As in prior episodes of high risk-aversion, it is the currencies of emerging markets that are most reliant on external investors for financing that have suffered the most. The currencies of these current-account-deficit (CAD) markets are down -13% year to date. Let’s study these markets in more detail: India, Indonesia, Malaysia, Brazil, Mexico, Colombia, Turkey & South Africa.
At first glance, total fiscal packages for the eight countries under consideration appear large (e.g. 8.5% of GDP for Brazil or 7.1% for Colombia). Yet a big chunk are guaranteed loans - bridge loans to companies to allow them to survive the crisis - which will not necessarily add to public debt as they should be repaid. ‘Should’ is the key word here, as it assumes that these firms will not default or that governments will not forgive their loans.
Focusing only on fiscal spending that will impact the debt level, these EMs appear to have generally struck a good balance between necessity and affordability - all apart from Brazil.
But public debt is just one indicator we think should be considered. Using six inputs to compile our proprietary sovereign debt sustainability score, we then track this in fig.2 below against the fiscal stimulus in the different markets.
This shows that the larger fiscal stimulus packages have come from those countries on a more sustainable debt footing. Or conversely: the higher the sovereign risk, the weaker the fiscal stimulus. Examples of high debt and low stimulus include South Africa and India. Again the notable exception is Brazil, which has just passed the second largest budget in EM after Thailand, worth BRL380bn.
Brazil aside, fiscal deterioration should be much smaller in emerging markets than in advanced economies. The median direct fiscal stimulus in EM being 1.6% of GDP which compares to 4.2% for advanced economies. Moreover, EMs have generally been much more cautious in providing guaranteed loans to the private sector than in developed markets.A clear risk is that smaller fiscal packages are ineffective.
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