FX.co ★ 8 events that shocked emerging markets

COVID-19 pandemic

The global outbreak of the coronavirus infection has been a sore trial for both emerging markets and developed countries. The pandemic instantly spread across the whole world. With the onset of 2020, after the United States and China signed the phase one of the trade agreement, investors felt quite optimistic. However, the COVID-19 pandemic destroyed all plans and quarantine restrictions were introduced on an international level. The world economy has entered a period of stagnation and countries have faced the global crisis as a result. Emerging markets were hit hardest, contracting by more than 30%.

Extremely low interest rates

In the immediate aftermath of the COVID-19 pandemic and the implementation of quarantine measures around the world, central banks started to increase liquidity, while governments created record incentives. The authorities of emerging markets reduced interest rates to unprecedented lows in order to save their economies. Analysts underlined that these measures helped stop a sell-off of stocks. In the second quarter of 2020, thanks to the current adaptive policy, emerging markets experienced an extraordinary surge of dollar bonds that had not been recorded for 11 years.

US-China trade conflict

After temporary warming in the trade relationship between China and the United States in the end of 2019, the confrontation started afresh. The beginning of 2020 was marked by another escalation of the trade dispute between Washington and Beijing. When the US topped the list of countries with the largest number of COVID-19 cases, the US president accused China of spreading the coronavirus. As a result, the disagreement between the two world’s largest economies intensified and reached its peak. At the same time, the renminbi fell against the greenback to a record low causing a surge in volatility in emerging markets.

Oil quotes collapse

A break of the treaty between OPEC and Russia that had supported oil markets for three years became a terrible blow to emerging markets. This fact triggered an unprecedented drop in oil prices which went into the red zone. As a result, many emerging markets with their economies being weakened by the coronavirus had faced additional challenges. In April 2020, the countries reached an agreement to cut oil production. The deal was extended in June. However, a full recovery is still far away.

Default probability

An increase in government spending in order to minimize the negative consequences of COVID-19 brought a number of emerging markets to the brink of default. The most affected countries were those with huge debts in foreign currency. Aiming to improve the situation, the IMF has expanded emergency lending programs to emerging markets most affected by the pandemic. A number of emerging markets that have financial difficulties in addition to the current crisis are taking emergency measures to restructure their debts.

Rating downgrade

The sovereign credit rating of many emerging markets has dipped sharply. For example, South Africa has lost its investment-grade credit rating when Moody's downgraded it to junk status. As a result, the country's economy was on the verge of the largest collapse in 90 years. The rand, the official currency of South Africa, crashed to a record low against the US dollar. India found itself in a similar situation. The country’s credit rating also moved one step closer to junk.

Trade restrictions in Turkey

Recently, Turkey has tightened trade restrictions. This decision has had an adverse impact on emerging markets. Interestingly, Turkish banks have expanded interventions in the foreign exchange market in order to support the lira after the collapse. In May of this year, the Turkish currency crashed due to capital outflows, while the interest rate fell below zero. According to analysts at the Goldman Sachs Group Inc., the Central Bank of Turkey has spent about $45 billion on foreign exchange interventions for the four months of 2020.

India-China border clash

Emerging markets went through additional negative experience after the escalation of geopolitical tensions between China and India over North Korea. Thus, in June, an inter-Korean liaison office was blown up on the border with North Korea and a violent face-off of Indian and Chinese troops took place. Consequently, this led to human casualties, although the conflict was quickly resolved.