IMF sees weaker currencies failing to boost emerging economies

[WASHINGTON] Developing nations are unlikely to reap the rewards of weaker exchange rates as the coronavirus pandemic batters global trade and tourism, according to the International Monetary Fund.

While falling currencies have traditionally been a boon to exporters, this is not the case today as global trade grinds to a halt due to the epidemic, IMF researchers wrote in a staff discussion note and blog post. A drop in tourist numbers as governments shutter borders to contain the virus will further erode the benefits of cheaper exchange rates.

Weaker currencies are unlikely to "provide a material boost to their economies in the short term as the response of most exports will be muted, besides the physical disruptions to trade from supply and demand disruptions," they wrote.

Global trade suffered a historic fall at the peak of the lockdowns to contain the spread of the virus, plunging more than 12 per cent in April alone, according to CPB Netherlands Bureau for Economic Policy Analysis data. Economists are still assessing the damage amid a second wave of infections from Florida to Melbourne, with the IMF expecting the global economy to shrink this year in the deepest contraction since the Great Depression.

A JPMorgan gauge of emerging-market currencies has tumbled more than 10 per cent this year as the epidemic spurred a global hunt for the haven greenback.

US dollar strength is "likely to amplify the short-term fall in global trade and economic activity," the IMF researchers wrote. "Both higher domestic prices of traded goods and services and negative balance sheet effects on importing firms, lead to lower import demand among countries other than the US."

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While currencies still have a role to play in mitigating capital outflow pressures, fiscal and monetary stimulus, including unconventional tools, will still be needed to safeguard developing nations from the worst of the virus, they said.

BLOOMBERG