Worst yet to come for developing economies, BIS warns

Developing countries have yet to feel the full economic impact of the coronavirus crisis but will not be able to rely on the world’s leading central banks for support as they scale back their pandemic-era stimulus, the head of the Bank for International Settlements has warned.

Agustín Carstens, general manager of the BIS, the bank for central banks, said developing economies are close to exhausting their capacity to borrow and to use fiscal and monetary policy.

“They have to start facing the music of how to get growth going [with] all these things working against them . . . reduced fiscal space, they don’t have monetary space, they have higher corporate debt and higher sovereign debt,” as well as an entrenched low capacity for growth, he told the Financial Times.

“This is the first time in the world that advanced economies’ growth is above global growth, and global growth is above emerging market growth,” he said. “Growth in emerging market economies has been slowing down, and we don’t see it picking up.”

Many emerging economies’ growth rates slowed in the decade before the pandemic, barely outpacing growth in advanced economies. While China, India and other parts of developing Asia have continued to grow quickly, large parts of the emerging world have stagnated.

Emerging economies’ high levels of both public and private debt will weigh on investment, and if financial conditions tighten, emerging economies will be particularly exposed, Carstens said. That is becoming more likely as leading central banks including the US Federal Reserve look to scale back their pandemic-era stimulus measures.

As a result, although the number of bankruptcies worldwide has fallen to its lowest level this century thanks to policymakers’ support, Carstens said “the jury is still out” on whether businesses can survive “if faced with less [policy] accommodation and less direct support”.

So although developing economies have so far managed to get through the pandemic without a financial or economic crisis, there is still a substantial risk of one, he said: “Some of us think that this might not be the final picture, and that what we have seen so far is too good to be true.”

Developing countries which rely on foreign investors to bolster their economies will face a particularly difficult time, according to two recently published reports.

Earlier this month the Centre for Economic Policy and Research found the average return on foreign direct investment had fallen over the past decade, with a bigger decline in developing than in advanced economies.

Simon Evenett, lead author of the report, said: “There seems to be an assumption that there is a wave of money waiting to be allocated but, if anything, the pool is drying up.”

A report published last week by the United Nations Conference on Trade and Development found that developing countries suffered an especially steep fall last year in greenfield FDI, which creates new facilities and jobs. Both the number and the value of greenfield investments fell by more than 40 per cent in developing countries, compared to less than 20 per cent in advanced economies.

James Zhan, lead author of the report, said geopolitics and rising protectionism meant that the role of emerging economies in global value chains was under threat. “Developing [that] as a strategy will become more difficult,” he said.

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