Victor Lequillerier, President of BSI Economics, answers three questions on the economic consequences of COVID-19 around the world, particularly in emerging countries.
BSI Economics – Will bankruptcies increase?
Victor Lequillerier – In 2020, business bankruptcies are expected to increase significantly (Coface forecasts a 25% increase in the number of bankruptcies worldwide compared to 2019). While certain measures could limit a sharp rise in bankruptcies (cancellation of charges, deferral of bank loan repayments, etc.), the increase in defaults would go hand in hand with the scale of the economic contraction.
Apart from the agri-food and pharmaceutical industries, all sectors would be affected by an increase in insolvencies: air transport (South Africa), automotive (Brazil, China), tourism (Thailand, Tunisia), energy (Saudi Arabia, Mexico), metals (Chile), construction and real estate (United Arab Emirates), trade (Argentina, Turkey), textiles (India), and electronics (South Korea).
Can emerging economies avoid a currency crisis?
In 2020, emerging countries are experiencing a sudden stop, causing strong downward pressure on emerging currencies (-11% ytd, as of May1, on average in some 30 emerging countries).
In the short term, the challenge is to avoid a currency shortage. One solution would be to use the IMF’s rapid financing facility and, above all, to increase the number of currency swap agreements with other central banks (as Indonesia recently did), which Turkey, highly vulnerable to currency risk, is currently attempting to do.
In the medium term, the challenge will be to prevent accommodative monetary policies from generating strong inflationary pressures. Sterilizing interventions to maintain positive real rates would be a strategic move, in order to remain attractive at a time when foreign investors, in search of returns, will be ready to invest in emerging countries (which would break the current spiral of currency depreciation).
What are the challenges for emerging countries’ debt in the post-COVID-19 era?
The rise in public debt, caused by widening public deficits, could lead some countries to pursue fiscal austerity policies (this is already more or less the case in Algeria and Oman, for example).
However, this type of policy will most likely have a recessionary effect on economic activity, even though public investment often plays a driving role in emerging economies. A restructuring of public debt, particularly in sub-Saharan Africa, seems necessary and inevitable in order to avoid compromising an economic rebound and an undesirable increase in social risk.
