Emerging markets economies increasingly vulnerable

13 April 2016 Consultancy.uk

Following the slowdown in China and geopolitics around oil, commodity prices have slumped and are expecting to stay low. At the same time, strong growth in the US has seen the Federal Reserve increase rates, pushing up the dollar. Low returns on exports and higher costs to service foreign debt, a new report finds, are making the economies of emerging markets increasly vulnerable.

Stimulating the pieces
The economies of the developed world have undergone considerable upheaval as a result of the 2008 financial crisis. Following the sub-prime mortgage meltdown and the resultant bailing out of too big to fail financial institutions, many of the world’s developed country found themselves in strong recessions, with high levels of unemployment.

central bank negative rates

In recent years, a number of policy initiatives have been introduced to increase the availability of money to spur economic growth. Large quantitative easing programmes have been launched by the ECB and the US Federal Reserve. In addition, interest rates are sitting at historic lows, with the ECB setting negative interest rates to encourage banks to put their money to use. While Europe is continuing to stimulate its economy through low rates, the US, in response to improving GDP and employment figures, has started rising interest rates as it begins to wind down stimulus programmes.

The policy interventions have managed to stabilise headline GDP growth within developed economies. Across the Eurozone as a whole, growth of 1.6% is projected for the coming year, and, when looking more specifically at individual countries, GDP growth in the UK is projected to be around 2.2% in 2016, while Germany and France will see growth of 1.3% and 1.8% respectively for 2016.

emerging economy growth is slowing

Emerging slowdown
While emerging market growth took hits during the economic crisis, they quickly rebounded and provided for a large part of global growth. Yet, as US and Europe get back on their feet, with improving public finance and employment figures as well as headline GDP growth, emerging market players are finding themselves in some strife.

China in particular has fallen from an average growth rate of 9.4% annual increase over the past three decades to 6.9% last year, with the continuation of the slowdown expected to see growth slow to 6.5% this year and average 5.7% between 2018 and 2022.

Many other emerging economies too, fell considerable in 2015 against the medium term average. Brazil and Russia, in particular, have found themselves in a period of contraction; with a drop against the medium-term average of more than 6% apiece. Turkey and China have both fallen by almost 2%, while India found itself in the enviable spot of slight (1%) growth on its medium-term growth.

Brazilian fiscal weakness and decreased commodity prices

Commodity falls
The causes of economic mire in Russia are relatively well understood, and include sanctions levelled at it as well as a massive reduction in commodity prices, including oil. Commodity prices, following the slowdown in China, have plummeted during 2015. A number of projections created last year, regarding the long term commodity price outlook, were quickly shown to be incorrect, with the latest projection seeing only modest price growth into 2021. Oil in particular, according to the IMF projections, will stay at an average $46/bbl. Which, if correct, will put a persistent strain on the economies and public finances of major oil exporters. 

In Brazil, considerable headwinds are faced by the country as inflation and unemployment are significantly eating into consumers’ ability to sustain the continued growth of the country, while exports and commodity prices further squeeze government finances. The budget surplus that the country has had for more than a decade, up until 2013, has now fallen below the line. This year's GDP is projected to see the economy contract by -3.6%.

emerging market risk profile

Emerging vulnerability
The consultancy also considers the relative risk profile of a range of countries based on their foreign debt, currency movements and current account balances. The country with the highest risk profile is Turkey, which has debts in foreign currencies at 53% of GDP, while its own currency has weakened considerably against foreign currencies – making it harder to service foreign debts. Its current account balance has hit -4.5%. Malaysia is in a similar position, although its current account balance remains positive at 2.2%. Chile, too, is in a highly vulnerable position, facing high foreign debt and a decreased value of its currency.

Medium vulnerable countries include Peru, Mexico, Russia and India. These countries have smaller amounts of foreign debts as a % of GDP, at around 30%, although many have seen their currencies drop considerable in recent months. Low risk countries include China, which has low foreign debt levels and a strong currency, and the Philippines, which too remains in a relatively robust position.

According to the researchers, vulnerability is likely to only last across the short term for many emerging economies, stating: “Overall though, the short term economic outlook for the emerging economies has deteriorated even though many retain considerable long-term potential. We therefore, recommend that our clients stress test their business plans against a lower than baseline growth scenario for major emerging markets over the next few years.”


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