Publications /
Opinion

Back
Channels of transmission of coronavirus to developing economies from abroad
Authors
April 28, 2020

In a previous article, we highlighted how developing economies have faced simultaneous shocks from their external environment, as pandemic and recession curves have unfolded abroad (Canuto, 2020a). In addition to financial shocks, there have been declines in remittances, tourism receipts, and commodity prices (Canuto, 2020b). The combination of these shocks with the hardships related to flattening domestic infection curves has configured what we have called a ‘perfect storm’ for developing countries, brought by COVID-19 (Canuto, 2020c).

Recent World Bank and United Nations World Tourism Organization reports have given us a view of how serious these shocks have been. We assess here the falls in remittances, tourism receipts, and commodity prices, particularly in oil markets.

Remittances, foreign capital and aid flows

On April 22, the World Bank (2020a) published its Migration and Development Brief 32. The World Bank estimates that in 2019 there were 272 million international migrants—including 26 million refugees.

Foreign workers are often the first to lose their jobs in times of crisis and remittance flows around the world sent by migrants to their home countries are forecast to shrink by more than US$100 billion this year. The global economic lockdown, which has provoked steep job losses across the world, is expected to lead to a 20% decline in remittance flows to low- and middle-income nations. That equals a fall from a record US$554 billion last year to US$445 billion in 2020.

Last year, remittances amounted to about 8.9% of GDP in poorer countries. For the first time, they overtook foreign direct investment (FDI) as a source of money inflows to low- and middle-income countries (Figure 1). FDI is expected to decline by even more than remittances, reflecting local recessions and disruption of international trade. The World Bank report estimates that FDI into low- and middle-income countries could fall by more than 35%. Private portfolio flows through stock and bond markets could shrink by over 80%, while official development assistance (ODA) will maintain its steady evolution.

Figure 1: Remittances, foreign capital and aid flows

PCNS

Among remittance-dependent countries, vulnerable to the ongoing decline, there are fragile states including Somalia, Haiti, and South Sudan, as well as small island nations such as Tonga, with remittances accounting for more than a third of GDP in some countries. Larger countries including India, Pakistan, Egypt, Nigeria, Mexico, and the Philippines, will also be hit because remittances have become a major source of external financing for them.

Migrant remittances are a fundamental source of income of poor households in many countries and the drop in flows this year will increase poverty. Remittances to Europe and central Asia are expected to fall most, crashing about 28% this year, while remittances to sub-Saharan Africa are forecast to diminish 23.1%. But all regions will face steep declines.

International tourism receipts

On March 26, the United Nations World Tourism Organization (UNWTO, 2020) announced estimates of decline of 20% to 30% in 2020 of international tourist arrivals, compared to 2019 figures. This would translate into a loss of international tourism receipts of between US$300 billion to $450 billion, almost one third of the US$1.5 trillion generated in 2019 (Figure 2). According to World Bank data, low- and middle-income countries recorded over US$420 billion of international tourism receipts as exports last year and will be heavily affected by the decline in 2020.

Figure 2: International tourism receipts, world (real change, %)

PCNS

 

Commodity prices

The World Bank (2020b)’s April Commodity Markets Outlook pictured how the global economic shock of the pandemic has driven most commodity prices down and is expected to result in substantially lower prices over 2020. Because of the halt in economic activities, the world’s commodity markets are likely to continue to be downbeat for months to come. Commodity-dependent emerging market and developing economies will be among the most vulnerable to the economic impacts of the pandemic.

Energy is most affected, and agriculture least. Most metal prices fell in the first quarter of 2020, reflecting the collapse in global industrial demand because of the COVID-19 pandemic. Although average declines in metals prices are—for now, at least—less severe than in the global financial crisis, the sudden economic stops have taken a toll on industrial commodities such as copper and zinc, and metal prices overall are expected to fall this year. The deceleration of economic growth in China—which accounts for half of global metal demand—has weighed on industrial metal prices.

Most food commodity prices have declined in response to mitigation measures to contain the spread of COVID-19, even though part of that price decline can be attributed to the previous record production for some grains, and favorable weather conditions in key producing regions. Rice prices are the only major exception, as they rose after announcements of export restrictions by some East Asian producers.

The greatest impact of the outbreak of COVID-19 has been on the crude oil market, as two-thirds of oil is used for transport. According to the World Bank report, because of travel restrictions and declining demand, crude oil demand is expected to be almost 10% lower this year than in 2019. That will be more than twice as much as any previous fall (Figure 3).

Figure 3: Current drop in oil demand outpaces previous global recessions

PCNS

Crude oil prices are forecast to average US$35 a barrel in 2020, reflecting the unprecedented collapse in oil demand. Brent crude oil prices have declined 70% from their January peak. The large production cut by OPEC and other oil producers failed to lift prices in April. Natural rubber and platinum are also heavily used by the transportation industry, and their prices have tumbled.

All crude oil benchmarks have seen sharp falls, with some briefly dropping to negative levels—as we saw on April 20, the day buyers were paid to accept oil! New York Mercantile Exchange (NYMEX) West Texas Intermediate (WTI) crude oil front-month futures prices fell below zero dollars per barrel—at one point, trading at minus $40.32 per barrel—and remained below zero for part of the following trading day. It was the first time the price for the WTI futures contract fell below zero since trading began in 1983 (Figure 4, obtained from Richter, 2020).

