Emerging Markets Have Never Experienced A Crisis Like This Before

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

Tracy, I hate to do this, but I have to troll you again.

Tracy Alloway (0:21)

I knew it. I knew you were going to do this.

I'll spare you the effort, but yes, there is a crisis that we haven't covered yet.

Joe Weisenthal (0:34)

I'm never gonna let you forget the time when you said that we had touched all the bases of this, when there were clearly several more major areas that we had yet to discuss. Well, we're starting to get there in terms of hitting all the really big themes, I think.

Tracy Alloway (0:51)

Okay, I'm not gonna respond, but yes, go ahead. What of the many crises will we be covering today?

Joe Weisenthal (0:59)

Okay, so one that we definitely have not talked about yet is emerging markets. And there are all kinds of aspects to an extraordinary economic disruption of this sort, the likes of which we've never seen in terms of essentially a mandated halt to so many businesses worldwide.

But one acute vulnerability point is obviously emerging markets, countries whose economies may rely on tourism or other exports to richer countries, countries that have a lot of dollar denominated debts, but are suddenly finding it very difficult to acquire those dollars in their normal means of business. This is a huge shock domestically for many countries, but also a huge shock to world trade. And of course, emerging markets are sort of necessarily the most at risk here.

Tracy Alloway (1:55)

Right, so you have this perfect storm really of pressures on emerging markets. You have the big spike in the dollar, which as you mentioned causes pain for emerging markets in different ways, a bunch of different ways.

You also have the contraction in global trade. You have the fall in the oil price, which is bad if you're an oil exporting developing nation. And then of course, you have the coronavirus pandemic itself, which could disproportionately impact developing countries, given that they have fewer health resources, fewer financial resources, and different, not really ideal living conditions to actually battle the virus. So yeah, it's a pretty bad mix for EM at the moment.

Joe Weisenthal (2:40)

Right. The way, as you put it, they're really sort of like just being buffeted on every side right now.

So our guest today, and I feel like our guest today is yet another one of our recent guests that deserves when we eventually get Odd Lots tote bags or something like this, because this might be his fourth or fifth time.

We've talked to Dan Wang several times. We've talked to Chris White several times. And of course, our guest today, Brad Setser. It's got to be at least his fifth time talking to us since we launched the podcast, but he has been tracking the EM angle very closely and really has been for years, but now sort of with this particular crisis. And so we'll sort of get a broad overview of the crisis facing different EMs and what needs to be done going forward. So without further ado, Brad Setser, thank you very much for joining us.

Brad Setser (3:35)

It's a great pleasure.

Joe Weisenthal (3:37)

Brad, just sort of big picture, have you, how does this shock to the real economy for EMs as a whole? And I know people always say, oh, you can't look at EMs as a whole and every country has its unique situation, but as a whole, how does it compare to prior major downturns in global trade or the global economy?

Brad Setser (4:00)

And this shock is clearly going to be significantly worse than the 2008 shock, the global financial crisis. It's clearly gonna be significantly worse than the Asian financial crisis. I think this is across a range of measures.

It is the biggest shock the emerging world has faced in the last 30 years.

Tracy Alloway (4:26)

Yeah, I think I saw someone on Twitter describing the current economic situation or the crisis as sort of like the Spanish flu meets Great Depression, meets 2008 financial crisis, meets Asia financial crisis, which is a pretty terrible mix. When it comes to EMs, what would you say is the biggest pressure point at the moment, what's causing the most pain?

Brad Setser (4:52)

Well, I think there are two distinct pressure points.

One pressure point is the global financial crisis analog pressure point. Those countries that have borrowed in dollars or those countries that have a large dependence on foreign investors holding their local currency debt have had difficulty borrowing dollars and have had to manage a world where a lot of foreign investors are pulling money out.