Many developing countries are now beginning to be hit by a pandemic that has been wreaking havoc in China, Europe and the United States for months. In just a few weeks, infections in Africa have risen from zero to more than 15,000. If the coronavirus begins to tear through cities, slums, or refugee camps, the human cost of this pandemic could be truly devastating.

The head of the UN food agency warned this week that COVID-19 could cause “famines of biblical proportions” in many vulnerable countries in a few months.

Why are emerging countries more vulnerable? There are the obvious answers: the absence of robust health systems, the lack of public and private resources to combat the disease, and the prevalence of informal jobs that make it very difficult to opt to stay at home and not work. Beyond these, the MAPFRE Economics team goes into great detail in its latest Outlook report on the financial vulnerabilities that make many countries especially helpless when faced with this situation.

In the last decade, emerging markets have experienced increased financial vulnerability and debt in a context of lukewarm economic growth, trade slowdowns, a slowing of real investment and rising income inequality.

“It should be noted,” the report states, “that this is especially true in Latin America, where low productivity and GDP growth predominate, along with a lack of domestic savings mediated by the finance sector. These problems expose the region to external shocks that can be transmitted through its current account or foreign debt stock.”

Therefore, emerging markets that were already at high risk of sovereign external debt problems at the end of 2019 currently have an unsustainable debt burden. Total debt is estimated at more than 220 percent of the GDP of emerging markets, with private debt close to three quarters of this figure, mostly due to the expansion of private enterprise leverage.

In addition, “the growing proportion of sovereign debt (which is owed to foreign non-bank institutions) has also meant an increase in debt service costs and an avalanche of obligations on international bonds due to mature relatively soon over the next decade.” The external funding needs of emerging countries are particularly relevant (current account balance and debt repayments) and account for between 8 percent and 25 percent of GDP.

It is also estimated that a large part of the debt of private non-financial firms in developing countries (around 35 percent) is in the hands of external creditors in foreign currency. Last but not least, corporate debt in many emerging markets is expanding much faster than investment in physical capital, suggesting a clear speculative bias toward increasing growth potential and the resulting future repayment capacity.

As MAPFRE Economics concludes, “with current levels of international reserves, emerging markets’ ability to cushion the downturn of this crisis seems extremely limited.”