By Anu Gaggar, Global Investment Strategist for Commonwealth Financial Network
The recent resurgence in COVID-19 cases and the emergence of the highly mutated Omicron variant are reminders that the pandemic is still very much a part of our lives. It is unclear how serious the health implications of the Omicron variant will be, let alone how governments, households, and firms will respond to it. While the financial markets have been through a range of emotions in the past few weeks, there is little evidence on how the underlying global economies will react.
From experience, we know that responses to the viral threat will have an economic impact, and some countries are more at risk than others. Indeed, the economic fallout could be greatest for emerging markets. Here, it’s important to remember that Omicron is just one of the many threats facing emerging markets for 2022 and that the recovery for emerging markets will remain bumpy.
3 Possible Scenarios
Emerging markets are certainly vulnerable to economic damage if Omicron proliferates. They are more at risk of renewed restrictions, supply chain disruptions, and deteriorating financial market conditions. Many smaller emerging markets, which have far less medical, fiscal, and monetary flexibility, are likely to be more severely affected than others. There are three potential scenarios that could play out here:
1) In the absence of reliable scientific evidence, countries and communities could err on the side of caution. This means they may impose greater restrictions on social lives, leading to near-term disruptions in the economies and, hence, in the markets. This is already occurring in several emerging markets as they are still haunted by images of the Delta spread and don’t want to be caught off guard.
2) Data could emerge that Omicron is spreading faster and is more lethal, causing panic that spreads like wildfire. Many emerging markets have low vaccination rates and scant healthcare systems; thus, a rapid spread could be very damaging and derail their nascent recoveries. Fortunately, preliminary data on Omicron’s effects is not alarming. So, it is likely that this worst-case outcome can be averted.
3) Omicron could turn out to be less bad or no worse than previous variants, at least in terms of severity and mortality. In this scenario, some restrictions will be imposed but not enough to cause major economic damage. Vaccine uptake and possibly herd immunity would speed up. There would be some bumps on the road and the recovery would be stretched out a bit, but economies could trudge along the post-pandemic path.
3 Factors to Consider
It is likely that the spread of the Omicron variant will widen, possibly even eclipsing the Delta spread. Early reports of less severe outcomes are encouraging. Nevertheless, economic activity in emerging markets could be hurt as administrations try to play it safe. Within emerging markets, some countries will be affected more than others. Here, again, there are three factors to consider:
1) Government and social appetite for stricter lockdowns. Some countries will be able to impose stricter lockdowns and achieve better compliance than others. While lockdowns could reduce the health damage, the economic damage could be more severe. The vaccination rate will be a key variable as well. Some countries, especially those in Africa, South Asia, and parts of emerging Europe, have lower vaccination rates and, hence, will have no choice but to resort to lockdowns.
2) Fiscal space. Some countries have more breathing room to provide fiscal support to their economies, while others, including South Africa, need to tighten their purse strings to keep the public debt and sovereign risk in check.
3) Composition of the economies. For countries dependent on tourism, Omicron could be a severe blow to a fragile recovery as borders are closed again. Others that feed the global supply chain for stay-at-home goods could benefit.