global economy will fully enter the “depression” quagmire and the recovery of the global economy will take longer time.


Final analysis conclusion:

Under the circumstances of the Covid-19 pandemic spreading to Africa, South America and the Asian region, emerging market countries will face more economic pressure, which may lead to a series of crises. The crisis in emerging markets will have a “third wave” impact on the global economy and the global economy will continue to fall into depression.

About the Authors

Founder of Anbound Think Tank in 1993, Chan Kung is now ANBOUND Chief Researcher. Chan Kung is one of China’s renowned experts in information analysis. Most of Chan Kung‘s outstanding academic research activities are in economic information analysis, particularly in the area of public policy.

Wei Hongxu, graduated from the School of Mathematics of Peking University with a Ph.D. in Economics from the University of Birmingham, UK in 2010 and is a researcher at Anbound Consulting, an independent think tank with headquarters in Beijing. Established in 1993, Anbound

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of All China Review.


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