Many emerging market economies could begin defaulting on their bonds in the coming weeks. This is due to the COVID-19 pandemic, which has led to huge outflows from emerging market assets, thereby causing their foreign exchange reserves to plummet at an alarming rate.
Why it’s important: The series of defaults is unlikely to be confined to emerging market assets alone; it could greatly affect the global credit market crisis already forming in the world’s debt markets.
The massive outflows will be particularly damaging for emerging countries, that are heavily reliant on foreign capital such as Nigeria, especially as foreign direct investment inflows have been plummeting since last year due to the lingering China-US trade war.
The World Bank and International Monetary Fund have lately called for an immediate postponement of debt payments from International Development Association countries, which are classified as the world’s poorest countries.
The emerging markets are being battered on all angles by a pause in manufacturing, falling crude oil prices and poor global demand as a result of the COVID-19 pandemic.
With COVID-19 pandemic raging on across emerged markets and in its infancy in Africa, there’s little relief on the horizon.
Major central banks around the world, including the U.S, China, Japan, Europe, have already added up more than $21 trillion on their respective balance sheets and are expected to add up more in the coming months.
In addition, in potential politically conflicted central banks such as the ones in some parts of Africa, such a program like quantitative easing carries a very huge risk of spiking inflation and eroding the credibility of policymakers.
Source:Nairametrics.com
