One reason for global market weakness is investors’ fears that emerging market economies may be heading for a broad crisis, sparked by higher U.S. interest rates and slowing growth in China.
Much of the analysis in the last few days has focused on why these nations are less exposed to a financial meltdown than during the Asian crisis of the late 1990s. A major reason is lower overall foreign debt exposures.
But a number of countries do look fragile, especially those that remain reliant on foreign investors for funding or have failed to institute economic overhauls.
Capital Economics, the London-based macro research company, points out that investors would do well today not to lump all emerging markets into the same pot. Its economists believe you can divide the emerging markets into five groups:
Mismanaged: Argentina, Ukraine, Venezuela. This group faces currency crises due to government policies, as exemplified by Argentina’s recent depreciation of the peso amid runaway inflation and a thriving black market in its currency.
Living beyond means: Turkey, South Africa, Thailand, Indonesia, Chile, Peru. These nations boomed on cheap credit and unsustainable consumption, which led to a surge in imports. As global monetary policy tightens, these nations will find it harder to finance their large current account deficits.
Weak banks: Hungary, Romania, Bulgaria. These countries’ banking systems are still fragile as institutions focus on repairing their balance sheets.
Domestic structural problems: India, China, Brazil, Russia. This group faces challenges to revamp their economic models. China, for instance, needs to rely less on state-led investment to fuel growth. India needs to allow more foreign investment. Brazil and China also face excessive credit growth.
Brightening outlook: South Korea, Philippines, Mexico, Poland, Czech Republic. Some of these nations have taken steps to overhaul their economies and reduce debt. Others, like South Korea and Mexico, should benefit from a pick-up in demand from the U.S.
Kristin Forbes, a professor of global economics at the Massachusetts Institute of Technology, argues in a recent paper that investors will differentiate more between emerging markets based on their vulnerabilities.
In the emerging markets sell off last summer, sparked by fears of higher U.S. interest rates, investors targeted nations with large current account deficits. Ms. Forbes notes a 60% correlation between a country’s deficit as a percentage of GDP and the percentage fall in the value of its currency over this period.
But she argues that investors will focus on a broader range of data in the next few months, including nations’ foreign reserve stockpiles, inflation levels, recent credit growth and mismatches in currency assets and liabilities.
Capital Economics believes some nations could be in trouble but others look resilient.
“The upshot is that as the tide turns toward tighter monetary conditions in the developed world, several emerging markets are vulnerable to recession and even economic crisis,” Capital Economics said in a note to clients.
But it also noted that it does not see an overall worsening of conditions in the developing world. It is forecasting emerging markets to grow 4.5% this year, unchanged from 2013.
Much of the analysis in the last few days has focused on why these nations are less exposed to a financial meltdown than during the Asian crisis of the late 1990s. A major reason is lower overall foreign debt exposures.
But a number of countries do look fragile, especially those that remain reliant on foreign investors for funding or have failed to institute economic overhauls.
Capital Economics, the London-based macro research company, points out that investors would do well today not to lump all emerging markets into the same pot. Its economists believe you can divide the emerging markets into five groups:
Mismanaged: Argentina, Ukraine, Venezuela. This group faces currency crises due to government policies, as exemplified by Argentina’s recent depreciation of the peso amid runaway inflation and a thriving black market in its currency.
Living beyond means: Turkey, South Africa, Thailand, Indonesia, Chile, Peru. These nations boomed on cheap credit and unsustainable consumption, which led to a surge in imports. As global monetary policy tightens, these nations will find it harder to finance their large current account deficits.
Weak banks: Hungary, Romania, Bulgaria. These countries’ banking systems are still fragile as institutions focus on repairing their balance sheets.
Domestic structural problems: India, China, Brazil, Russia. This group faces challenges to revamp their economic models. China, for instance, needs to rely less on state-led investment to fuel growth. India needs to allow more foreign investment. Brazil and China also face excessive credit growth.
Brightening outlook: South Korea, Philippines, Mexico, Poland, Czech Republic. Some of these nations have taken steps to overhaul their economies and reduce debt. Others, like South Korea and Mexico, should benefit from a pick-up in demand from the U.S.
Kristin Forbes, a professor of global economics at the Massachusetts Institute of Technology, argues in a recent paper that investors will differentiate more between emerging markets based on their vulnerabilities.
In the emerging markets sell off last summer, sparked by fears of higher U.S. interest rates, investors targeted nations with large current account deficits. Ms. Forbes notes a 60% correlation between a country’s deficit as a percentage of GDP and the percentage fall in the value of its currency over this period.
But she argues that investors will focus on a broader range of data in the next few months, including nations’ foreign reserve stockpiles, inflation levels, recent credit growth and mismatches in currency assets and liabilities.
Capital Economics believes some nations could be in trouble but others look resilient.
“The upshot is that as the tide turns toward tighter monetary conditions in the developed world, several emerging markets are vulnerable to recession and even economic crisis,” Capital Economics said in a note to clients.
But it also noted that it does not see an overall worsening of conditions in the developing world. It is forecasting emerging markets to grow 4.5% this year, unchanged from 2013.
http://blogs.wsj.com/economics/2014/02/04/five-groups-of-emerging-markets-to-watch/
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