Link to the University of Pittsburgh
Link to the University Library SystemContact us link
AEI Banner

COVID-19’s reality shock for external-funding dependent emerging economies. Bruegel Policy Contribution Issue n˚10 | May 2020.

Garcia Herroro, Alicia and Ribakova, Elina (2020) COVID-19’s reality shock for external-funding dependent emerging economies. Bruegel Policy Contribution Issue n˚10 | May 2020. [Policy Paper]

[img] PDF - Published Version
Download (504Kb)

    Abstract

    COVID-19 has brought to light a reality that had been mostly forgotten in an era of ample dollar liquidity: the excessive dependence of emerging economies on external financing. The sudden increase in global risk aversion arising from COVID-19 has caused investors to rush to safe assets and to the dollar, away from no-reserve currencies. The COVID-19 shock has also sharply reduced emerging markets’ access to dollars, exports, tourism receipts and even remittances, as the shock also affects the countries where migrants earn their incomes. The fiscal and monetary room emerging economies have to respond is limited, and the lack of automatic stabilisers on the fiscal side also means that fiscal policy does not have the same redistributive effects during a severe shock as in the developed world. In principle, various options are available to confront liquidity problems: domestic monetary policy, capital controls, dipping into foreign exchange reserves, regional schemes such as the Chiang Mai Initiative Multilateralisation, central bank swap lines, and International Monetary Fund programmes. But not all these options are available to most countries. Central banks’ responses to the pandemic have been much less aggressive in the emerging world than in the west, as their currencies have plummeted in many cases, increasing the cost of dollar liabilities. Capital controls are temporary and costly. Self-insurance and regional insurance schemes are unavailable to many economies, particularly in Latin America. The United States Federal Reserve has reacted quickly with swap lines to key central banks, but this is only a partial option because the Fed risks being overburdened in its attempt to provide cross-border dollar liquidity. The IMF remains the most obvious lender of last resort for emerging economies, but needs to make two changes to become more effective: a more targeted set of facilities with quicker disbursement and less conditionality; and increased financial resources.

    Export/Citation:EndNote | BibTeX | Dublin Core | ASCII (Chicago style) | HTML Citation | OpenURL
    Social Networking:
    Item Type: Policy Paper
    Subjects for non-EU documents: EU policies and themes > External relations > EU-ACP
    Other international institutions > IMF
    EU policies and themes > Policies & related activities > economic and financial affairs > banks/financial markets
    EU policies and themes > Policies & related activities > economic and financial affairs > fiscal policy
    EU policies and themes > Policies & related activities > economic and financial affairs > monetary policy
    Subjects for EU documents: UNSPECIFIED
    EU Series and Periodicals: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Bruegel (Brussels) > Policy Contributions
    Depositing User: Daniel Pennell
    Official EU Document: No
    Language: English
    Date Deposited: 11 Nov 2020 10:09
    Number of Pages: 13
    Last Modified: 11 Nov 2020 10:09
    URI: http://aei.pitt.edu/id/eprint/103265

    Actions (login required)

    View Item

    Document Downloads