Calling for a New Deal for Developing Countries

April 28, 2020
A deserted street , Tuesday, 28 April 2020 in downtown Johannesburg, South Africa. Photo/Karel Prinsloo

By John Donnelly

Mark Mobius is an emerging markets fund manager and founder of Mobius Capital Partners. Previously, he was executive chairman of Templeton Emerging Markets Group, where he established and directed a team that managed more than $50 billion in emerging markets portfolios. In this edited interview with IFC Insights, conducted from Durban, South Africa, Mobius said the impact of the crisis will be felt especially hard in developing countries but that a major public works program could help them rebound.

Q: What’s your perspective on the pandemic and how it will affect emerging markets in the coming weeks and months?

A: This COVID-19 crisis, as everybody knows, is quite unique. But it is also a crisis with similarities to every other crisis that we've had. From a stock market or bond market perspective, it's not really that different. In fact, it's amazing that the initial downturn in stock markets was not as much as we expected. Now, even with the recent recovery, we could see another downturn. But the longer-range impact is something that I'm very concerned about.

It's an interesting situation because while in the past, the banks were the problem, now banks are the solution because they're the ones that will be responsible in each country to get the right kind of liquidity into the market. Most of the larger companies in all these markets are in pretty good shape. The real concern I have is with the small and medium enterprises who are in debt to the extent that many of them will go bankrupt. That's one big issue that has to be addressed by the international financial institutions and the local banks. Then, of course, there are the people who are employed by these companies. Many of them have lost their jobs already, or many of them will lose their jobs permanently.

Here in South Africa, the unemployment before this crisis was 30 percent. Now, can you imagine what it is now that a total shutdown of the economy has been ordered by the government? So how do you solve this problem? How do you get these people employed?

Q: What do you suggest?

A: I believe that one of the solutions could be similar to what happened during the Great Depression in America during the administration of Franklin Roosevelt who started the “New Deal.” This was a financial reform program that injected a lot of money into the system in order to build massive infrastructure projects to put people to work The program not only included roads, bridges, hydroelectric dams and other infrastructure, but also funded artistic projects to employ actors, writers, dancers, and musicians that enhanced the social and artistic life of the people in the country. I know there are a lot of people who say, ‘Oh, no, another big government program.’ But I think this time, we have to grasp that opportunity to provide better infrastructure to these countries, and at the same time putting these millions of people to work on these projects.

Q: You’ve been called the ‘father of emerging markets’ for your long history in investing in them. How can IFC and other development finance institutions best help countries during this crisis?

A: Thank you for that, but the credit should go to IFC’s Antoine van Agtmael, who coined the term Emerging Markets in the 1980s. My advice would be for the IFC and other multilateral institutions, when they are giving or lending money to these countries, to try to do it in such a way that could support a program of the type that I've just mentioned.

A very good example of this is what happened in Mexico – in Cancun, many years ago. The plan started with vacant land in the south of Mexico, with beautiful beaches, and very interesting, ancient history. The land was transformed into a holiday paradise with great hotels and facilities. It resulted in an incredible tourism boon to the country and continues to garner badly needed foreign exchange. It's this kind of comprehensive project that could be really useful in getting people to work and improving the infrastructure at the same time.

Q: Cancun is an interesting example, but right now tourism is one of the hardest hit areas. Wouldn’t it be difficult to start a tourism project?

A: I'm thinking of projects that will take a year or quite a few years to complete. For example, here in South Africa, the rail infrastructure is not very good. They need more passenger railways going from one city to the next. That's the kind of thing you can do. It's a longer-term project to achieve results. And of course, as you say, nobody can travel now, but this will end. By the end of the year, you will likely see tourism picking up again. And by the way, the key is not only international tourism, but domestic tourism as well. If you look at many countries, you can see that infrastructure was built at the beginning to serve domestic tourists. That could happen again.

These big projects really do result in more employment. If you’re going to build roads, or bridges, or tunnels, or airports, the number of workers is just one fraction of the total number of employment. It’s also all the other services that come with it, a multiplier effect of three or four times in terms of employment.

Q: You seem optimistic over the longer term that countries will bounce back. In what parts of the world, or in what sectors, do you see early successes?

A: There are sectors that are not going to be impacted very much. Anything in health care, anything in pharmaceuticals, and also a number of related things like delivery services, they are all doing well. The interesting thing that's developed as a result of COVID-19 crisis also is the incredible boom in internet traffic. The companies that are servicing video conferencing are doing very well. So not everybody is suffering. But these sectors maybe represent 15 percent at most of the total. Everybody else is in pretty bad shape, at least temporarily.

I’m optimistic for a number of reasons. First, we know this is not going to go on forever. We know that there are now vaccines being developed at a very fast pace. We know that various medicines are being found that treat the disease. A second reason why I'm optimistic is we've been through these crises before and have learned to survive. And the third reason is that the incredible discipline that has been displayed around the world, not only in the developed countries, most particularly in the emerging countries, where people have really been listening to what the government has to say.

Q: You’ve been a longtime proponent of corporate governance. What’s your advice to companies who will be rebuilding after the crisis when it comes to governance?

A: I would say, at this stage, corporate governance is becoming even more important than it is under normal circumstances, if you want support from shareholders and bankers. And the companies that we have talked with, are very aware of the need to improve their corporate governance, whether it be having independent directors, whether it be having women on the board or other measures.

Q: How has living in Durban affected the way you look at the pandemic?

A: Oh, it's been an incredible eye opener for me. What has been really impressive to me is the degree to which things have been shut down. It's very difficult. People are prohibited from going on the streets except for going to the food supermarkets and pharmacies, the only shops allowed to open. That's it. The impact has been devastating.

I was talking to one of the security people at a hotel the other day and I asked how he was doing. He said, ‘Well, you know, I've got this job, but no one else in my family can work. It’s very difficult for us because we depend on other members of the family to buy food and so forth.’ So the impact is very deep.

Published in April 2020