The financial turmoil that hit emerging market economies
last spring, following the US Federal Reserve’s taper tantrum over its
quantitative easing (QE) policy, has returned with a vengeance. This
time, the trigger was a confluence of several events: a currency crisis
in Argentina, where the authorities stopped intervening in the forex
markets to prevent the loss of foreign reserves; weaker economic data
from China; and persistent political uncertainty and unrest in Turkey,
Ukraine and Thailand.
This mini perfect storm in emerging markets was soon transmitted,
via international investors’ risk aversion, to advanced economies’ stock
markets. But the immediate trigger for these pressures should not be
confused with their deeper causes: Many emerging markets are in real
trouble.
The list includes India, Indonesia, Brazil, Turkey, and
South Africa—dubbed the Fragile Five because all have twin fiscal and
current account deficits, falling growth rates, above-target inflation,
and political uncertainty from upcoming legislative or presidential
elections this year. But five other significant countries—Argentina,
Venezuela, Ukraine, Hungary, and Thailand—are also vulnerable. Political
and electoral risk can be found in all of them, loose fiscal policy in
many of them, and rising external imbalances and sovereign risk in some
of them.
Then, there are the over-hyped BRICS countries, now
falling back to reality. Three of them (Brazil, Russia, and South
Africa) will grow more slowly than the US this year, with real
(inflation-adjusted) gross domestic product (GDP) rising at less than
2.5%, while the economies of the other two (China and India) are slowing
sharply. Indeed, Brazil, India, and South Africa are members of the
Fragile Five, and demographic decline in China and Russia will undermine
both countries’ potential growth.
The largest of the BRICS, China, faces additional risk
stemming from a credit-fuelled investment boom, with excessive borrowing
by local governments, state-owned enterprises, and real estate firms
severely weakening the asset portfolios of banks and shadow banks. Most
credit bubbles this large have ended up causing a hard economic landing,
and China’s economy is unlikely to escape unscathed, particularly as
reforms to rebalance growth from high savings and fixed investment to
private consumption are likely to be implemented too slowly, given the
powerful interests aligned against them.
Moreover, the deep causes of last year’s turmoil in
emerging markets have not disappeared. For starters, the risk of a hard
landing in China poses a serious threat to emerging Asia, commodity
exporters around the world, and even advanced economies.
At the same time, Fed’s tapering of its long-term asset
purchases has begun in earnest, with interest rates set to rise. As a
result, the capital that flowed to emerging markets in the years of high
liquidity and low yields in advanced economies is now fleeing many
countries where easy money caused fiscal, monetary, and credit policies
to become too lax.
http://www.livemint.com/Opinion/NLtzcE6zodVUWwxlqwvQeK/Nouriel-Roubini--The-trouble-with-emerging-markets.html
Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of RGE Roubini Global Economics
