Predictions for EM’s & Frontier Markets Post CV-19

Predictions for Emerging and Frontier Markets after Covid-19

Investors broadly agree that covid-19 will devastate frontier emerging markets, unleashing economic havoc through slumping domestic and external demand. Yet without sounding unduly optimistic, your correspondent suspects a brighter path: these markets may well outperform.

The MSCI Frontier Markets index tracks big firms across 34 countries, from Argentina and Bahrain to Togo and Vietnam. Such economies typically falter from home-grown woes, not foreign shocks. To be sure, the pandemic will lay bare local vulnerabilities, especially where tourism and remittances prop up finances. Sri Lanka, already wobbly, faces a tourism nosedive that could deliver a brutal blow.

Nigeria and Egypt, too, stand to suffer from export slumps and remittance droughts. Lockdowns may exacerbate banking strains, as in Bangladesh, where dud loans at state banks equal 30% of GDP amid chronic liquidity woes.

That said, a more sanguine assessment—drawn from on-the-ground insights across these markets—points to robust recoveries in several spots once the virus ebbs. The Philippines, Peru and Vietnam look especially sturdy, buoyed by resilient banks and hefty foreign-exchange reserves. The Philippines boasts vast FX buffers, a slim deficit and liquid lenders; its external debt is a mere 24% of GDP (half the emerging-market average), with reserves covering nearly a year of imports—far outpacing Thai or Indonesian peers. Sweeping fiscal and monetary stimuli have been deployed without imperilling stability.

Peru, similarly, pairs public-health resolve with policy elbow-room, thanks to prior fiscal prudence. Even its hefty 8% of GDP stimulus—among the most generous in emerging markets—leaves room to manoeuvre, backed by domestic surpluses, external funding and an IMF credit line.

Vietnam tamed the virus with dispatch, drawing on past pandemic experience to keep infections and deaths minimal. Economic life has snapped back to near-normal.

Even debt-laden Egypt and Pakistan may surprise. Both cling to tax and civil-service reforms while tapping IMF largesse. In Pakistan, Imran Khan's 2018 election triumph has lifted business morale and sharpened macroeconomic husbandry. Egypt has quieted doubts by blending rapid IMF financing with a fresh standby arrangement, easing strains on domestic borrowing. Bond-market access has followed, alongside fat reserves to cushion tourism and remittance shortfalls—helping retain foreign cash in local debt.

These stand out as prime picks, but frontier markets writ large should pip developed ones in the short-to-medium term. The IMF concurs, forecasting a brisk snapback to pre-pandemic growth in frontiers, against prolonged torpor in rich economies.

Investors would do well not to dismiss frontiers' post-covid promise. Sound public finances, better governance and alluring growth paths are plentiful.