We can draw a number of parallels between the economic effects of the current global pandemic and the 2008-2009 financial crisis. In one area, however, the markets are in uncharted territory: the debt owed by countries in emerging markets.

China’s emergence as the world’s manufacturing hub in the early naughts led to increased investment in other countries in the Global South. Few were incurring debt to stimulate their economies, so the recession halted growth but positioned them to resume their economic engines after that crisis had passed. To make up for that lost time, however, more and more of those countries began financing their growth through external debt and depleting their comfortable foreign exchange reserves built up in previous years as financing costs in USD and EUR fell to ever-lower levels.

That brings us to today. Unlike in 2008, emerging markets are carrying a debt of nearly $2.5 trillion — and the export markets that many have spent the last decade developing are at a standstill. These countries are also more likely to be overwhelmed by the virus itself, given their weaker healthcare systems. Monetary policy changes are part of the answer, but for the countries that are not borrowing in their own currency, the cost of debt servicing will grow into a crisis. 

The G20 and the World Bank have announced plans to restructure international aid debts, but preventing a crisis depends on private creditors being willing to do the same. The extent to which institutional investors are willing to bet on post-COVID-19 growth will dictate how this chapter of the pandemic story ends.