|A street in HCM City is quiet during the weekend due to the pandemic. VNA/VNS Photo
In a report on the outlook for emerging markets (EM), Fitch noted that Vietnam had low fiscal flexibility, given its high public sector liabilities, to manoeuvre with regard to policy, which could limit the size, speed and effectiveness of their responses.
Fitch also downgraded the growth of other emerging markets, forecasting that the pandemic would pull EM growth down to 2009 levels.
“Although we have not seen many large localised outbreaks of COVID-19 across emerging markets, we forecast EM growth to come in below 3% in 2020. This will mark a sharp deceleration from the recent high of 4.8% in 2017 and the slowest pace of growth since 2009 during the financial crisis, when EMs grew by 2.6% in 2009,” Fitch said.
It noted it had already made several revisions to its growth forecasts and expected more over the coming weeks, as an increasing number of countries experience outbreaks of their own and as more governments impose localised lockdowns and travel restrictions.
According to Fitch, the combination of financial market stress hitting EMs, less policy space, weakening external demand and a rising number of localised coronavirus cases will weigh heavily on growth.
“Global financial market stress has seen a sharp tightening of liquidity conditions for EMs, which we believe will weigh significantly on growth. The sharp sell-off in markets has resulted in around a 30% decline in the MSCI Emerging Market Equity Index, around a 350 basis points (bps) widening in the JP Morgan Global EMBI Spread, and about an 8% decline in the MSCI EM FX Index since January 2020 on the back of a recent 9% appreciation of the US dollar across the board. Historically, this type of volatility has led a sharp reduction in growth across EMs in the months following the period of stress.”
While not surprising, there is clear evidence that financial market stress in EMs results in a sharp slowing in growth after financial conditions deteriorate.
Going forward, Fitch expected ongoing financial stress and especially the sharp widening of credit spreads and declining equity, currency and commodity markets to weigh on growth.