By David Luhnow and Santiago Pérez
MEXICO CITY -- After slamming developed economies in Asia,
Europe and North America, the coronavirus pandemic is coming for
economies across the developing world.
Economic output in emerging markets is forecast to fall 1.5%
this year, the first decline since reliable records began in 1951,
according to research firm Capital Economics. In Mexico, the U.S.'s
largest trading partner, the economy could contract by up to 8%,
its steepest decline since the Great Depression, Bank of America
Corp. has estimated.
Even if some developing nations manage to avoid catastrophic
coronavirus infection rates, the lockdowns and expected recessions
in industrialized countries will take a heavy economic toll. They
likely will dent demand for beach holidays in Thailand, clothing
stitched together in Bangladesh and auto parts and avocados from
Mexico. One-third of Mexico's economy depends on exports to the
U.S.
If the forecasts prove accurate, the toll across emerging
markets as a whole could be more severe than in the global
financial crisis of 2008, the Asian one of the late 1990s and the
Latin American debt implosion of the 1980s. In those cases,
economies such as China's and India's continued to grow
robustly.
Poorer countries have far fewer tools than rich ones to cushion
such blows. Their economies are less diversified, relying more on
volatile commodities such as oil, remittances from workers abroad
and services like tourism. They have less money to spend to ease
the burden on companies, and weaker social safety nets. Brazil and
Mexico, for instance, have no unemployment insurance for laid-off
workers.
"Unemployment may become an even bigger problem than the virus,"
said John Rodgerson, chief executive of Brazil's low-cost airline
Azul Linhas Aéreas Brasileiras SA, which has grounded all but 20%
of its fleet.
Unlike in many industrialized ones, when central banks in
emerging-market nations print money they can stoke fears of a
return to past episodes of inflation. Borrowing becomes far harder
as investors flee to the relative safety of markets like U.S.
Treasurys.
Cutting interest rates often leads to weaker currencies. The
Mexican peso, Russian ruble and South African rand have tumbled
about 20% against the U.S. dollar in recent weeks, followed closely
by the Brazilian real.
"It's always unpleasant to be an emerging market in a crisis,"
says Benjamin Gedan, a South America expert at Washington think
tank Wilson Center. "Just when you need capital, it flees to safer
harbors. Just as you rely more on export earnings, the price and
volume of your commodities exports fall. Just as your tax revenue
drops, your currency depreciates and your dollar debt
skyrockets."
The downturn follows a difficult 2019 for many emerging markets
hit by a wave of civil unrest and protests, including Algeria,
Lebanon, Iraq, Ecuador, Chile and Colombia.
A record $82 billion has been pulled from emerging markets since
Jan. 21, according to the International Monetary Fund. That will
raise the costs of borrowing and may push debt-laden countries such
as Ecuador and Argentina to default. Stocks in emerging markets
have fallen 20% in the past six weeks, wiping out all gains since
2017.
Some 80 nations have asked the IMF for emergency assistance, the
IMF says.
Many developing nations don't have the financial firepower they
had during the 2008 global financial crisis, when commodities,
tourism and remittances were booming.
In Brazil, the administration of President Jair Bolsonaro has
far fewer resources than the government did in 2008, when it spent
freely to spur recovery. Brazil's government debt-to-GDP ratio
reached 75.8% at the end of last year, compared with 58.6% in
December 2008. Brazil's economy is now expected to slide about 4.5%
this year, according to data firm IHS Markit.
South Africa's credit rating was downgraded to "junk" status on
March 27, meaning many U.S. and European pension funds won't be
able to buy its debt anymore. Mexico's rating was dropped to two
notches above junk, and the country's state-oil firm Petróleos
Mexicanos, which has more than $100 billion in debt, may face a
debt crisis this year.
South Africa's large state-run enterprises also are groaning
under debt, including $30 billion at power utility Eskom, a level
that represents almost 9% of the country's economic output. Many
South African businesses already have stopped paying workers.
