Coronavirus uncertainty in EMs

Coronavirus uncertainty and caution drive initial impact in emerging markets, but efforts to understand how the virus may behave are not helpful at this point, according to the Emerging Markets Debt Team at Eaton Vance.

It was currently estimated the virus had over 20,000 cases worldwide including 99% within China, and despite attempts to model the impact after previous viruses like SARS and MERS, there wasn’t enough information to make a reasonable comparison.

The Eaton Vance team said the virus was affecting emerging market economies through two channels: an increase in uncertainty depressing asset prices and travel bans impacting economically.

“Until we have an idea of how widespread and how deadly the novel coronavirus is, we have to price more uncertainty into markets, and this has the effect of moving asset prices lower,” it said.

“The second impact is that efforts to contain the virus in China through travel bans and extending the Chinese New Year holiday will reduce Chinese economic activity specifically, and global economic activity more generally.

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“As the Chinese economy slows, countries that trade with China will be impacted, in Southeast Asia, this would mainly mean countries that are part of the Chinese manufacturing supply chain.”

Countries that relied on exports to China, like Chile, Saudi Arabia and Brazil would be hit by reduced demand from China, while countries with fewer ties like the Dominican Republic and Mexico may do better.

“Until the world gets a better handle on the specifics of the coronavirus, uncertainty and caution will drive the impact on emerging markets and the rest of the global economy,” it said.