One silver lining of the COVID pandemic has been the unexpectedly sharp recovery of select emerging-market economies, particularly in Asia. This, coupled with new vaccines to counter COVID-19, and the election of a more pro-trade administration in the US, supports market expectations for a V-shaped recovery in 2021. I discussed these issues with fellow panellists at the recent SIBOS webinar, “A Defining Year for Global Trade”.
An emerging surprise
At the onset of the COVID pandemic, concern was widespread that emerging market economies (EMs) would be worst affected by the virus, given their fragile healthcare and administrative systems, sensitivity to tourism, weak infrastructure, and limited fiscal resources. A report published by the UN trade body UNCTAD in March painted a bleak picture of the pandemic’s likely economic impact on developing countries, noting their reliance on export revenues.1
Nine months later, the picture looks quite different. While the US and Europe reel from second waves of COVID-19, many EMs have recovered much more quickly. Although global export volumes are still far below pre-pandemic levels, EM export volumes have recovered in the space of two quarters, compared with the six or seven quarters it took them to recover from the Global Financial Crisis (GFC) in 2008.2
"Two-thirds of global growth comes from Asia, where most countries are EMs."
What is particularly notable about the Asian rebound is that intra-regional trade between EMs has been a big driver of this recovery over the past three or four months. Nor is this just a China story: it is trade among the Asia-Pacific (APAC) as a whole. It should be noted that China has now overtaken the US as the main market for exporters in other APAC countries.3
This profound recovery of EM exports provides a platform for a broader global recovery in 2021. It would not have been possible were it not for global trade and the mechanisms that underpin it. Globalisation, which is not a goal in itself but rather an approach to lifting prosperity, has been controversial of late. The Trump administration’s America First policies had a significant impact on trade flows, so the change of administration in Washington DC potentially signals an improvement in trading conditions.
The signing in November of RCEP, a regional trade deal between 15 APAC countries, will further energise intra-regional trade and prompt reflection in the US and Europe on the wisdom of remaining outside such trading blocs, given the advantages they may confer on China, a RCEP member and emerging superpower. President-elect Joe Biden has said that unlike President Trump, he will not engage in “punitive trade”. 4 Although Biden will not immediately rescind Trump’s tariffs on Chinese goods, his approach to other US trade partners is likely to be more collegiate.5
"A recent Standard Chartered survey of Chief Financial Officers found that more than half of the US participants see opportunities for sourcing, sales, and operations in APAC, compared to 22% in the Middle East and 14% in Africa.⁶"
US corporates remain receptive to global expansion.
This change in the political weather, combined with the rapid EM recovery and the creation of anti-COVID vaccines, explains why markets are pricing-in a V-shaped recovery for 2021. The vaccine is particularly important: global recovery depends on people feeling confident that they can board airlines, stay in hotels and visit retail outlets without risking their health. The world’s first COVID vaccinations began in the UK on 8 December, and other major economies will follow suit in the coming months. Their rollout will also support the recovery of EMs that are major producers of vaccines and medical equipment, such as India.
Managing low interest rates
The financial sector faces some unique challenges in the recovery. It is well documented that global interest rates have collapsed to what are in many cases historical lows, especially in developed markets where we see policy rates and government bond yields in some cases trading at, or below, zero. There has been a surge in negative-yielding debt, which now represents some 25% of the global bond universe, or equivalent to USD17 trillion that is paying investors less than zero returns.
This has negative implications for the banking sector. Flattening yield curves reduce the ability of banks and other institutional investors to use their balance sheets to earn carry. However, there is a silver lining. The low-interest-rate environment makes it a little easier for companies and sovereign nations to refinance their debt, and thus we’ve seen a significant increase in debt issuance by sovereign nations and corporates alike. This offers some support for financial institutions’ other capital markets activities. For instance, those with the capability to leverage new technology in order to digitise trade finance in a secure way – a major focus for Standard Chartered – will be able to expand financial inclusion, reduce fraud and grow their customer base.
Moreover, unlike after the GFC, when the financial sector encountered a great deal of criticism and regulatory scrutiny, there is no one industry or sector to blame for the COVID crisis. On the contrary, financial institutions are seen as absolutely crucial both to stabilising the economy, and facilitating the delivery of central banks’ easy monetary policy to support the wider global recovery.
By facilitating trade and supporting corporates and governments through the COVID crisis, the financial sector can enable the fiscal stimulus and Herculean logistics necessary to return life to normal, defeat the pandemic and propel a strong, global recovery. The strong export performance of EMs in Asia, the start of the vaccine rollout and a more benign geopolitical context all indicate that markets are acting rationally in foreseeing a V-shaped recovery in 2021.
1 UNCTAD, March 2020, "The Covid-19 Shock to Developing Countries: Towards a ‘whatever it takes’ programme for the two-thirds of the world’s population being left behind", https://unctad.org/system/files/official-document/gds_tdr2019_covid2_en.pdf
2 Tatiana Lysenko, Elijah Oliveros-Rosen, 2 December 2020, "Economic Research: Emerging Markets: Risks To Outlook Balanced As Recovery Momentum Set To Pick Up In 2021", S&P Global, https://www.spglobal.com/ratings/en/research/articles/201202-emerging-markets-risks-to-outlook-balanced-as-recovery-momentum-set-to-pick-up-in-2021-11761662
3 Eric Robertsen, Madhur Jha, 2020, "SMS – Sunday Macro from Singapore", 26 July.
4 BBC News, 2020, "Biden vows to set 'rules of the road' on trade", BBC, 17 November https://www.bbc.co.uk/news/business-54958299
5 Cissy Zhou, 2020, "US-China relations: Joe Biden says trade war tariffs to remain in place for now as alliance building comes first", South China Morning Post, 2 December https://www.scmp.com/economy/china-economy/article/3112294/us-china-relations-biden-says-trade-war-tariffs-remain-place
6 Torry Berntsen, 2020, "Pursuing growth in a pandemic", Standard Chartered, 9 November https://www.sc.com/en/trade-beyond-borders/post-79952