The Emerging Markets Recovery & The Race Ahead

Rarely do the headlines from the U.S. Federal Reserve cross news from the Ganges, but market anxiety around rising interest rates has direct consequences for the tragic reports of surging deaths along the banks of India’s sacred river.

As pandemic containment comes into view across the world’s richer half, the race continues in poorer countries. Actually, there are two races—one race to save lives and another to reopen borders before interest rates normalize. There’s no reason to believe vaccines won’t eventually contain the recent spikes in COVID-19 cases from Brazil to Turkey, but delays will come with heartbreaking human cost and a much slower economic recovery.
 

“Even a country like India that depends less on foreign trade than its Emerging Markets peers will suffer without unrestricted international travel. Foreign investors may buy stocks and bonds from their distant desks, but they won’t build a factory on Zoom.”

For investors, the long-awaited signal in the minutes from April’s Federal Open Markets Committee meeting marked the official countdown on the return to post-pandemic normal. So far this year, stock markets in Mexico, Russia, and South Africa have delivered handsome returns as the global economy roars back, and the broad asset class looks attractive as long as global inflation expectations remain in check.

Now, however, America’s central bank is officially “thinking about thinking” about normalizing monetary policy. It will be gradual and well-advertised when it comes, but it means the days of ample liquidity are numbered and world’s developing countries will need to prepare for higher global rates.  

Free-flowing financial liquidity and recovering global trade over the last year more than compensated for travel restrictions for a number of developing countries, many of which seemed to avoid significant waves of the coronavirus early in the pandemic. Where it did appear, some governments either would not or could not afford the costs of economic restrictions.

But 10-year Treasury yields that start drifting back above 2.5% will mean a stronger dollar, more expensive foreign debts, and slower flows of capital to riskier markets. These challenges turn overwhelming if central bankers and finance ministers must raise rates and cut spending with a domestic health crisis still unfolding. 

Already, some markets have been forced to hike interest rates in the early stages of the global recovery. Countries like Mexico and Brazil currently look like they have the resources and the strategy to navigate a global normalization, while Colombia, Indonesia, and Turkey may face steeper challenges.

In fact, the developing world faces an even stiffer challenge than we realized if new COVID-19 estimates from The Economist are even close. While official numbers put total COVID-19 deaths at 3.4 million so far, its best estimate soars closer to 10 million.
 

Global Estimated Excess Deaths Attributable To COVID-19

Sources: Johns Hopkins University CSSE; The Economist excess-deaths model.

Many COVID-related deaths go uncounted given poor testing and comorbidities, but analysis of “excess deaths” leads them to the unsettling conclusion that “the pandemic is increasingly concentrated in developing economies and continues to grow.” 

In developed countries, the undercounting may miss 15–20% of the actual COVID deaths; in sub-Saharan Africa, the real total may be 14 times the official number. More precisely, The Economist concludes there is a 95% likelihood that global COVID deaths range from 7–13 million. For context, this is more than World Health Organization estimates for death from either heart disease or stroke.

The silver lining in these eye-watering absolute estimates is that they remain relatively low as a percentage of the population, most likely because these countries generally skew younger and better able to withstand the disease.

But epidemiologists already know the lingering virus can produce contagious variants, and economists know that the flows of money and goods can only do so much to support economic activity if people—tourists, students, guest workers, investors, engineers, and sales reps—can’t follow. 

The absence of tourism is already devastating to the likes of the Thailand and the Dominican Republic. But even a country like India that depends less on foreign trade than its Emerging Markets peers will suffer without unrestricted international travel. Foreign investors may buy stocks and bonds from their distant desks, but they won’t build a factory on Zoom.

By some estimates, vaccine production may reach 11 billion by the end of the year, providing two shots for 70% of the world’s population and coming close to herd immunity. There are plenty of obstacles to this goal, and rich countries will inevitably need to help on humanitarian grounds, as well as in their own self-interest. Waiving patents may or may not help speed the process given the complexities of vaccine production, but sharing existing stocks that far exceed the needs of the rich can accelerate shots into arms of the poor.

Meanwhile, the immediate burden rests with health ministers of the world’s emerging markets to contain the virus so borders can reopen before their colleagues in finance really need to respond to the global tightening that lies ahead.