After an outbreak that initially affected developed countries and China, Covid-19 has become an emerging market and developing economies (EMDEs) pandemic. The most recent estimates of excess deaths show that these regions could account for up to 86% of global mortality. However, these figures do not tell the whole story. From an economic perspective, the lion’s share of working hours lost in 2020 was in lower-middle-income countries, resulting in the first significant slowdown of the increase in per capita income after a decade of impressive growth.
The divergence of EMDEs from developed economies is due to two aspects. On one hand, EMDEs have weaker health systems, and on the other hand, their economies were already affected by imbalances prior to the crisis. In fact, policymakers in these countries currently face a complex trade-off between mitigating the spread of the virus and rebuilding economic resilience in the long-term. This situation explains the concern of the international community that EMDE governments take short-term policy decisions that give priority to normalising economic growth, forgoing the inclusion of longer-lasting inclusive recovery plans aimed at achieving the UN’s Sustainable Development Goals.
It is clear that EMDEs will face relevant challenges. However, these can also unlock attractive opportunities for investors. Focusing on emerging market debt (EMD), the asset class offers a source of yield pick-up in the context of a broader low rate environment, while showcasing a rising degree of Environmental, Social and Governance (ESG) integration. Even though it currently represents a small part of total EMD, sustainable fixed income is experiencing momentum in the market. As of today, EM green bonds can already be considered a mature instrument, with a growing market size of $200bn. Moreover, social, sustainability and sustainability-linked bonds are potential instruments to address Covid-19 relief efforts and to finance inclusive growth in the long-run. Their total market size exceeds $120bn today and new issuance has more than doubled on aggregate year-on-year.1
After Covid-19, social issues and the green transition are more intertwined than ever. This is particularly true for EMDEs not only because of the deep social and economic losses brought about by the pandemic, but also because they are the most in need of climate financing. Indeed, the pandemic has widened the gap between the funding available and that needed to meet the SDGs. As a result, the surge in issuance of sustainable bonds in EMDEs can potentially help make up for this deficit: they can therefore be considered as an interesting opportunity for investors who not only desire to access the EM yield pickup, but also want to support EMDEs on their sustainable recovery paths.