The explosion in Beirut is calling attention to a pervasive culture of negligence, corruption, and complacency among Lebanon's ruling elite. The blast will deepen the contraction in the economy, but may spur badly needed political and economic reforms. If not, the country will continue to sink. 

The Caucasus and Central Asia (CCA) region was hit hard by COVID-19, with energy exporters also enduring the oil price collapse. Exchange rate flexibility, support from the IMF, and low risk of sovereign debt distress will help most CCA countries remain stable through 2021 absent further outbreaks. 

To date, over 40 countries have requested forbearance via the G20 Debt Service Suspension Initiative (DSSI). The DSSI could freeze over $11.5 billion of debt payments due to official bilateral creditors between May and December 2020.

COVID-19 has exacerbated Costa Rica’s external and fiscal imbalances. We project a widening of the current account deficit driven by the services sector. Further IMF funding would be needed to cover a potential external financing gap. External risk remains tied to substantial fiscal vulnerability. 

We analyze external adjustments in EM Asia following the COVID-19 shock. Cross-border flows are shifting considerably in many countries in the region. The global recession weighs on exports and weak domestic demand on imports. Other sources of FX inflows have come under significant pressure as well in H1. This includes both international tourism revenues and workers’ remittances.

The ASEAN region is now China’s largest trading partner, top tourism destination, and a key investment partner. However, the depth of these relationships vary among the individual ASEAN member states. We expect economic integration to continue in the region.

Concerned with the economy's already-high debt levels and RMB stability, the PBoC was the least dovish major central bank this year. The PBoC has begun to suspend even this moderate pandemic emergency stimulus as China’s economy recovers and as concerns about financial froth increase.

We update our analysis of EM inflation dynamics in light of the COVID-19 crisis. Core inflation is a better gauge of domestic balances than the headline number. In many emerging markets, core inflation slowed in Q2 compared to early-2020. This, together with higher credibility, allowed many central banks to ease policy. While inflation risks appear moderate, fiscal dominance could change the picture.