Jun 25, 2020 - Economy & Business

Coronavirus is the worst-case scenario for developing countries

Illustration of an arrow going through multiple continents.

Illustration: Aïda Amer/Axios

The coronavirus pandemic's spread around the globe looks to be intensifying, bringing closer a worst-case scenario in which many of the world's developing countries are left with economic damage that is deep and long-lasting.

Why it matters: The Great Lockdown, as the IMF calls it, is pushing the world into a synchronized recession unlike any seen before.

Driving the news: The IMF lowered its global growth projection for 2020, expecting a 4.9% contraction this year — almost two percentage points lower than it predicted in April.

  • It also lowered expectations for U.S. growth to -8% for 2020 and reduced its 2021 global growth prediction to 5.4% from 5.8%.

What they're saying: As painful as the 2008 global financial crisis was, only 11 advanced economies were severely impacted, World Bank chief economist Carmen Reinhart said during this week's Bloomberg Global Invest summit.

  • "This time if advanced economies are seeing problems it actually pales in comparison to some of the problems and challenges the developing countries and emerging markets are seeing because they don’t have fiscal space to try to counter the effects of the lockdowns."
  • "The issue is how do you support countries in which revenue has collapsed. If you rely on tourism, tourism has collapsed, if you rely on commodities, commodity exports and volumes are down."

The intrigue: Advanced economies such as the U.S., eurozone and Japan have the ability to borrow and lend virtually unlimited sums of money to support their populations, but developing countries are forced to turn to organizations like the IMF and World Bank, which already have provided a record amount of aid and lending, Reinhart noted.

  • "The international community simply doesn’t have that kind of firepower."

Watch this space: Fitch downgraded Canada's credit rating Wednesday, making it the 24th country to have its sovereign rating downgraded by the agency since March — more than the previous total for any full year dating back to 1994, Fitch analysts tell Axios.

  • Additionally, 30% of the world's sovereign countries were on negative ratings watch as of June 2 and Fitch has taken some form of negative rating action on around 50% of rated sovereigns.
  • "It has definitely been a record year," says Kelli Bissett-Tom, a director at Fitch.

What's next: Ratings downgrades could cost some countries their investment-grade status, meaning fewer investors will be able to buy their bonds and make it more expensive and difficult for them to borrow money in the future.

Go deeper: The U.S. coronavirus recovery may be W-shaped

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