He warns that “tolerant” financial markets will begin to turn under pressure on the most indebted and vulnerable countries, such as Brazil and South Africa.
“Last year’s fiscal sins in emerging markets have been forgiven, but not forgotten.”
The pressure on countries with large stacks of foreign currency debt may increase even more. Dollar debt charges are expected to face increasing pressure if the Federal Reserve is forced to raise interest rates to cool an overheated American economy, with higher borrowing costs making recovery difficult and exposing vulnerabilities. Some emerging market central banks, such as Brazil and Russia, are already raising interest rates as they seek to sustain their struggling currencies.
“High indebtedness increases the risk of suffering financial stress in the future,” says Kirby. “You often have to go through a long period of deleveraging, which can weigh on growth.”
A generation of progress eliminated
A prolonged blow to the pandemic is disrupting and even reversing some of the progress of poverty in the world in recent decades. The financial crisis has slowed, but it has not completely halted poverty reductions worldwide. However, the pandemic has eliminated a generation of advances in the eradication of extreme poverty. The World Bank believes that between 119 million and 124 million people have entered extreme poverty after two decades of steady decline in poverty rates.
It is important for the West that these low and middle income economies will be crucial to the direction of global growth in the years to come. Global institutions, such as the IMF and the World Bank, have emphasized the importance of eradicating Covid cases everywhere to prevent the pandemic from growing again.
“If you eliminate the Covid virus in advanced economies, but not in emerging markets, it will come back,” warns Carvalho.
These countries have also become a much more important engine of the world economy in recent decades. China’s economy was the size of Britain in 2005. It is now more than four times bigger, while countries like India, Indonesia, Brazil and Nigeria will rise in the ranking.
“We are seeing a recovery in emerging markets, but it is not enough to undo the damage from the pandemic,” said Kirby. “For more than a quarter of those countries, it eliminated 10 years of per capita income gains. The top priority is vaccination, and then you want to look at the pandemic’s legacies – such high debt. ”
Advanced economies could soon put Covid in the rearview mirror, but for many poorer countries a longer and more difficult road to recovery is ahead.