Emerging markets are in better shape than you think
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The writer is chair of Rockefeller International
These days major emerging market leaders must be feeling the chagrin of Roger Moore, often criticised as the worst James Bond ever. The British actor is said once to have quipped that long after he stopped playing the iconic secret agent, he still got a bad review each time a new 007 movie came out. Now every time dire news breaks on the global economy, from rising interest rates to increasing commodity prices, pundits say “emerging markets” are in the worst spot.
Read closer, however, and the countries these critics cite are generally small ones like Zambia and Sri Lanka. Among the roughly 150 developing economies there will always be distress somewhere. But by most measures — from current account deficits to currency valuations — the 25 largest developing nations, from India to Brazil, are in strong financial shape.
Together these markets account for 70 per cent of the population and nearly 90 per cent of gross domestic product in the developing world. They are less vulnerable to capital flight now than they were the last time global investors fled en masse in response to tightening monetary policy, during the taper tantrum of 2013.
Compared to 2013, their current accounts have shifted from deficit into surplus, and only one in ten has a worrisome deficit — above 3 per cent of GDP — down from three in ten. Foreign exchange reserves have grown from 19 per cent of GDP to nearly 26 per cent; currencies are on average 40 per cent cheaper against the dollar than they were during the taper tantrum.
The dour commentary also misses where the big emerging markets stand in the reform cycle. The crises of the 1990s forced these countries to put their financial houses in order, setting the stage for booms in the 2000s. The excesses of the 2000s led to the lacklustre 2010s. Now, forced again to reform by the pandemic, they have set themselves up for another solid run.
Pessimism around emerging economies intensified over the past decade as the growth lead they normally enjoy over developed economies kept narrowing. But that gap is on track to widen again — from half a point to nearly 3 percentage points in coming years, with a leavening effect on markets. Also overlooked is the fact that in dollar terms all the world’s ten top-performing stock markets of 2022 are in emerging economies.
When the US market falls, emerging markets are generally expected to fall even more. So why are they outperforming now? One reason may be that the foreign capital which would normally exit these nations in troubled times had already fled before the start of 2022. And in many emerging markets, from Mexico to Thailand, domestic investors have been net buyers of stocks in recent quarters. Historically, locals have a record of anticipating shifts, for better or worse, in their domestic market well before foreigners do.
Emerging markets are also ahead of the policy curve. Usually, they follow the lead of the Federal Reserve. This time, under pressure from weaker currencies, their central banks started tightening in early 2021, a year ahead of the Fed. As a result, they now have less work left to do in the fight against inflation. For the first time in at least two decades, the share of countries suffering rapid inflation (above 5 per cent) is higher in developed markets than in emerging markets.
Pessimists point to rising government debt in emerging markets, which has indeed increased from 55 to 65 per cent of GDP during the pandemic. But government debt in the United States and other developed markets has risen faster, by nearly 20 points to 120 per cent of GDP. Meanwhile as current account surpluses grow in emerging markets, the US deficit is approaching 4 per cent of GDP — its largest in more than a decade.
Today the world capital of hot money is in the US, not in the emerging markets. Over the course of a decade-long tear in the 2010s, the US share of global stock market capitalisation surged from a low around 40 per cent to near 60 per cent, a level far above its roughly 25 per cent share of global GDP.
In an economic environment that many analysts now compare to the stagflationary 1970s, some of that money will be looking for new homes. Against that backdrop, it is worth noting that, at least relative to the rest of the world, the 1970s was a strong decade for growth in the emerging world. Commodity prices surged then, as they are doing now, and many emerging nations are big exporters of commodities. Like Roger Moore’s films, which now grab spots near the top of Best-of-Bond lists, emerging markets deserve a fresh review.
Letter in response to this article:
Why Fed’s rate rise failed to rattle emerging markets / From Jing Liang, Bromley, Kent, UK