The Effects of the Covid-19 Pandemic on the Exchange Rates of The Fragile Seven Countries

This study aims to analyze the exchange rate fluctuations in seven fragile emerging market economies (EMEs), with similar macroeconomic structure characteristics such as a high short-term external debt, low official international reserves, and dependency on foreign capital inflows, underlined by the IMF at the onset of the COVID-19 crisis. After the COVID-19 outbreak, the first sudden impact of uncertainties appeared on the portfolio outflows from EMEs. The spillover effect of the excess liquidity through unconventional expansionary monetary policy and helicopter money created by the expansionary monetary policy by the FED did not lead to any repeating portfolio flows from advanced economies to EMEs, contrary to the Global Financial Crisis of 2008- 2009. Thus, the risk-off sentiment of investors led to capital reversals, which in turn, brought about the sudden depreciation of many emerging market currencies. However, differences in the size and time of depreciation rates raise a question about the relative importance of push and pull factors on the fluctuations in these currencies. From this point of view, the research found out that push factors like the Volatility Index (VIX) affect national currency immediately and adversely. In contrast, the effects of the pull factors on exchange rates are asymmetrical. In this setting, good economic performance helps to mitigate depreciation while the bad indicators accelerate this depreciation in the currency.

Keywords: Sudden stop, exchange rate depreciation, fragile seven, emerging market economies, COVID-19.

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The Covid-19 Pandemic Global Risks and Uncertainties

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The Effects of the Covid-19 Pandemic on the Exchange Rates of The Fragile Seven Countries

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