- Participants in informal economies have limited safety nets and access to finance, which hurts their ability to continue operation under pressure. Informal work constitutes approximately 70% of emerging markets’ total employment and a third of their GDP.
- Persistently low oil prices could harm economies which rely heavily on oil export, as the current prices are below the fiscal break-even level for many producers. Where government resources are limited, low oil prices could also limit fiscal support or stimulus.
- Global debt has risen to 230% of GDP. And in 40% of emerging markets, the debt-to-GDP ratio is at least 20% more than it was in 2007. Increasing sovereign debt levels will impede growth in the long term, as governments will eventually need to repay the debt through higher taxes, additional borrowing or cutting expenses.
Here is how major market regions are expected to contract given certain risks according to the World Bank report:
|Regions||Expected Contraction||Major Risks|
|East Asia and Pacific||-0.5% (+6.6% in 2021) (including PRC);
-1.2% (+5.4% in 2021)
|Europe and Central Asia||-4.7%(+3.6% in 2021)||
|Latin America and Caribbean||-7.2% (+2.8% in 2021)||
|Middle East and North Africa||-4.2%||
|South Asia||-2.7% (+3% in 2021)||
|Sub-Saharan Africa||-2.8% (+3.1% in 2021)||
In response to the pandemic, central banks across the globe have provided much greater fiscal support than in previous financial crises. And policies have been introduced to promote lending, such as relaxing capital and liquidity coverage requirements and allowing temporary loan repayment delays. But a robust recovery would require more.
The immediate need is to have coordinated global policies alleviating solvency strains to prevent bankruptcies of firms possibly viable in the longer run without endangering private ownership. Promoting investment and restoring investors’ confidence require a more concerted strategy among governments. In addition, governments need to expand the social security coverage for the informal sector participants to avoid mass unemployment. Emerging market and developing economies, which are particularly vulnerable, should strengthen public health systems, address the challenges posed by informality and limited safety nets, and enact reforms to generate strong and sustainable growth once the crisis passes. Aggressive fiscal policies should be accompanied by realistic measures to help restore medium-term fiscal sustainability, including actions that strengthen fiscal frameworks, increase domestic revenue mobilization and spending efficiency, and raise fiscal and debt transparency.
Source: The World Bank, Global Economic Prospects Report (June 2020)
 For information regarding the impact of COVID on the United States economy, please see “What to know about the report on America’s COVID-hit GDP,” The World Economic Forum COVID Action Platform, July 31, 2020 (https://www.weforum.org/agenda/2020/07/covid-19-coronavirus-usa-united-states-econamy-gdp-decline/).
If you wish to receive periodic updates on this or other topics related to the pandemic, you can be added to our COVID-19 “Special Interest” mailing list by subscribing here. For any other legal questions related to this pandemic, please contact the Firm’s COVID-19 Core Response Team at FW-SIG-COVID-19-Core-Response-Team@mayerbrown.com.