Are emerging markets about the slap on capital controls? Emerging market economies are witnessing a collapse in external financing, with indications that outflows from EM bond and equity funds of the last three weeks exceeded 4% of net asset value. Normal protocol would see EM policymakers respond by selling reserves and allowing their currencies to devalue, but with the spread of covid-19 putting us all in uncharted territory, policymakers are reticent about selling USD. The answer could well be capital controls, writes David Lubin, Citi’s head of emerging markets economics, in the Financial Times.

Risk is going up, but certain risk premium measures are going down: Public debt burdens in EMs are increasing, either because of automatic fiscal stabilizers or because of measures taken to protect citizens from the economic fallout of covid-19, says Lubin. But at the same time, some aspects of the risk premium are going down along with monetary policy easing by central banks. So while a given country’s domestic economy might benefit from lower rates, preventing large capital outflows may require higher interest rates — especially with rising debt burdens.

Some EM may decide it’s best to just close up shop for the duration: This could see countries defaulting on debt or imposing restrictions on domestic banks’ ability to sell USD through taxes, differential exchange rates or even bans. These measures are all the more likely thanks to the IMF’s increased flexibility on the subject of capital movement restrictions and the probability that the Trump administration would not support measures to boost international liquidity, such as new Special Drawing Rights for member countries, Lubin says.

Egypt has managed to avoid the worst of this, so far: We’ve already seen analysts predict that the central bank’s emergency 300 bps rate cut two weeks ago is likely to accelerate outflows of foreign debt securities, but for the moment EGP debt still remains “relatively attractive.” But as we remain in a covid-19 lockdown, which Renaissance Capital predicts we may struggle to finance, the question of how long we can sustain these heavy outflows remains answered.