Policy brief

COVID-19’s reality shock for external-funding dependent emerging economies

COVID-19 is by far the biggest challenge policymakers in emerging economies have had to deal with in recent history. Beyond the potentially large nega

Publishing date
28 May 2020

COVID-19 has brought to light a reality that had been mostly forgotten in an era of ample dollar liquidity: the excessive dependence of emerging economies on external financing. The sudden increase in global risk aversion arising from COVID-19 has caused investors to rush to safe assets and to the dollar, away from no-reserve currencies. The COVID-19 shock has also sharply reduced emerging markets’ access to dollars, exports, tourism receipts and even remittances, as the shock also affects the countries where migrants earn their incomes. The fiscal and monetary room emerging economies have to respond is limited, and the lack of automatic stabilisers on the fiscal side also means that fiscal policy does not have the same redistributive effects during a severe shock as in the developed world.

In principle, various options are available to confront liquidity problems: domestic monetary policy, capital controls, dipping into foreign exchange reserves, regional schemes such as the Chiang Mai Initiative Multilateralisation, central bank swap lines, and International Monetary Fund programmes.

But not all these options are available to most countries. Central banks’ responses to the pandemic have been much less aggressive in the emerging world than in the west, as their currencies have plummeted in many cases, increasing the cost of dollar liabilities. Capital controls are temporary and costly. Self-insurance and regional insurance schemes are unavailable to many economies, particularly in Latin America. The United States Federal Reserve has reacted quickly with swap lines to key central banks, but this is only a partial option because the Fed risks being overburdened in its attempt to provide cross-border dollar liquidity. The IMF remains the most obvious lender of last resort for emerging economies, but needs to make two changes to become more effective: a more targeted set of facilities with quicker disbursement and less conditionality; and increased financial resources.

Recommended citation
García-Herrero, A. and E. Ribakova (2020) 'COVID-19’s reality shock for external-funding dependent emerging economies', Policy Contribution 10/2020, Bruegel


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About the authors

  • Alicia García-Herrero

    Alicia García Herrero is a Senior Fellow at European think-tank BRUEGEL. She is also the Chief Economist for Asia Pacific at Natixis, and a non-resident Senior Follow at the East Asian Institute (EAI) of the National University Singapore (NUS). Alicia is also Adjunct Professor at the Hong Kong University of Science and Technology. Finally, she is a Member of the Council of Advisors on Economic Affairs to the Spanish Government and an advisor to the Hong Kong Monetary Authority’s research arm (HKIMR) among other advisory and academic positions.

    In previous years, Alicia held the following positions: Chief Economist for Emerging Markets at Banco Bilbao Vizcaya Argentaria (BBVA), Member of the Asian Research Program at the Bank of International Settlements (BIS), Head of the International Economy Division of the Bank of Spain, Member of the Counsel to the Executive Board of the European Central Bank, Head of Emerging Economies at the Research Department at Banco Santander, and Economist at the International Monetary Fund. Alicia has maintained a part-time academic life throughout her career as Visiting Professor at John Hopkins University (SAIS program), at the China Europe International Business School (CEIBS) in Shanghai, Carlos III University in Madrid among others.

    Alicia holds a PhD in Economics from George Washington University and has published extensively in refereed journals and books (her publications can be found in ResearchGateGoogle ScholarSSRN or REPEC).

    Alicia is also very active in international media (Bloomberg and CNBC among others) as well as social media (Twitter and LinkedIn). Alicia was included in the TOP Voices in Economy and Finance by LinkedIn in 2017 and #6 Top Social Media leader by Refinitiv in 2020.

  • Elina Ribakova

    Elina Ribakova is a Non-Resident Fellow at Bruegel and she is also Deputy Chief Economist at the Institute of International Finance. Her research focuses on global markets, economic statecraft, and economic sovereignty. She was previously a research fellow at the London School of Economics (LSE). She also held senior-level roles in economic research at a diverse set of financial institutions, most recently with Deutsche Bank in London as Head of EEMEA Research and leadership positions at Amundi (Pioneer) Asset Management and Citigroup. Before that, she spent nine years at the IMF, Washington, DC.

    Elina is a seasoned public speaker, has participated in and led multiple panels with C-level executives and is a frequent speaker at CNN, BBC, Bloomberg, CNBC and NPR, among others. She is often quoted by, and contributed OpEds to, several global media, including the NYT, WSJ, FT, Washington Post, the Guardian, Le Monde and several other media outlets. Ms. Ribakova holds an MSc in Economics from the University of Warwick, where she was awarded the Shiv Nath prize for outstanding academic performance.

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