Virus Outflows Stoke IIF Fear of Global Financing ‘Sudden Stop’

(Bloomberg) -- The fast-spreading coronavirus that has killed thousands, derailed financial markets and shattered global growth expectations could be about to claim another victim: new investment.

Investors could bring global financing to a halt as Covid-19 and extreme measures to contain it stop economies in their tracks, according to the Institute of International Finance. Italy is all but shut down and U.S. President Donald Trump has restricted travel from Europe for the next 30 days. Emerging-market outflows presage a cutoff of investment, the IIF said.

“We worry a global ‘sudden stop’ in financing is beginning to emerge, with Covid-19 the underlying driver,” economists Robin Brooks and Jonathan Fortun wrote in a Thursday note. “Monetary and fiscal easing measures are a welcome palliative, but in the end only a concerted response in terms of testing and containment will be able to mitigate the ‘fear factor’ in markets and jump-start global demand.”

Investors have pulled almost $42 billion from developing nations since the coronavirus outbreak began to rattle global markets on Jan. 21, according to data from the IIF. The outflow fueled a 22% slump in MSCI Inc.’s emerging-market stock gauge over the same period and pushed down Russia’s ruble and the Colombian and Mexican pesos by at least 15%.

The IIF’s flow tracker “is currently the most negative ever,” the economists wrote, surpassing the amount pulled in the aftermath of China’s 2015 financial market crash, the 2013 taper tantrum and 2008 global crisis.

The outflows may signal a sudden halt to risky investments, which is bad news for high-beta assets including emerging markets, the IIF said. A rise in investor holdings in Mexico, Chile and South Africa over the past decade that was driven by underlying flows, rather than valuation gains, puts those nations at particular risk.

Sudden stops in Turkey and Argentina in 2018 hammered economic growth, “with the reversal in foreign financing leading to a shut-down in investment from which both countries have yet to recover,” according to the IIF. “We worry that the unfolding ‘sudden stop’ now has a similar potential, just on a more global and systemic level.”

Risks are mounting for another challenging year for developing nations, as annual average growth in China, where the virus first emerged, probably coming in at 4% rather than the previously expected 6% for 2020, according to the IIF. Global growth could approach 1% in 2020, which would be the weakest pace since 2009, according to the economists. In the U.S., there’s risk the economy will flatline in the second quarter “as the potential brunt of the Covid-19 shock hits,” Brooks and Fortun wrote.

To contact the reporter on this story: Sydney Maki in New York at smaki8@bloomberg.net

To contact the editors responsible for this story: Carolina Wilson at cwilson166@bloomberg.net, Alec D.B. McCabe, Aline Oyamada

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