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International Monetary Fund. Research Dept.

Abstract

The global recovery continues but the momentum has weakened, hobbled by the pandemic. Fueled by the highly transmissible Delta variant, the recorded global COVID-19 death toll has risen close to 5 million and health risks abound, holding back a full return to normalcy. Pandemic outbreaks in critical links of global supply chains have resulted in longer-than-expected supply disruptions, further feeding inflation in many countries. Overall, risks to economic prospects have increased, and policy trade-offs have become more complex.

International Monetary Fund. Middle East and Central Asia Dept.

Abstract

The coronavirus (COVID-19) crisis led to a surge in government debt and financing needs as many countries in the Middle East and Central Asia reacted swiftly to mitigate the pandemic’s impact. Although several of these countries successfully accessed international financial markets, domestic banks covered a significant share of emerging markets’ financing needs, further expanding their already significant exposure to the public sector. By contrast, most low-income countries (LICs) had a small response to the crisis because of financing and policy space constraints. Looking ahead, public gross financing needs in most emerging markets in the Middle East and Central Asia are expected to remain elevated in 2021–22, with downside risks in the event of tighter global financial conditions and/or if fiscal consolidation is delayed due to weaker-than-expected recovery. However, further reliance on domestic financing will reduce banks’ ability to support the private sector’s emergence from the crisis, thus prolonging the recovery. Credible medium-term fiscal and debt management strategies, together with policy actions to develop domestic capital markets and mitigate banks’ overexposure to the sovereign would reduce financing risks, address the elevated debt burdens, and entrench financial stability.

International Monetary Fund. Research Dept.

Abstract

The global recovery continues but the momentum has weakened, hobbled by the pandemic. Fueled by the highly transmissible Delta variant, the recorded global COVID-19 death toll has risen close to 5 million and health risks abound, holding back a full return to normalcy. Pandemic outbreaks in critical links of global supply chains have resulted in longer-than-expected supply disruptions, further feeding inflation in many countries. Overall, risks to economic prospects have increased, and policy trade-offs have become more complex.

Mr. Jorge A Chan-Lau and Mr. Yunhui Zhao
The COVID-19 pandemic prompted unprecedented economic stimulus worldwide. We empirically examine the impact of a withdrawal of fiscal stimulus policies on the stock markets. After constructing a database of withdrawal events, we use event study analysis and cross-country regressions to assess the difference between the pre- and post-event stock price returns. We find that markets react negatively to premature withdrawals—defined as withdrawals at a time when the daily COVID cases are high relative to their historical average—likely reflecting concerns about the withdrawal impact on the prospects for economic recovery. The design of a successful exit strategy from COVID-19 policy responses should account for these concerns.
Mr. Serhan Cevik and Belma Öztürkkal
This paper investigates the impact of infectious diseases on the evolution of sovereign credit default swap (CDS) spreads for a panel of 77 advanced and developing countries. Using annual data over the 2004-2020 period, we find that infectious-disease outbreaks have no discernible effect on CDS spreads, after controlling for macroeconomic and institutional factors. However, our granular analysis using high-frequency (daily) data indicates that the COVID-19 pandemic has had a significant impact on market-implied sovereign default risk. This adverse effect appears to be more pronounced in advanced economies, which may reflect the greater severity of the pandemic and depth of the ensuing economic crisis in these countries as well as widespread underreporting in developing countries due to differences in testing availability and institutional capacity. While our analysis also shows that more stringent domestic containment measures help lower sovereign CDS spreads, the macro-fiscal cost of efforts aimed at curbing the spread of the disease could undermine credit worthiness and eventually push the cost of borrowing higher.
International Monetary Fund. Middle East and Central Asia Dept.

Abstract

A year into the coronavirus (COVID-19) pandemic, the race between vaccine and virus entered a new phase in the Middle East and Central Asia, and the path to recovery in 2021 is expected to be long and divergent. The outlook will vary significantly across countries, depending on the pandemic’s path, vaccine rollouts, underlying fragilities, exposure to tourism and contact-intensive sectors, and policy space and actions. 2021 will be the year of policies that continue saving lives and livelihoods and promote recovery, while balancing the need for debt sustainability and financial resilience. At the same time, policymakers must not lose sight of the transformational challenges to build forward better and accelerate the creation of more inclusive, resilient, sustainable, and green economies. Regional and international cooperation will be key complements to strong domestic policies.

International Monetary Fund. Middle East and Central Asia Dept.

Abstract

A year into the coronavirus (COVID-19) pandemic, the race between vaccine and virus entered a new phase in the Middle East and Central Asia, and the path to recovery in 2021 is expected to be long and divergent. The outlook will vary significantly across countries, depending on the pandemic’s path, vaccine rollouts, underlying fragilities, exposure to tourism and contact-intensive sectors, and policy space and actions. 2021 will be the year of policies that continue saving lives and livelihoods and promote recovery, while balancing the need for debt sustainability and financial resilience. At the same time, policymakers must not lose sight of the transformational challenges to build forward better and accelerate the creation of more inclusive, resilient, sustainable, and green economies. Regional and international cooperation will be key complements to strong domestic policies.

International Monetary Fund. Research Dept.

Abstract

The global recovery continues but the momentum has weakened, hobbled by the pandemic. Fueled by the highly transmissible Delta variant, the recorded global COVID-19 death toll has risen close to 5 million and health risks abound, holding back a full return to normalcy. Pandemic outbreaks in critical links of global supply chains have resulted in longer-than-expected supply disruptions, further feeding inflation in many countries. Overall, risks to economic prospects have increased, and policy trade-offs have become more complex.