13 June 2018

More Troubles for Emerging Markets

Emerging markets have seen a lot of ups and downs over the past decade.  After generally growing at a solid pace in the early 2000s, most emerging markets saw their economies battered by 2008’s global financial crisis, which reduced growth rates around the world.  However, unlike developed economies, most emerging markets recovered quickly from the financial crisis, with a surge of cheap and available money leading to an investment boom in these countries that resulted in soaring economic growth rates in most emerging markets in the early part of this decade.  In fact, for a time, emerging markets were contributing more to overall global economic growth than their developed counterparts.  Since then, emerging markets in Asia have continued to grow at a solid pace thanks to that region’s ability to export manufactured goods around the world, and the increasingly diversified economies found in that region.  Outside of Asia, however, it has been a different story.  Here, emerging markets have been hit hard by changes in monetary policy in the United States and elsewhere, as well as by the downturn in commodity prices since 2014.  Now, just as many of these struggling emerging markets believed that they were turning the corner and heading for higher growth, events are conspiring to throw a wrench into their recoveries and bring yet more hardships to many leading emerging markets.

Unfavorable Monetary Policies: For the moment, many of the threats facing emerging markets stem from changes in monetary policy in many areas of the world, some of which are driving the current exchange rate fluctuations that are causing major concerns in emerging markets.  First and foremost, the US dollar has been strengthening in recent months, while at the same time, more interest rate hikes are likely in the United States over the remainder of this year.  While this is leading to a stronger US dollar, many emerging market currencies have seen their values plummet this year, with currencies such as the Brazilian real, the Turkish lira and the South African rand all depreciating sharply in recent months.  Furthermore, capital is flowing out of emerging markets and into US dollar assets, reinforcing these exchange rate trends.  Altogether, these changes in monetary policy and their impact on exchange rates is fueling inflationary pressures in emerging markets, while at the same time weakening domestic demand in many of the world’s leading emerging markets, leaving them ever-more dependent upon exports to generate economic growth. 

External Threats: While many of the domestic factors that determine the health of emerging market economies are deteriorating, a number of external factors are also raising fears for the health of emerging markets in the coming months.  One such concern is the fact that, as many emerging market currencies weaken, imports into these emerging markets are becoming more expensive, worsening these countries’ trade and current account balances.  At the same time, many of these external concerns are centered around the threats facing emerging markets and their ability to export goods and services, particularly to developed markets.  Quite simply, the threat of a global trade war is a major concern for most emerging markets.  This is due to the fact that much of the economic growth generated by emerging markets continues to be driven by exports to the world’s wealthier markets.  Now that the Trump Administration has begun to erect trade barriers in the United States, many other developed economies are likely to follow suit, fearful of a flood of cheaper manufactured goods from lower-cost emerging markets meant to offset their reduced access to the vast US market.  As a result, the foundation upon which emerging market economic growth is built upon, exports to wealthier markets, is now in serious jeopardy.

Worrying Signs: For emerging markets, the next weeks and months are certain to be fraught with danger and could determine their economic well-being for years to come.  For many emerging markets, particularly those dependent upon commodity exports, the last four years have already been a period of dashed hopes and disappointing growth.  Major emerging markets such as Brazil, Russia, Mexico and South Africa have experienced either deep recessions or persistent stagnation in recent years.  In fact, few emerging markets have economies that are robust enough to withstand major disruptions caused by changing investment flows or the imposition of major trade barriers.  Therefore, these two factors may result in another severe slowdown in emerging market growth in the coming months, a development that would have major repercussions for the entire world.  For example, without sustained levels of higher economic growth, job creation levels will be anemic at best and will not meet the demand for new jobs in many emerging markets, particularly as automation is already threatening job growth in many of these countries.  This, in turn, could lead to higher levels of political unrest in emerging markets, fueling what is already a sharp increase in support for populist political and economic policies.  While the recent trade disputes have been focused on the world’s leading developed economies, it is emerging markets that stand to lose the most should current trends continue and global trade and investment is disrupted.  Indeed, these are dangerous days for the world’s emerging markets.