Pandemic Stimulus Has Backfired in Emerging Markets

The writer, chief global strategist at Morgan Stanley Investment Management, is the author of ‘The Ten Rules of Successful Nations’

Since the beginning of the pandemic, many emerging nations saw the United States and other large developed countries “go to great lengths” in economic stimulus, and wished they could afford to continue. It turns out that they were lucky if they couldn’t and wise if they decided not to.

Emerging markets that stimulated more aggressively did not reap the rewards in a faster recovery, due in part to the downsides of excesses. Big spenders tended to suffer higher inflation, higher interest rates, and currency depreciation, at least partially canceling the high level of stimulus.

Analyzing data from major emerging and developed markets for a statistical link between the scale of their 2020 stimulus programs and the strength of the subsequent recovery, I found none. Even after correcting for deeper recessions, which often produce a further recovery in growth, aggressive monetary and fiscal stimulus did not add anything perceptible to the recovery.

This disconnect was most acute in emerging markets, from China to Chile. By dividing the top emerging markets in which they spend the most and the least aggressively, the big spenders tend to suffer weaker recoveries. Throughout the second quarter of this year, the recovery for big spenders averaged 12 percent of gross domestic product, compared with 19 percent for light spenders.

Among the emerging markets with the highest spending are Hungary with Viktor Orban, Brazil with Jair Bolsonaro and the Philippines with Rodrigo Duterte, all populist governments. Each of these nations spent at least 16 percent of GDP on stimulus, including new government spending and asset purchases by the central bank.

At the top of the list of big spenders is Greece, which was downgraded in 2013 from developed to emerging markets amid a streak of financial mismanagement. It spent the equivalent of 67 percent of GDP, apparently for nothing. Like Hungary, Brazil and the Philippines, Greece made an unremarkable recovery, close to the emerging market average of around 16 percent of GDP.

Why does the stimulus show unclear benefits and even backfire in emerging markets? The impact of the stimulus on any emerging country may now be overwhelmed by factors unique to the pandemic, including the global impact of a huge stimulus on the US and other developed countries, and the ongoing fight against the virus. Goldman Sachs research found a close link between growth and blockages and vaccines: the tighter the blockage and the slower the launch of the vaccine, the greater the impact on growth.

Furthermore, overspending is often counterproductive, especially in developing countries. They lack the financial resources and institutional credibility to increase spending without throwing the economy out of balance and end up being punished by global markets.

Over the past year, in high-spending emerging markets, inflation topped 5 percent, almost one point faster than in low-spending ones; Bond yields are up more than 142 basis points, compared to 43 points for low spenders. Currency values ​​have slumped, while holding steady at light spending levels. According to IMF forecasts, the public deficit at the end of 2021 will also be slightly higher in those who spend a lot, at almost 7% of GDP, compared to 6% in those who spend little.

Comparing emerging markets on an index of these factors (inflation, currency, interest rates, and deficits) highlights where the counterproductive effects are most pronounced. The worst-scoring big spenders include Hungary, Brazil and the Philippines. Top-scoring light spenders include Taiwan, South Korea, and Mexico.

The logic of stimulus campaigns may have more to do with politics than economic conditions. In keeping with their governmental traditions, East Asian nations tended to spend little, while Latin American nations tended to spend a lot. Emerging or developed nations that suffered the most pronounced recessions did not necessarily implement the largest stimulus packages.

The developing world has faced these options before. Many emerging markets entered the crisis of the late 1990s in a weak financial condition, were forced to reform rather than spend their way out of trouble, and controlling deficits and debt prepared them for a boom the next. decade. By 2008 they were on the rise, and many responded to the crisis that year by spending and borrowing heavily, contributing to one of the worst decades on record for emerging economies.

Nations that spend hastily are often forced to quietly repent. Those who tried to “go big” during the pandemic likely saw less additional growth than they imagined and considerably more problems, in the form of higher deficits and debt, leaving them with less ammunition to fight the next battle.

Source: https://insider-voice.com/pandemic-stimulus-has-failed-in-emerging-markets/