Timo B. Daehler, Joshua Aizenman, Yothin Jinjarak, 15 November 2020

Covid-19 was predicted to hit emerging markets particularly hard, as many containment measures were deemed less effective in an emerging market context. This column examines emerging market sovereign credit default swaps spreads during the pandemic and assesses the relative importance of global factors, sovereign fundamentals, COVID-19 mortality, and policy responses. The analysis suggests that while emerging market sovereign CDS spreads can be explained by regional and global risk factor before COVID-19, they were driven by fiscal space, commodity revenues and mobility dynamics during the pandemic, but not directly through variation in country-specific COVID-19 mortality rates.

Alexander Chudik, Kamiar Mohaddes, M. Hashem Pesaran, Mehdi Raissi, Alessandro Rebucci, 19 October 2020

The Covid-19 pandemic is unprecedented in its global reach and impact, posing formidable challenges to policymakers and to the empirical analysis of its direct and indirect effects within the interconnected global economy. This column uses a ‘threshold-augmented multi-country econometric model’ to help quantify the impact of the Covid-19 shock along several dimensions. The results of the analysis show that the global recession will be long lasting, with no country escaping its impact regardless of their mitigation strategy. These findings call for a coordinated multi-country policy response to the pandemic.

Emine Boz, Camila Casas, Georgios Georgiadis, Gita Gopinath, Helena Le Mezo , Arnaud Mehl, Tra Nguyen, 09 October 2020

Most global trade transactions are invoiced in just a few currencies, regardless of the countries involved in the transaction. This column presents a new dataset that offers a comprehensive and up-to-date understanding of trade invoicing patterns within the major currencies. It finds that vehicle currency use has been on the rise, with dollar invoicing increasing over time despite the decline in the share of global trade accounted for by the US, and euro invoicing also rising among certain countries (typically at the expense of the dollar). 

Gaston Gelos, Umang Rawat, Hanqing Ye, 20 August 2020

Emerging markets and developing countries are particularly vulnerable to economic shocks such as that posed by COVID-19, not least because of their often weaker monetary policy frameworks. This column discusses the extent to which these economies have been able to react to the crisis with a loosening of monetary policy. While the initial inflation level is an important determinant of a country’s ability to cut rates, additional institutional factors can also affect their ability to conduct countercyclical monetary policy during the crisis.   

Katharina Bergant, Francesco Grigoli, Niels-Jakob Hansen, Damiano Sandri, 12 August 2020

The vulnerability of emerging markets to global financial shocks leads to recurrent calls for policymakers to deploy additional policy tools besides relying on exchange rate flexibility. This column presents evidence that a more stringent level of macroprudential regulation can considerably dampen the effects of global financial shocks on economic activity in emerging markets. A possible channel through which macroprudential regulation enhances macroeconomic resilience is by allowing for a more countercyclical monetary policy response. The authors do not find evidence that capital flow restrictions provide similar benefits.

Reinout De Bock, Dimitris Drakopoulos, Rohit Goel, CFA, Lucyna Gornicka, Evan Papageorgiou, Patrick Schneider, Can Sever, 19 August 2020

The COVID-19 pandemic caused an unprecedented sharp reversal of portfolio flows in emerging and frontier markets, triggering concerns about financial stability and consequently, strong policy responses. This column uses a novel analytical framework, the capital-flows-at-risk methodology, to show that changes in global financial conditions tend to influence portfolio flows more during surges and reversals than in normal times. Furthermore, stronger domestic fundamentals do not necessarily lead to surges in portfolio flows but help mitigate outflows. Hence, the weaker growth outlook for emerging markets due to COVID-19 will worsen local currency flows, while global financial conditions will affect hard currency flows.

Thorsten Beck, 11 August 2020

Survey responses from early April across nearly 500 listed firms in ten emerging markets reveal that the vast majority of firms have been negatively affected by COVID-19 and reacted by reducing investment rather than payrolls. Thorsten Beck (Cass Business School) talks to Tim Phillips about “COVID-19 in emerging markets: firm-survey evidence”, from Covid Economics, Vetted and Real-Time Papers 38, July .

Thorsten Beck, Burton Flynn, Mikael Homanen, 22 July 2020

Most of the evidence on firm-level impact of COVID-19 so far has been for advanced economies. Using survey responses from early April across nearly 500 listed firms in ten emerging markets, this column reveals that the vast majority of firms have been negatively affected by COVID-19 and reacted by reducing investment rather than payrolls. Moreover, it finds that there is a surprising degree of support vis-à-vis employees, customers, other stakeholders and broader society. Stakeholder-centric firms experienced lower stock price declines during the crisis drawdown.

Gianluca Benigno, Jon Hartley, Alicia García-Herrero, Alessandro Rebucci, Elina Ribakova, 29 June 2020

Emerging economies are fighting COVID-19 and the economic sudden stop imposed by the containment and lockdown policies, in the same way as advanced economies. However, emerging markets also face large and rapid capital outflows as a result of the pandemic. This column argues that credible emerging market central banks could rely on purchases of local currency government bonds to support the needed health and welfare expenditures and fiscal stimulus. In countries with flexible exchange rate regimes and well-anchored inflation expectations, such quantitative easing would help ease financial conditions, while minimising the risks of large depreciations and spiralling inflation. 

