By Founding CEO of Lundgreen’s Capital, Peter Lundgreen.
Twice during the first quarter, the International Monetary Fund (IMF) has warned emerging markets countries of serious economic challenges if the Covid-19 crisis is not handled sensibly.
The IMF has a very large number of highly skilled economists in its organisation, and it happens surprisingly often that rather sharp views are aired from the head office in Washington D.C. In my opinion, it is one of those organisations worth listening to despite the political agendas that the organisation both has and is met with. The latest announcement was published just before Easter, when IMF chief Kristalina Georgieva simply gave a warning that the world should be prepared for a debt crisis in the Emerging Markets countries- it is quite a remark, and it should get at least a few alarm bells to ring.
Before investors start pressing the “sell” button, it is worth to consider the timing of the IMF announcement. It was, of course, to set the stage ahead of the “IMF spring meeting” that took place just after Easter (this time virtually, like so much else). The IMF had a very clear-cut plan that something must be achieved at the spring meeting, and clearly on behalf of the Emerging Market countries. I think it was rightfully so, and the challenge must be addressed by the top IMF level in order to have the right weight when communicating the concerns on behalf of Emerging Market countries. One suggestion as a solution is to introduce a temporary extra tax on companies that have been particularly successful during the crisis. The response from the US is the idea about a minimum corporate tax globally.
The current rising risks are explained to be caused by the crisis that is ravaging the world, but I will not attribute all the problems solely to the Covid-19 crisis, actually very far from it, which means that a minimum corporate tax won’t solve everything.
One of the megatrends that I have been working with since years is a growing fragmentation of the world economies in A, B, and C countries. It might best be described as a relative quality assessment of individual countries, which means that quite a number of different countries can very well be A-countries. For me, it is about how well the countries are prepared for future growth- the healthy economic growth, of course.
I argue that since the Global Financial Crisis, the A, B, and C development has intensified, where the A-countries are currently the future economic strongest countries. The C-countries have ended up in a difficult deadlock situation, that is typically a combination of too much debt, weak external trade, and could also be missing domestic modernisation like bad internet deployment, etc.
In my view, the Covid-19 crisis accelerates many trends, like when developments that might have been in an early stage suddenly move much faster forward. Though it’s also the case for negative developments that are likewise gaining speed during the crisis.
As the IMF also underlines, it is obvious that a number of economically strong countries will exit the Covid-19 crisis fairly undamaged. These countries will also explore higher government debt, but the economic growth will recover. On the other hand, there are a range of Emerging Market countries suddenly threatened by very high debt and the economic recovery might miss out as the positive counterweight. There is no doubt that the crisis has increased the gap between the A and C countries, but how I assess the different economies means that A are not only developed countries, while C countries are Emerging Market countries.
I asses the two economic superpowers USA and China as A countries, also Germany, though mainly due to the historical economic strength. Despite the tough Covid-19 situation, I still regard, for example, the Philippines and some other ASEAN countries to belong to the A group of future most interesting countries for investors.
Some C countries are probably obvious to point out, though some participants might find my definition of a part of the C-countries as controversial. I argue for example, that Greece is a C-country since long, while Italy and India are moving in the C direction. The Turkish government has, with impressively high speed, sent the economy straight down to the C-level.
The Covid-19 crisis has intensified Turkey’s problems, but the real reasons were the government significantly increased control over the central bank, ignored international investors and the financial markets, and abandoned fiscal discipline, etc.
Emerging Markets will also have to increase the government debt to counteract some of the negative effects from the Covid-19 crisis, but the government spending must be done wisely. At the same time, economies must be reformed towards improved flexibility. It is my distinct expectation that international investors will increasingly pay more attention to these kinds of qualities and thereby favour the A-countries in the Emerging Markets even more in the future.