Some #EmergingMarkets thoughts. The shock is unprecedented. Q1 GDP likely contracted -15% (annualized). If #China indeed recovers, Q2 headline number may look better. But, X-China, the pain has only just started. 1/6
The nature of the shock is complicated. Domestic factors (lower consumption and investment) is combining with external shocks (collapsing exports; imploding commodity prices; lower remittances; & disappearing tourists). 2/6
To that, add the tightening of financial conditions including, most insidiously, the severe #USD liquidity shortage (exacerbated by portfolio outflows). Among others, the crunch will hurt a highly indebted corporate sector. 3/6
Can policy makers react? Not clear. Unusually, EM #centralbanks are aggressively easing. But room will be limited if lower rates lead to un-anchored FX weakness. In the meantime, fiscal space in EM is almost non-existent. 4/6
Massive shocks, liquidity shortages, and constrained policies is a recipe for “accidents”. What we politely refer to as “credit events” (aka defaults) is increasingly likely. This, lest it be forgotten, could easily boomerang back to the DM. 5/6
This logical conclusion is the urgent need for foreign funding: FX swap lines to EM central bankers and lower-conditionality and fast disbursing #IMF programs. More aggressive steps (capital controls and a “pause button” on debt servicing) shouldn’t be ruled out either. 6/6
