Some people think that if the US continues to taper, the pressure on the emerging markets may end up as a crisis of the sort that overwhelmed many Asian countries in 1997-8. Are they right?
Let us begin at the beginning. It is by no means clear that tapering has caused this latest mini-crisis in emerging markets. For a start, it has been known for some time that tapering would occur.
Moreover, it is not as though the Fed has stopped QE, let alone reversed it. It is still pumping $65bn (£40bn) a month into the markets through its bond purchases – money which can readily spill over into the emerging markets.
Often the thing that both market operators and commentators seize on as the cause of a major event is really an excuse, or at most a trigger, while the underlying causes lie elsewhere. I think this is what has happened here. There were good fundamental reasons for being wary of many emerging markets, regardless of what the Fed did with tapering.
As it is, a repeat of the Asian crisis of 1997-8 is unlikely, not least because the position of most of the emerging markets is quite different.
In those days it was common to lump all the emerging markets together. Indeed, there were some marked similarities between them. In particular, those countries that were engulfed by the financial crisis of 1997-8 were all running unsustainable current account deficits and were therefore dependent upon continued inflows of foreign capital.
When confidence fell back, this foreign capital washed out again, leaving the former recipients with declining asset prices and weak currencies. In some countries the impact of the crisis on GDP was as large as, or larger than, the effect of the Great Depression on American GDP.
Today, on average, the emerging markets are much less exposed to a crisis of this scale. In general, the economic variables that act as a forward indicator of troubles ahead – the trade deficit, the level of real equity prices, the real exchange rate, short-term external debt and private sector credit growth – are not flashing red, as they did so clearly before 1997-8.
I commend Roger Bootle’s column to subscribers for the examples that he also provides.
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Many emerging markets were also affected by two factors which occurred in 2013, if not earlier. 1) Commodity exporters were hit when China sharply reduced its imports of natural resources. 2) Japan’s decision to devalue its overvalued currency contributed to the weakening of emerging market currencies.
While I am on record for expecting somewhat choppy markets in 2014, I do not think that the risks for the mostly better managed emerging markets are anything like 1997-98. This Bloomberg article: BlackRock’s Fink Says Emerging Stocks Attractively Priced, provides some of the reasons.Back to top