There has been no shortage of COVID-related bad news lately, especially if you google ‘Emerging Markets.’ Four of the top five virus hotspots are in developing countries. Industries crucial to many emerging economies are among the worst hit: tourism has been all but cancelled; low demand for oil and other commodities persists.
Even with more positive stories appearing recently, such as Vietnam’s success with virus containment or the return of U.S. appetite for emerging market investments, the road to recovery appears long and hard for much of the developing world.
It may be too soon to look for a light at the end of the tunnel, but we can’t help wondering whether disruption from COVID might actually open up unanticipated opportunities for some countries. In our search for optimism we were struck by the following three stories from around the globe. Each contains a potential market shift that could be a silver lining of the COVID crisis.
According to The New York Times, Kenya is leveraging the current reduction in global trade to focus on its domestic fashion industry. Kenya had been a key importer of used clothing from around the world, but recently banned the practice citing concerns about COVID transmission. Kenya has long sought to limit used clothing imports in order to increase demand for locally made clothing. The move also comes at a time when local factories are getting far fewer orders to manufacture clothing for foreign firms. A larger domestic market could create new jobs in textiles and other parts of an in-country supply chain. There may be significant road blocks to Kenya’s plans, such as insufficient funding and trade pressures, but both the demand for clothing and the local design talent are strong.
Kazakhstan’s economy relies heavily on Chinese companies that invest in oil production and infrastructure in Central Asia. According to Forbes, with oil demand down and many Chinese projects on hold, Kazakhstan is attempting to pivot to sustainable finance. The country is vying to become the region’s first issuer of green bonds (which supply funding for renewable energy and other green projects). It may be a far-fetched idea that Kazakhstan would appeal to sustainable investors, given its history as a totalitarian regime. However, this story may have implications for other countries looking to diversify away from oil and gas, while at the same time reducing the cost of borrowing. Global demand for green bonds remains high and according to Barron’s, investors are increasingly turning to emerging market issuers.
Brazil has been hit hard by the pandemic, and the government is waging an unprecedented stimulus response, including payments to the informally and self-employed. According to Franklin Templeton Investments, waves of Brazilians are opening bank accounts for the first time in order to receive aid via direct deposit. This rise in accounts will help Brazilian banks. More profoundly, it could also increase financial security for Brazil’s previously unbanked population by encouraging them to save and giving them access to credit.
Though they come from crisis, these stories highlight three avenues that investors have long thought might help developing countries grow and stabilize their economies: boosting domestic consumption, diversifying away from commodities and enabling citizens to build wealth.
Things do look pretty bad right now for most emerging markets, but neither ingenuity nor opportunity has disappeared. Recovery will take a long time for all of us, but in some cases the process of rebuilding just might yield greater resiliency in the future.