The pandemic has a long tail. While there are long-term health complications many economies are also registering persistent and permanent economic damage. In the near-term, the headwinds are already fierce in many emerging markets as they are in a race to vaccinate their population again resurging Delta-related infections and policy options are increasingly constrained. There are also concerns about the fragility of a trade-driven recovery if production in the West recovers. Another major challenge is the prospect of slower growth as we advance compared to the pre-pandemic projection. Thus, while the economic lookout is characterized by an exceptionally high level of uncertainty and a wide range of possible medium-term outcomes, the implications on insurance development will nonetheless be pertinent.
Has the pandemic done lasting damage to emerging markets?
References to previous financial and economic crises and anecdotal evidence point to the tangible long-term negative impact of COVID-19 on emerging market growth and outlook. There is still ongoing research to pinpoint the transmission mechanisms but the loss of human and physical assets as well as lowered productivity could lead to lower potential growth for many markets. The IMF is projecting a loss of three percentage points of growth by 2024 for the world compared to pre-pandemic expectations. The damage to emerging markets is also likely to be bigger than that in developed markets. Low-income economies are expected to see per capita income gains be set back by at least a decade.
The pathway to lower productivity (and economic growth) varies from one crisis to the other. However, it is believed immediate management of COVID-19 could have negative repercussions. For example, individual decisions to shift resources to deal with the pandemic could delay the diagnosis and the forgoing of treatment for other diseases and illnesses. At the same time, young workers could delay their entry into the labour force, investment in occupational training could be subdued and there could be a loss of firm-specific know-how if companies flounder during the pandemic. In addition, other negative impacts could arise from truncated education and prolonged labour furlong.
The productivity channels seem equally likely to be impacted much like in previous crises. Considering the inevitable variation across markets, there has been a general reduction in capex investment amid heightened business and economic uncertainty last year. The impact on high-contact sectors like the retail, hospitality and tourism sectors has been more pronounced.
To summarise:
- There has been lasting damage to growth due to the negative impact currently estimated as a 3% reduction in growth by 2024 in comparison with the pre-pandemic expectations. However, it is less than the actual degrowth over a comparable period following the Global Financial Crisis (GFC) when the global economy shrunk by 10%.
- Another important consideration is a convergence in growth between advanced and emerging economies after the GFC but there could yet be a diverging growth trend in the post-pandemic era. It hints that pandemic scars are deeper in emerging markets than in their developed counterparts.
- There is still a high level of uncertainty contingent on policy responses. For instance, large infrastructure construction plans can bolster capex and compensate for some of the earlier losses. Furthermore, firm-level activities to shift resources from lower-productivity, high-contact sectors towards higher-productivity, low-contact sectors could help to improve productivity.
End of the super-cycle?
An important question is if the pandemic will end the emerging market super-cycle and render this group of countries towards the fringe of growth? Are emerging markets more at risk of falling into the middle-income trap?
This is unlikely. Despite slowing momentum, emerging markets are still expected to outperform advanced markets in the coming years and provide most of the additional economic value-added. This will be more likely if appropriate policies are implemented to reboot emerging market productivity and growth. Notably, most of the fundamentals that drive emerging market growth remain (more or less) intact.
- A favourable demographic structure: A large loss of life notwithstanding, the basic premise of favourable demographics in emerging markets remains intact. The loss of schooling and productivity could trim the demographic dividend but emerging markets retain their competitive advantage due to favourable demographic structures.
- Manufacturing competitiveness: As indicated by the trade-driven growth of Asia this year, emerging markets remain competitive in manufacturing production. The ongoing restructuring of the global supply chain will have an impact.
- Commodity price cycle: While volatile, the coming of the “shortage economy” could benefit resource-rich emerging markets.
- Foreign direct investment: The pandemic has only reinforced the global liquidity glut and added interest in emerging economies. Governments are looking to inaugurate more pro-investment policies to support growth.
This article was written by Clarence Wong, Chief Economist, Peak Re. The article is reproduced with the kind permission of ICMIF Supporting Member Peak Re.
To access the full in-depth article, including more graphics, please visit this webpage. For more insights from Peak Re’s Knowledge Centre, please click here.
The original article is provided in English only. Any translation to other languages via the ICMIF website has not been done by Peak Re, and therefore Peak Re are not liable or accountable for those translated versions.
Published February 2022
Through an insurance lens
Insurers have responded to this changing market landscape by pivoting to a post-pandemic growth strategy and adjusting to the “new normal”. Some carriers have doubled down on tech investment, given that customers have accelerated adoption of technology. There is also an increasing focus on customer engagements to tap into heightened risk awareness while some previously under-represented risks are gaining more attention such as mental health or supply chain resilience. In addition, efforts to expand the insurability frontier to cover pandemic risks and revise business models allowing more considerable government support is underway.
To better understand the challenge, it will be helpful to stress a scenario-type thinking about how macro-economic parameters will look in emerging markets in the coming years.
The below table attempts to construct a possible growth scenario for emerging markets over the next few years and highlights potential insurance implications.
Economic scenarios and insurance implications
| Slower potential GDP growth (relative to pre-pandemic projections) |
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| A faster rise in consumer price inflation1 |
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| Fiscal consolidation to contain or reduce government debts |
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| Gradual interest rate normalization, led by advanced market central banks |
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| Financial deleverage and regulatory risks |
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Source: Peak Re
1 It should be noted that previous financial crises are generally non-inflationary. However, the current market conditions are typified by the so-call “shortage economy” as a result of significant and persistent disruptions to production and supply chains. This could herald a period of higher price pressure than previous financial and economic crisis.
From an economic perspective, the post-pandemic market landscape is also opening up new opportunities for insurers. For example, with many emerging markets racking up more debts and the fiscal space turning tangibly narrower, the attractiveness of private insurance 1) to reduce contingent government liability from having to fund post-disaster relief; and 2) to pay for the expansion of social security covers has increased. Furthermore, as alluded to in earlier publications in this Peak Re series, the unfolding recovery offers a strategic new direction in terms of sustainable and inclusive insurance, areas that are not necessarily fully tapped by insurers in the past.
In sum, reliance on pre-pandemic economic assumptions is increasingly untenable given increasing evidence that COVID-19 has done persistent damage to emerging economies. Of course, the outlook is still highly uncertain and dependent on policy responses but a scenario-type analysis can help to flash out some valuable insights for insurers’ strategic planning.
