Implications of COVID-19 on EM regions

When COVID-19 began to spread uncontrollably, the number of confirmed cases primarily increased the most in developed economies across, China, Europe, and then the US. Albeit Emerging Market (EM) economies took longer to feel the pinch, when it did, the impact was severe and presumed to be longer-lasting.

To-date, developed economies, despite the recent surge in COVID-19 cases which intensified fears of the possibility of a second wave, are seeing an easing of new cases within their borders. Deaths related to the COVID-19 pandemic drastically dropped and the focus, initially more inclined towards a healthcare emergency, shifted to the re-opening of communities and thus recovery in economic numbers.

The same cannot be said for EM economies whose challenge seems to be far from over.

Given the latency of the impact, EM's who initially faced a decline in demand for their most renowned assets and manufactured products they offer due to the surge in cases and lockdown measures implemented in the developed economies, are yet to reach the peak of their pandemic, putting policymakers in a dilemma with their priorities thorn between; safeguarding the wellbeing of their citizens or the prosperity of their economy.

In a bid to safeguard the impact on the economy, several EM economies, at the expense of safeguarding the wellbeing of its people, failed to react immediately, causing political unrest and mounting uncertainty on the respective government's ability to deal with the crisis.

Portraying the above is Brazil's approach to the pandemic. Brazil's pro-business president Jair Bolsonaro played down the health risk posed by COVID-19 – a move which has been heavily criticized; sparking protests and leading to the resignations of two health ministers in less than a month. Consequent to Brazil's weak response to the pandemic, Latin America's largest economy now has the second-highest number of COVID-19 related cases globally, only behind the US and placing the nation in a worse position, than initially anticipated.

Conversely, India, in the initial stages, acted aggressively to contain the virus. In late March when the country had about 500 cases, Prime Minister Narendra Modi imposed a nationwide lockdown, ordering its 1.4bn people to stay indoors, with practically all services and factory operations suspended. The imposed lockdown extended several times afterwards, left a significant burden on India's economy and caused millions of people to lose their jobs – many of whom rely on daily labour to earn money. Like many other countries, India’s government is trying to balance the control of COVID-19 and avoid economic disaster.

The two nations undertook a contrasting approach. Whether the latter or the former will be more successful from an economic front is at this stage unknown and too early to predict. However, by first and foremost dealing with the health crisis – what the pandemic is ultimately all about, nations like India may indeed have the upper hand, not just from their ability to re-instate normality, but also by taking advantage from the easing of lockdowns that has been re-instated in the more advanced economies. This, possibly leading to a recovery from a dismal first half of 2020 – a period which should have sustained the recent improvement Emerging Markets have experienced in past years.

Given that several central banks are already at record-low interest rates and policymakers are constrained by growing unmanageable debt, leaving less room to act if their economies continue to cave, we reiterate the importance of a bottom-up approach.

From a credit perspective, we recommend corporates with excellent fundamentals and robust liquidity, allowing them to deal with this unprecedented scenario and any hiccups that may indeed crop up in the coming months.

Disclaimer: This article was issued by Christopher Cutajar, credit analyst at Calamatta Cuschieri. For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.