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 Bruegel.

    She is the Chief Economist for Asia Pacific at French investment bank Natixis, based in Hong Kong and is an independent Board Member of AGEAS insurance group. Alicia also serves as a non-resident Senior fellow 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 (HKUST). Finally, Alicia is a Member of the Council of the Focused Ultrasound Foundation (FUF), a Member of the Board of the Center for Asia-Pacific Resilience and Innovation (CAPRI), a member of the Council of Advisors on Economic Affairs to the Spanish Government, a member of the Advisory Board of the Berlin-based Mercator Institute for China Studies (MERICS) and an advisor to the Hong Kong Monetary Authority’s research arm (HKIMR).

    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. As regards her academic career, Alicia has served as visiting Professor at John Hopkins University (SAIS program), China Europe International Business School (CEIBS) and Carlos III University. 

    Alicia holds a PhD in Economics from George Washington University and has published extensively in refereed journals and books (see her publications in ResearchGate, Google Scholar, SSRN or REPEC). Alicia is very active in international media (such as BBC, Bloomberg, CNBC  and CNN) as well as social media (LinkedIn and Twitter). As a recognition of her thought leadership, 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. She is also a Non-resident senior fellow at the Peterson Institute for International Economics and a Director of the International Affairs Program and Vice President for foreign policy at the Kyiv School of Economics. Her research focuses on global markets, economic statecraft and economic sovereignty. She has been a senior adjunct fellow at the Center for a New American Security (2020–23) and a research fellow at the London School of Economics (2015–17).

    Ribakova has over 25 years of experience with financial markets and research. She has held several senior-level roles, including deputy chief economist at the Institute of International Finance in Washington, managing director and head of Europe, Middle East and Africa (EMEA) Research at Deutsche Bank in London, leadership positions at Amundi (Pioneer) Asset Management, and director and chief economist for Russia and the Commonwealth for Independent States (CIS) at Citigroup.

    Prior to that, Ribakova was an economist at the International Monetary Fund in Washington (1999–2008), working on financial stability, macroeconomic policy design for commodity-exporting countries and fiscal policy. Ribakova is a seasoned public speaker. She has participated in and led multiple panels with leading academics, policymakers, and C-level executives. She frequently collaborates with CNN, BBC, Bloomberg, CNBC, and NPR. She is often quoted by and contributes op-eds to several global media, including the New York Times, Wall Street Journal, Financial Times, Washington Post, The Guardian, Le Monde, El Pais, and several other media outlets.

    Ribakova holds a master of science degree in economics from the University of Warwick (1999), where she was awarded the Shiv Nath prize for outstanding academic performance; and a master of science degree in data science from the University of Virginia (2023).

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