The larger points of the essays, collectively put in an anchor report titled ‘The world after Covid-19’, say there could be a vacuum in global leadership, tense
and deglobalisation might continue, and emerging markets might face a more challenging medium-term outlook. “We see the US dollar following a path of reduced global dominance," the bank said. It also expects inflation to remain low and sees the possibility of an even lower real rate of interest. Unconventional monetary policies would be the new normal, reducing the urgency for fiscal austerity. There is also a danger of moral hazard that could lead to excessive risk taking and asset price bubbles.
"Income inequality should worsen substantially, and we flag the danger of a global food crisis in coming years. Conversely, Covid-19 could be a blessing in disguise in uniting efforts to tackle climate change," the report said.
The current US-China tensions will most likely compel some multinational companies to diversify part of their production to other emerging market countries such as Vietnam, India and Cambodia because of their much cheaper labour forces. This move was evident even before the Covid-19 crisis, as China’s labour cost was on the rise and the tax sops of the companies were also ending one by one.
Such dislocation should help other emerging markets countries, in which Asia stands to gain the most. Eight of the top 10 countries that would potentially benefit from the dislocation from China are situated in Asia, with India topping the list.
India, Singapore, Vietnam, Malaysia and Indonesia rank in the top five. “India could benefit from its large market size and potential, while Singapore’s advantage lies in its ease of doing business, economic and political stability and trade openness,”
Nomura said. Vietnam, which has already started to benefit from trade diversification from China, is gaining due to its closer proximity to China, trade openness, market potential and low labour costs. The two non-Asian countries in the top 10 are Poland and the Czech Republic, “owing to their favourable investment climate”.
However, the top losers due to the dislocation would again be Asian countries, with the top 8 potential losers in the world coming from the continent. “Taiwan (its value addition in China’s gross exports stood at 6.3 per cent of its GDP in 2018), South Korea (3.0 per cent) and Malaysia (2.8 per cent). The value-added by industry across Asian countries shows that computer & electronics, textiles, leather & footwear and machinery & equipment sectors are the most exposed,” said Nomura.
However, large emerging markets such as Brazil, India and South Africa have debt ratios that are getting close to, or are already at thresholds that empirical evidence suggests become counter-productive for growth, Nomura said, and these countries must embark on fiscal consolidation and tighter fiscal policies in the coming years. The emerging markets would likely deliver lower growth with interest rates being at near record lows now.
"When combined with weak fundamentals such as higher corporate debt (China), weak banking sector (India) and weak fiscal positions (India, Malaysia), EM risk premia may need to rise to compensate investors for higher risks,” Nomura said.
The global health crisis and the lack of policy co-operation is compelling governments to better safeguard economic sovereignty, Nomura said, citing the example of India's new “vocal for local” campaign.Relocation of supply chains from China to benefit India the most: Nomura