Figure 4: The day you were paid to buy oil

PCNS

The WTI front-month futures contract was for May 2020 delivery, and contracts were set to expire on April 21, 2020. Market participants that hold WTI futures contracts to expiration must take physical delivery of the crude oil in Cushing, Oklahoma. As a result of the extreme demand shock, excess imported and domestically-produced crude oil has been placed into storage. The increased demand for storage has placed significant upward pressure on crude-oil storage costs.

The inability of some market participants to take physical delivery meant they had to settle the May 2020 WTI contract financially by selling the contract to another market participant. As a result, owners of the May 2020 WTI futures contract most likely had to sell at lower prices to exit their contracts and avoid physical settlement obligations. In this extreme market situation, several participants had to sell at negative prices—that is, pay the other party to take over the contract before expiration. That was obviously an extraordinary and temporary state of things, but it was an omen regarding how bad the picture remains in oil markets.

Bottom line

Given the magnitude of the multiple negative shocks that COVID-19 has brought to developing countries, including domestic coronavirus infection and recession curves, international support will be needed as developing country governments see their revenues drop, their access to financial markets dry up, and remittance-dependent poor households are impacted.

RELATED CONTENT

  • From

    15
    6:00 pm July 2022
    L'impact du COVID-19 sur le marché du travail : Une perspective marocaine L’apparition de de la COVID-19 a engendré une crise sanitaire mondiale, qui s’est rapidement transformé à d’autres crises bouleversant le vécu des humains de par la planète. En ce qui concerne les marchés mondiaux, notamment du travail, les incertitudes ont fortement impacté les comportements des agents. Aussi, les mises sous restrictions, totales ou partielles, des facteurs de production ont eu leur incidence sur l’activité globale -via différents canaux -, y compris celle des acteurs du marché du travail. À court terme, la pandémie est synonyme de fortes perturbations pour les citoyens et les marchés du travail. Celles-là concernent les revenues et les dépenses des particuliers comme elles portent su ...
  • June 10, 2022
    The latest IMF projections indicate that global growth will be 4.4% in 2022 after 5.9% in 2021. These projections make us very optimistic for the future, but they certainly cannot heal th ...
  • April 25, 2022
    Retrouvez en exclusivité l’interview de Abdelhak Bassou, Senior Fellow au Policy Center for the New South, qui se livre à Helmut Sorge, Columnist au Policy Center for the New South, au sujet des multi-disparités présentes en Afrique. Abdelhak Bassou est l’auteur du Chapitre 5 du rapport...
  • Authors
    Afaf Zarkik
    Alessandro Minuto-Rizzo
    Bernardo Sorj
    Frannie Léautier
    Iskander Erzini Vernoit
    Kassie Freeman
    Nathalie Delapalme
    Oussama Tayebi
    J. Peter Pham
    March 7, 2022
    The COVID-19 pandemic has had a huge impact on the global economy and has challenged the best minds to rethink how to design and implement an effective recovery. Countries in the wider Atlantic region have exhibited differential trajectories in traversing the pandemic. A number of countries in Europe succeeded in vaccinating most of their eligible populations, enabling life to return somewhat to normal. A smaller group of countries in Europe could manage infection rates even more ti ...
  • Authors
    February 3, 2022
    COVID-19 has ravaged nearly every country in the world, with the globalization of recent decades intensifying its spread. As of mid-2021, the world had spent $16.5 trillion—18% of global GDP—to fight the disease. And that amount does not even include the most important losses such as deaths, mental health effects, restrictions on human freedom, and other nonmonetary suffering. Nearly 90% of this spending was by developed economies, with the rest by emerging market and developing eco ...
  • Authors
    January 26, 2022
    COVID-19 has caused serious damage throughout the entire world. As of mid-2021, the global fiscal cost of COVID-19—excluding the most important consequences, such as human lives, mental health effects, restrictions of human freedom, and other non-pecuniary components, have amounted to at least $16.5 trillion, about 18% of world GDP (Dinh 2021). Financial support has varied across countries depending on income level, political willingness, and the extent of the pandemic in each econo ...
  • Authors
    December 29, 2021
    Après une longue période de prix atones, le café a vu ses cours se raffermir au cours de l’année 2020 et du premier trimestre 2021, avant de flamber durant l’été et l’automne. Il renouait alors avec des plus hauts niveaux depuis 2011, date de la fin du dernier « super-cycle des matières premières (2002-2011). Tandis que la demande progresse structurellement, l’offre s’est repliée, pénalisée par une conjonction de facteurs climatiques, géopolitiques et, bien évidemment, sanitaires en ...
  • Authors
    Gerson Javier Pérez Valbuena
    Diana Ricciulli
    Jaime Bonet
    Inácio Araújo
    Fernando Perobelli
    December 28, 2021
    This paper analyses the regional economic differences in the impact of lockdown measures to prevent the spread of COVID-19 ordered by Colombia’s national gov­ernment. Using an input-output model, we estimate regional economic losses by extracting a group of formal and informal workers from different sectors of the economy. Results show regional differences in the impact of lockdown measures on their labour markets, local economies, and productive sectors. We also find that periphera ...
  • December 15, 2021
    Since its emergence, the new coronavirus has continued to bring many uncertainties, whether in terms of health aspects, policy measures or social and economic consequences. If there is, however, one certainty in this Covid-19 era, it is that the pandemic is a turning point in human hist...