A new lease of life for the Brics

One of the first things markets decided about the Covid-19 crisis was that it would hit emerging markets hardest. It’s not hard to see why that made sense. Fragile health systems could easily have been overrun. Slums and shanty towns make it very hard to self-isolate or socially distance. Corrupt, rackety governments would not be able to respond and debt ratios would rip out of control as economies and tax systems collapsed. It is, in general, much easier for rich countries to deal with an emergency than poor ones – they have more money.

But the first judgement is not always the correct one. And as the crisis hopefully starts to ease, that verdict is looking less convincing. Many of the emerging markets might struggle in the short term, but in the medium term they are likely to emerge as the big winners for three reasons.

Lower death tolls

First, so far they have coped with the virus far better than you might expect. Brazil looks to have been hit very badly and so has Russia. And of course it might be too early to tell: the virus might re-emerge in a deadly second wave. And yet, so far, countries are not being overwhelmed by the disease. Vietnam has a long border with China, and nearly 100 million people, but only 300 Covid-19 cases and no deaths. Most of Africa is so far relatively unscathed: South Africa, the most developed country on the continent, has recorded only 300 deaths so far, much less than its usual death rate.

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We don’t yet know the reason. It might be because they have younger populations – South Africa has only a tenth of the number of over-70s as Italy, for example. It might be warmer climates, or tuberculosis injections. It might be because they have stronger, more authoritarian governments that were able to impose lockdowns earlier (although that is hardly true of most of Africa). Whatever it is, the result is the same. Lockdowns will end earlier and there will be less damage done than to the countries – the UK, US, Italy and Spain – where the toll has been higher.

Manageable debts

Next, none of those countries are likely to be overwhelmed by debt. Sure, some of them have a lot of debt to start with and locked-down economies will suffer deep recessions. But the eye-watering levels of debt are all going to be in the developed world. Italy is heading towards a debt-to-GDP ratio of 200%. France is heading up towards 130% or 140%. They might be printing money like crazy right now, but they can’t do that forever and sooner or later taxes will have to rise, or else spending will have to be cut to pay for it all. One or two emerging markets – including some of the usual suspects, such as Argentina – may have a debt crisis. Overall, however, they should emerge in far better shape.

The big trend of the 21st century

Finally, it is the developed markets that look uniquely vulnerable. Europe has been very hard hit by the virus and the strict rules of the eurozone will stop governments from spending their way out of trouble (even if the Germans have finally agreed to a limited bailout). The US has been so chaotic in its response it has surrendered global leadership (China looks more and more likely to assume the role). It is not going to be hard for the emerging markets to do well by comparison.

The big trend of the 21st-century was always going to be the steady shift of power and wealth from the old developed economies to the newer developing ones. They have demographics on their side, smaller states, and they can catch up rapidly with more developed rivals. For the last decade that has been on hold. For different reasons, the Brics – Brazil, Russia, India and China – struggled, with the exception of China. Some of the other big developing countries, such as Turkey and Nigeria, had their own issues to deal with. The American technology giants powered forward and it was their growth that excited investors. But in this decade, the shift to emerging markets is going to re-emerge as the biggest trend in the global economy – and the Covid-19 crisis will accelerate that.