He warns that “tolerant” financial markets will begin to turn with pressure focusing on the most indebted and vulnerable countries, such as Brazil and South Africa.
“Last year’s fiscal sins in emerging markets were forgiven but not forgotten.”
The pressure on countries with large piles of foreign currency debt could mount further. Dollar debt burdens are expected to face mounting pressure if the Federal Reserve is forced to lift interest rates to cool an overheating US economy, with higher borrowing costs hampering rebounds and exposing vulnerabilities. Some emerging market central banks, such as Brazil and Russia, are already raising interest rates as they seek to prop up their struggling currencies.
“High debt increases the risk of suffering financial stress later on,” says Kirby. “You often have to go through a long period of deleveraging, which can weigh on growth.”
A generation of progress wiped out
A prolonged blow from the pandemic is halting and even reversing some of the world’s poverty progress in recent decades. The financial crisis slowed but did not completely stop reductions in poverty globally. However, the pandemic has wiped out a generation of progress in stamping out extreme poverty. The World Bank believes between 119m and 124m people have entered extreme poverty after two decades of consistently declining poverty rates.
Importantly for the West, these low and middle income economies will be crucial for the direction of global growth in the coming years. Global institutions, such as the IMF and World Bank, have stressed the importance of stamping out Covid cases everywhere to stop the pandemic rearing its head again.
“If you eliminate the Covid virus in advanced economies, but you don’t in emerging markets, it will come back,” warns Carvalho.
These countries have also become a far more important driver of the world economy in the past few decades. China’s economy was the size of Britain’s in 2005. Now it is more than four times larger while the likes of India, Indonesia, Brazil and Nigeria will climb the ranks.
“We are seeing a recovery in emerging markets but it’s not nearly enough to undo the damage from the pandemic,” says Kirby. “For more than a quarter of these countries, it erased 10 years of per capita income gains. The top priority is the vaccine and then you want to look at the legacies of the pandemic – so high debt.”
Advanced economies could soon put Covid in the rear-view mirror but for many poorer countries a longer, rougher road to recovery lies ahead.