The coronavirus pandemic has hit the markets hard. The S&P 500 hit ‘limit down’ twice last week and the Dow Jones had its biggest daily percentage drop since Black Monday, 1987. During the storm, emerging markets have also seen a huge amount of pain.
Research from the Institute of International Finance has found that outflows of capital in emerging markets has reached $41.7 billion. That’s double the outflows from during the financial crisis within a 51-day period.
They measured a 51-day period starting from 21 January 2020 (when the coronavirus started to become a concern in the markets), 8 September 2008 (just before the big sell-off due to the financial crisis) and 26 July 2015 (the Chinese market crash).
The MSCI Emerging Markets Index has fallen over 22% fueled by the outflow in the capital.
Sovereign and corporate bonds have also been caught in the decline but nowhere near to the same degree. This is likely due to central banks and governments attempting to reduce volatility in currencies and to control inflation, which increases investor appetite to take carry trades and profit from the interest rates.
Emerging market currencies have also taken a big hit. For example, among others, the Russian ruble has collapsed over 17% against the US dollar and the Columbian peso is also down over 18% year to date.
Investors are likely to be pulling their capital out because they are concerned about the spread of COVID-19 and the extreme measures that are required to contain it. Even if the country itself manages to contain the outbreak, the demand from trading partners is likely to decline and harm industries within that country.
In the past, the quick decline in capital flowing into countries has led to damage to the economies. Argentina and Turkey are still recovering from the damage caused when this occurred in 2018.
Economists at the IIF (Institute of International Finance) say that this means the financial conditions in emerging countries are going to see a big tightening, as this is a sudden stop.
Governments in emerging economies may try to contain capital outflows with restrictive measures, as China did in early 2016, but this can also add to the problem since it can be seen as an indicator of instability. However, they may not have much choice if there is systemic risk.
As COVID-19 continues to spread, the outlook on global growth continues to be revised down with the OECD predicting global GDP growth to be 2.4% for 2020, below last years already weak 2.9% and the lowest reading since 2009 following the financial crisis.
China has begun to report a declining number of new coronavirus cases and South Korea has been reporting more recoveries than new cases. Central banks in Indonesia, Russia, Mexico and Brazil have also intervened in markets by purchasing local bonds.
However, since the capital outflows are at a more global level this time rather than isolated countries, this could create problems worldwide and at a systemic level as it causes political and economic instability.
Is all the stimulus being provided enough really enough to calm investors fears in emerging markets or are we likely to see the pain continue?