Alicia García-Herrero, Elina Ribakova, 21 May 2020

The spread of COVID-19 and its associated impacts have again brought into focus the dependence of emerging market economies on external financing. This column analyses the factors that put emerging economies at an increased risk of a sudden reduction in dollar liquidity as a consequence of the COVID-19 outbreak. Based on this analysis, it reviews the key tools at the disposal of emerging economies, the Fed, and the IMF to address this problem. It concludes by offering some policy recommendations on the pecking order that could be followed to potentially shield the emerging economies from the dollar shortage problems related to COVID-19.

Kevin Daly, Tadas Gedminas, Clemens Grafe, 20 May 2020

Although the COVID-19 crisis is a global phenomenon, emerging market economies are in a weaker position than developed economies to absorb its fiscal costs. This column assesses the impact of the crisis on government deficits and debt levels in emerging markets, and the fiscal adjustments that are likely to be required in the aftermath of the crisis. The findings suggest that median government debt will rise by around ten percentage points of GDP and that most emerging economies will face painful post-crisis adjustments. The results also imply a strikingly wide range of outcomes across emerging economies around the world.

Erica Bosio, Simeon Djankov, 06 May 2020

With lockdown measures in place almost worldwide now, cash-flow represents a significant concern for firms across multiple sectors. It remains to be seen exactly which types of business will be able to weather the coming storm. This column estimates the survival time of nearly 7,000 firms in a dozen Southern European and emerging market economies. Under the assumptions that firms have no incoming revenues, the median survival time across industries ranges from 8 to 19 weeks. Once collapsed export demand is taken into account, the median survival time falls to between 8 and 14 weeks.

Silvia Marchesi, Tania Masi, 04 May 2020

As a consequence of the COVID-19 crisis, which will hit certain countries particularly hard (including those with official creditors), there may be a wave of debt restructuring over the next few years. This column argues that the specific characteristics of sovereign debt re-negotiations are important. In particular, it focuses on the link between sovereign restructurings and ratings, an issue that is of relevance but that has not received enough attention in recent research. 

Rui Esteves, Nathan Sussman, 18 April 2020

After an initial lull, financial markets reacted with a vengeance to the COVID-19 pandemic. Comparisons with 2008 are inevitable, but the ultimate impact on markets is still unclear. This column argues that the spread of the pandemic has little explanatory power over financial stress. Markets reacted as in any international financial crisis by penalising emerging economies (and countries without credible monetary anchors), exposing age-old vulnerabilities. This finding highlights the need for credible, but flexible, sovereign currencies and the need to build up liquidity reserves.

Tobias Krahnke, 14 April 2020

Fears of a next wave of emerging market debt crises recently sparked a renewed debate about the adequacy of IMF resources and its toolkit. This column argues that the issue is not whether the IMF has sufficient resources for large-scale financial assistance to all of its members in need, but that such assistance would ultimately be counterproductive and could, in fact, exacerbate the risk of liquidity crises morphing into solvency crises. One of the reasons is that large-scale IMF financial assistance coupled with the IMF’s preferred creditor status can lead to a crowding-out of private investors by increasing their expected loss in the event of default. This underlines the need for all elements of the international monetary and financial system to assume their full responsibility, including the private sector.

Giancarlo Corsetti, Emile Marin, 03 April 2020

In crises, the dollar tends to appreciate – especially against emerging market currencies – and dollar liquidity becomes scarce. This column shows that today’s events are following the historical pattern. Forex market turmoil is preceded by an inversion of the US yield curve as investors, anticipating tough times ahead, require relatively high short-term yields and an appreciation of relatively risky currencies until the disaster occurs. Then, the dollar appreciates sharply. Then, emerging markets suffer massive capital flight. What’s new about the COVID-19 crisis is its scale and speed.

Eduardo Levy Yeyati, 31 March 2020

Dollar shortages and the real consequences of the COVID pandemic may lead to the next wave of emerging market debt crises. This column argues that Fed swaps mitigate this shortage only for a few selected countries, and traditional international financial institutions’ products are ill-designed to assist an emerging market facing a sudden stop. As a broker between central banks and emerging economies, the IMF has a unique opportunity to complete the international financial architecture and fill the lender of last resort role that has long eluded it.

Benjamin Born, Gernot Müller, Johannes Pfeifer, Susanne Wellmann, 13 March 2020

Country spreads have traditionally been discussed in the context of emerging market economies, which tend to have high and volatile spreads. This column analyses spreads for both emerging and advanced economies before and after the Global Crisis. It argues that an ‘unpleasant convergence’ took place after 2008 and that the behaviour of country spreads in advanced economies is now similar to that in emerging economies. This is due to a both a decline in the volatility of the spreads for most emerging economies and an increase in volatility for advanced economies.

Gaston Gelos, Lucyna Gornicka, Robin Koepke, Ratna Sahay, Silvia Sgherri, 04 February 2020

Capital flows to emerging markets have continued to be highly volatile since the Global Crisis. This column uses a new framework to show that country characteristics and policy responses matter for risks to future capital flows. It finds that good institutions support stable capital flows over the medium horizon, and while foreign exchange interventions seem to help mitigate downside risks to inflows caused by worsening global conditions, a tightening of capital flow measures in response to an adverse global shock is found to be counterproductive.

Emily Liu, Friederike Niepmann, Tim Schmidt-Eisenlohr, 02 February 2020

After the Global Crisis, accommodative monetary policy also eased financial conditions in emerging market economies. This column shows that US banks contributed to the transmission of US monetary policy and that regulation and supervision attenuated it. Only US banks that performed well in the Fed’s annual stress tests expanded their lending to emerging markets in response to monetary easing. Banks that performed poorly left their lending unchanged.

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