The recent months have undoubtedly been challenging for people and businesses around the world, and this is equally true for those in the emerging and frontier markets in which we invest. While the number of cases in many of these markets has remained relatively low in comparison to the developed world, this is at least in part due to swift and significant action by governments in many of these countries.
While the response has varied from country to country, lockdowns have been applied widely in order to limit the spread of the virus. These measures have had a knock on effect for many domestic economies, resulting in the implementation of a range of economic relief strategies to reduce their socio-economic impact.
One strategy, which has been commonly used by governments, is some form of mandatory or voluntary repayment holidays for private individual or small business loans. This means that MFIs face challenges in collecting outstanding debts and therefore face liquidity issues when it comes to meeting their obligations to investors. In many markets, this is anticipated to be a temporary issue, with governments expected to implement other forms of relief to support the financial sector. However, it does still represent a challenge for many of the companies that we invest in, who need to respond to a situation affecting their own client base.
Encouragingly, many companies are proving to be resilient in the face of the crisis. For those institutions facing short-term liquidity issues, the majority have been highly proactive in engaging with lenders to agree on practical and sustainable solutions to delaying repayments by a period of between three to twelve months. In these cases, we are keen to work with them collaboratively to find a suitable solution that allows them to free up liquidity, prepare for a temporary low or zero growth environment and continue to meet their interest obligations, which is non-negotiable from our perspective. The overwhelming majority of institutions that we are working with who have requested rescheduling are continuing to pay interest.
From a country perspective, each of the markets that we invest in are experiencing the crisis in a different way. For example, India – the second most populous country and world’s largest functioning democracy – creates something of a perfect storm when it comes to enforcing a lockdown and preventing the spread of the virus. Perhaps unsurprisingly, the largest proportion of rescheduling requests received to date has come from India, as the implemented measures impact MFIs’ abilities to collect repayments. However, India’s MFI sector has historically been quite resilient to economic shocks, most notably during the demonetisation in 2016, which resulted in a similar drop in economic activity and restricted the abilities of borrowers to repay on time. As such, many institutions have demonstrated in relatively recent times their ability to remain resilient in the face of challenging circumstances.
On the other hand, Cambodia has been relatively untouched on both the public health and socio-economic fronts – it has had a low number of cases to date, and no reported deaths, without particularly harsh measures in place. The economy has continued to tick along and as China begins to remobilise should continue to see positive levels of activity.
It is important to highlight the role that international and multi-lateral organisations such as the IMF and World Bank are playing in responding to the crisis in the developing world. Many organisations have responded to requests for intervention packages and support, and we expect to see further emergency funding provided by development finance institutions, which could help to sustain some of the impacted companies within the MFI sector.
Overall, we are cautiously optimistic based on the current information available to us – particularly given the resilience of the markets and companies that we invest in, that have previously weathered a number of global and regional crises. There is no particular reason to believe that the implications here will be any different – it is fundamentally a temporary situation, which is not predicated on weakness in the financial system, but rather people’s inabilities to go to work in the current environment. Once the restrictions are lifted, particularly in economies driven by small and micro businesses, we should see things begin to pick up again fairly quickly. On this basis, we firmly believe that it is our role to continue to support the institutions that we invest in and work constructively with them to find responsible solutions where required.