COVID-19: estimating the impact on emerging market economies

Authored by Roger Mark, Analyst

27 March 2020

The direct risk of COVID-19 to emerging markets is rising and the impact on individual economies is likely to vary significantly. Roger Mark discusses the tools the team is developing to estimate how well/poorly countries will fare across the emerging market debt universe, and shares the insights these are providing.

Outside of North Asia, the coronavirus (COVID-19) pandemic has largely centred on Europe and it is becoming increasingly prevalent in North America. However, direct risks to emerging markets across the world are now rising. Over the last week the number of cases in countries in our investment universe (ex-China/Korea) has increased from around 2,000 to nearly 30,000. Many of these cases were imported, but there is increasing evidence of community transmission in some markets.

The pandemic is a humanitarian disaster, first and foremost. However, the financial impact has the potential to be both damaging for economies and to have long-lasting consequences for a large swathe of the global population.

We believe it is crucial for investors in emerging market debt to understand how vulnerable individual emerging market countries are to COVID-19, and how much fiscal space they have to mitigate the economic hit. To this end, we have created an index that ranks our emerging markets based on the following:

1. Pandemic Vulnerability Indicator
2. Fiscal Space Indicator
3. Real time COVID-19 outbreak and response tracking

The Pandemic Vulnerability indicator is a composite of two factors:

• Demographic score: given the susceptibility of the older population to the virus, we focus on the share of a country’s population that is over the age of 70.
• Health System score: we use the John Hopkins Global Health Security Index as a measure of the capacity of each country’s healthcare system to cope with a pandemic. The Index was designed specifically to measure this.

We then compare this to an aggregate measure of fiscal space (Fiscal Space Indicator): this aims to quantify how much room governments have to absorb revenue losses from shutdowns, spending on fiscal stimulus measures, etc. 

We then overlay this with real-time analysis of the pandemic, weighted towards the growth rate of cases and adjusted for the demographics of each market (Real time COVID-19 outbreak and response tracking). We also supplement our underlying Pandemic Risk indicator with a qualitative analysis of the outbreak response from each emerging market, assisted by news flow and comparative analysis from academia.

The chart below shows the results of the above approach, which allow us to track vulnerability to real time trends in the pandemic. 

Chart: Covid-19 pandemic vulnerability vs fiscal space

 
Forecasts are inherently limited and are not a reliable indicator of future results. Y-axis: Pandemic Vulnerability + Response Score. X-axis: Fiscal Space Score. Bubble size represents real-time pandemic outbreak score – larger bubble represents greater pandemic risk based on level and trend (weighted towards trend, hence China scores better than Israel). Source: Ninety One, using also data from the John Hopkins Global Health Security Index and academia. March 2020. For illustrative purposes only. For further information on investment process, please see the Important information section.

Current observations from our COVID index

• Most of the more worrying outbreaks are happening in emerging markets with either substantial fiscal space and lower pandemic vulnerability – or a combination of both. East Asia is a good example, with Korea and Singapore scoring particularly well. Countries like Chile and Peru, where the pandemic is a much earlier stage, also seem quite well placed on both metrics.
• Eastern Europe scores particularly poorly on pandemic vulnerability, largely as a result of the older share of the population. However, from a fiscal space perspective, most are in relatively good shape.
• The pandemic response in some Latin American markets has been weak. Moreover, while COVID-19 cases are still only in the hundreds in most of these countries, we believe there is potential for fiscal strain, particularly in some of the smaller markets where we are already seeing relatively high case rates per capita.
• There are a number of emerging markets with limited fiscal room in the event of a pandemic. We rate Egypt and Sri Lanka as most at risk from a fiscal space perspective, but outbreaks here are still relatively small. Overall, the signals from the IMF are that there will be strong concessional financing to support more vulnerable emerging market countries.

Fiscal risks are of course just one element of the economic fallout from the pandemic. Within our process we are focusing on a whole suite of indicators that would be impacted, such as net commodity trade balances, tourism revenue, remittances, food prices and monetary policy.