Post-COVID: Dealing with the emerging market debt overhang by Kevin Daly, Tadas Gedminas and Clemens Grafe published by VOXEU (5/2020).
“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.
Although the COVID crisis is affecting all economies (Baldwin and Weder di Mauro 2020), emerging economies are in a weaker position than developed economies to absorb its fiscal costs.1 In developed market (DM) economies, with credible institutional frameworks and relatively developed financial markets, most governments can run substantial government deficits without driving interest rates and inflation higher. For emerging market (EM) economies (with the notable exception of China), borrowing constraints are more likely to be binding, especially in a world where DM governments will also be borrowing heavily.
In a recent paper (Daly et al. 2020), we assess the impact of the COVID-19 crisis on EM government deficit and debt levels, and the fiscal adjustments that are likely to be required in the aftermath of the crisis.
Estimating the COVID fiscal impact in 2020 and 2021
To estimate the impact of the crisis on fiscal balances in 2020 and 2021, we incorporate the effects of both the discretionary fiscal easing measures announced in response to the crisis and the impact of weaker growth on budget balances. We do not include the potential cost of loan guarantees provided in many countries, so we view the risks relative to our estimates as being skewed towards larger deficits. To help ensure cross-country comparability, we derive our own estimates of the impact of growth on fiscal balances on a consistent basis, before inputting the latest Goldman Sachs growth forecasts for each of these economies.
Our primary (ex-interest) balance estimates for 2020 and 2021 are set out in Figure 1 (with the country ordering determined by the size of estimated primary deficits in 2020). On a regional basis, we find that primary deficits are likely to widen in Asia from 1.4% of GDP in 2019 to 5.5% of GDP in 2020, in Central and Eastern Europe, Middle East and Africa (CEEMEA) from 1.3% to 6.6%, and in Latin America from 0.3% to 5.8%. In 2021, as the impact of discretionary fiscal easing measures drop out, we expect primary deficits to improve on a sequential basis but remain materially wider than pre-crisis levels.
Unsurprisingly, we find that the largest deteriorations in fiscal balances are likely to take place in oil producers, including Saudi Arabia, Nigeria, and Russia. In CEEMEA, we also expect deficits to widen considerably in South Africa, Israel, Kenya, and Turkey. In Asia, the largest fiscal deterioration is likely to occur in Thailand and China (reflecting a large discretionary easing in these economies). In Latin America, we project the biggest primary deficits in Chile, Peru, and Brazil…”
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