In China and India, growth is expected to be the slowest in a
generation. Japan's Nomura bank forecasts India's economy will
shrink by 0.5%. Unemployment there is already at 6.5%, its highest
in three decades.
Although crude prices rose late last week after President Trump
said he expected Saudi Arabia and Russia would agree to new
oil-production cuts, prices are still sharply lower year to date.
They are likely to remain relatively weak amid falling demand,
which bodes ill for producers including Russia, Colombia and
Nigeria. BCS Global Markets forecasts that Russia's economy will
contract by 2.7% this year, mostly because of falling oil
prices.
Oil accounts for 65% of Nigeria's federal budget and 86% of its
export earnings. The government of President Muhammadu Buhari has
slashed some $5 billion from the budget already.
Argentina entered the year as one of the world's most vulnerable
economies, set to endure its third consecutive year of recession
and locked out of credit markets. Tourism and investment in the
country's vast shale deposits were seen as the only possible bright
spots. Now both look dead in the water.
"It's hard to imagine Argentina avoids default," said Mr.
Gedan.
Tourism accounts for nearly 12% of Thailand's economic output,
but a sharp decline in global travel will hit the Caribbean region
even harder. In Jamaica, tourism accounts for 34% of the economy,
and one in three jobs.
"Jamaica is in for a massive negative economic shock," Finance
Minister Nigel Clarke said last week.
Many countries depend on a diaspora of workers who send home
part of their paychecks. Low-wage workers in the U.S. and Europe
are suffering mass layoffs, leaving them with far less money to
send back home. For tiny El Salvador, remittances account for 20%
of GDP. In the Philippines, it is 10%.
Mexico, which has a more diversified economy, faces a quadruple
whammy: less U.S. demand for its manufactured exports, a drastic
decline in oil income that makes up one-fifth of government
revenues, a falloff in tourism revenue, and a decline in
remittances. Those are the country's top four sources of
foreign-currency earnings.
Mexico's Cinépolis, the world's second-largest cinema chain, has
closed all 6,700 theaters it operates around the world as countries
order residents to stay at home. Its revenues evaporated virtually
overnight. But the company still has fixed costs, including some
44,000 employees in 17 countries. In Mexico, where the company has
a staff of 26,500, Cinépolis is giving them two-thirds pay to stay
home.
"We're not prepared for a massive economic halt for many weeks,"
said Chief Executive Alejandro Ramírez.
Cinépolis has drawn on credit lines, as have Grupo Bimbo, the
world's largest baking company, and Grupo Televisa, Mexico's
dominant television broadcaster.
Mexican President Andrés Manuel López Obrador has so far said
his government won't offer tax breaks or other incentives to large
companies. He said he wants to focus the country's limited
resources on helping the poor, who either work in the informal
economy or run mom-and-pop shops.
The ruling party head of Mexico's Lower House, Mario Delgado,
last week called on industrialized nations to forgive the foreign
debt of Mexico and other developing countries.
Mexico's government debt levels are moderate -- about 55% of GDP
-- but that figure will grow. The government said last week it will
run a bigger-than-expected fiscal deficit this year of 4.4% of
economic output, up from 2.6%. The deficit will grow because of
lower revenues such as tax income, the government said.
Complicating matters for Mexico is a loss of confidence among
foreign investors, already spooked by the president's nationalistic
economic policies.
Because of that lack of confidence, "Mexico will have more
difficulties than other countries to issue more debt," says Sergi
Lanau, deputy chief economist at the Institute of International
Finance in Washington.
--Joe Parkinson in Johannesburg, South Africa, Georgi Kantchev
in Moscow, Quentin Webb in Hong Kong and José de Córdoba in Miami
contributed to this article.
Write to David Luhnow at david.luhnow@wsj.com and Santiago Pérez
at santiago.perez@wsj.com
(END) Dow Jones Newswires
April 05, 2020 14:58 ET (18:58 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.