Worst yet to come for developing economies, BIS warns

LONDON: Developing countries have not yet felt 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 take their stimulus from the pandemic era, the head of Bank for International Settlements warned. Agustín Carstens, chief of the BIS, the bank for central banks, said developing economies were almost exhausting their ability to borrow and use fiscal and monetary policy.

‘They have to face the music of how to get growth going [with] all these things work against it. . . less fiscal space, they do not have money space, they have higher corporate debt and higher government debt, ”as well as a hedged low growth capacity, he told the Financial Times.

“This is the first time in the world that growth in advanced economies is higher than global growth, and that global growth is above emerging market growth,” he said. “Growth in emerging market economies has slowed, and we do not see it increasing.”

Many growth rates in many emerging economies slowed in the decade before the pandemic, which barely surpassed growth in advanced economies. While China, India and other parts of developing Asia continued to grow rapidly, large parts of the emerging world stagnated.

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

As a result, although the number of bankruptcies worldwide has dropped to the lowest level of this century thanks to the support of policymakers, Carstens said ‘the jury is still not on’ whether businesses can survive ‘if they were before less [policy] accommodation and less direct support ”. Although developing economies have so far managed to get through the pandemic without a financial or economic crisis, there is still a significant risk of one, he said: ‘Some of us think this may not be the final picture , and that what we we have seen so far is too good to be true. ”

According to two recently published reports, developing countries that rely on foreign investors to strengthen their economies will have a particularly difficult time.

Earlier this month, the Center for Economic Policy and Research found that the average return on foreign direct investment has declined over the past decade, with a larger decline in development than in advanced economies. Simon Evenett, lead author of the report, said: “There seems to be the assumption that there is a wave of money waiting to be awarded, but when the pool is dry.”

A report published last week by the United Nations Conference on Trade and Development found that developing countries had a very strong decline in greenfield FDI last year, creating new facilities and jobs. Both the number and value of greenfield investments have fallen by more than 40 percent in developing countries, compared to less than 20 percent in advanced economies.

James Zhan, lead author of the report, said geopolitics and increasing protectionism mean that the role of emerging economies in global value chains is threatened. ‘Developing [that] as a strategy will become more difficult, ‘he said.