Emerging Markets Have Never Experienced A Crisis Like This Before

Episode Summary

Executive Summary: The episode examines how the COVID-era shock hits emerging markets through a double blow: collapsing trade/tourism and a global dollar/liquidity squeeze. Brad Setser argues this is worse than 2008 or the Asian financial crisis, highlights which EMs are most vulnerable or resilient, and explains the IMF’s emergency tools, including rapid lending and possible SDR allocation. The discussion broadens to long-run shifts in China, the U.S., and global supply chains toward resilience over pure efficiency.

Main Topics: Emerging markets face a dual financial and real-economy shock (Priority: 5/5): The hosts and Brad Setser frame EMs as being hit simultaneously by dollar funding stress, capital outflows, collapsing trade, tourism, and commodity prices, making this crisis more severe than prior downturns. Who is most vulnerable vs. most resilient in EMs (Priority: 5/5): Setzer divides EMs into fortress balance-sheet countries (e.g., China, Korea, Taiwan, Thailand) and highly vulnerable ones (e.g., Lebanon, Turkey, Argentina), with a middle group exposed to reserve depletion if outflows continue. IMF response, capacity, and special drawing rights (Priority: 5/5): The conversation details the IMF’s existing rapid-financing facilities, pooled lending model, quota resources, borrowing lines, and the case for a large SDR allocation to quickly boost reserves globally. China’s short-run balance-of-payments strength and long-run reform choices (Priority: 4/5): China benefits from lower oil prices and reduced imports, but Setzer argues it must choose between reviving investment-led growth or undertaking major tax, spending, and social-policy reforms to boost domestic consumption. The future of supply chains, trade, and globalization (Priority: 4/5): Participants discuss a likely shift away from hyper-globalization toward regionalization, resilience, stockpiles, and more local production, with implications for Mexico, China, the U.S., and aircraft demand. Dollar dependence and emerging-market borrowing behavior (Priority: 4/5): The episode considers whether the crisis will push EMs away from dollar borrowing, but Setzer argues creditors may still prefer hard currency; the broader trend is toward stronger external balance sheets rather than immediate de-dollarization. U.S. policy and the tradeoff between efficiency and resilience (Priority: 3/5): The discussion ends by linking pandemic shortages to U.S. industrial policy, especially pharmaceutical offshoring, and arguing that policymakers must rebalance toward resilience without abandoning trade benefits.

Key Arguments: This crisis is likely worse for emerging markets than the 2008 global financial crisis and the Asian financial crisis because it combines a dollar/liquidity shock with a collapse in trade, tourism, and commodities. Countries with dollar debt or heavy foreign investor dependence are under the most pressure because they need hard currency while export revenues and capital inflows are falling. Tourism-dependent and oil-exporting countries are especially vulnerable because sudden losses of foreign exchange make it hard to pay for imports and external debt. IMF assistance is crucial because it can lend reserves over multiple years and with broader flexibility than central-bank swap lines, and should be more generous than in past crises. SDR issuance is a fast way to inject reserves globally, but it is politically controversial because it is perceived as untargeted global money creation. China’s balance of payments may improve in the short run due to lower oil prices and lower imports, but its long-run growth model is likely to face pressure from partial deglobalization. A more consumer-oriented China would likely import less overall, not necessarily become a bigger buyer of foreign consumer goods, and could fit a world with less global trade intensity. The U.S. and other large economies may need to accept less efficiency in exchange for greater resilience in supply chains, especially for critical goods like pharmaceuticals and medical equipment. The future direction is not outright autarky but a reweighting of policy toward stronger balance sheets, more reserves, and less exposure to external shocks.

Data Points: Recording date: April 9, 2020 - The hosts note the timing because the IMF Spring Meetings are imminent and conditions are changing rapidly. IMF rapid financing output: $50 billion to $100 billion - Setzer estimates the IMF’s rapid financing instruments could put this amount of money out the door quickly. IMF quota resources: about $600 billion - Setzer says the IMF has roughly this amount in permanent quota resources. IMF quota resources already lent out: about $200 billion - He notes that a large portion of quota resources is already committed. IMF new arrangement to borrow (NAB): $225 billion - Current supplemental borrowing line from member countries. Potential NAB expansion: to around $450 billion - Setzer says this expansion was expected by year-end and could be accelerated. IMF bilateral backup credit line: $400 billion - Current bilateral backup lines from IMF members. Possible reduced bilateral backup line: $200 billion - Setzer says this would happen if the NAB expands unless members choose to maintain the higher level. Potential IMF lending capacity with reforms: close to $1 trillion - If NAB is accelerated and bilateral lines remain intact, he says IMF capacity could approach this level. Possible SDR allocation: 500 billion SDRs - Setzer argues the IMF could allocate this amount quickly with U.S. administration support, without a congressional vote. China personal income tax receipts: 1.3% of GDP - Setzer uses this to illustrate China’s very low and regressive tax base. U.S. personal income tax receipts: 10% of GDP - Used as a comparison to show China’s tax system is much smaller relative to GDP. Saudi Arabia and Russia reserves: about half a trillion each - Setzer cites these as fortress-balance-sheet oil exporters that can weather lower oil prices better than others. Years of crisis coverage: 2020 pandemic period - The podcast positions the discussion as part of the early COVID economic shock.

Pivotal Quotes: "This shock is clearly going to be significantly worse than the 2008 shock, the global financial crisis." — Brad Setzer: Setzer compares the pandemic shock to prior crises and argues it is more severe for emerging markets. "The basic lesson here is that only emerging economies with fortress-like external balance sheets will be able to come off relatively well." — Brad Setzer: He summarizes the key condition for resilience across EMs. "I think there'll be a shift towards greater priority on resilience, and there should be." — Brad Setzer: Setzer explains the likely long-run shift in trade and supply-chain policy.

Implications: EMs should prepare for deeper reserve stress, more IMF support, and slower deglobalization. Investors and policymakers should focus on external balance sheets, local-currency debt, and supply-chain resilience rather than assuming a quick return to pre-crisis trade patterns.