Cimpeanu Lucian

Gr. 1005
Emerging markets

(The unloved bounce)

The recovery in emerging markets looks fragile for all but a handful of countries
IT IS not easy to have faith in the rally in emerging-market currencies that has taken
place since February. The ones that have risen most in recent weeks are typically thosethe
rouble, the real and the randthat had lost most ground since May 2013, when the emergingmarket sell-off began in earnest (see chart 1). What is there to like about Russia, Brazil and
South Africa, with their wilting economies and dysfunctional politics?

The proximate causes of the rally are clear. One was the fading of fears for Chinas
economy. At the start of 2016 capital appeared to be fleeing China at a rapid rate, in a vote of
no confidence. The yuan seemed in danger of losing its moorings against the dollar, raising
fears of a round of competitive devaluations across Asia and beyond. Views changed around
the time of the meeting of the G20, a club of big economies, in Shanghai in February.
Informal pledges by the Chinese authorities not to let the economy slide were backed up by
stimulus policies, including a big budget deficit and faster credit growth. Tighter capital
controls stemmed the outflows from China. Prices of scorned commodities, such as iron ore,
surged at the prospect of Chinese construction. Currencies of raw-material exporters rose too.
A second trigger was a change of heart by the Federal Reserve. In December it raised
its main interest rate for the first time in a decade and suggested four further increases were
likely in 2016. It has since backed away from these hawkish forecasts. Real interest rates,
measured by the yield on inflation-proof bonds, have fallen to 0.14%. The dollar has slumped
against even rich-world currencies. No wonder the high yields on offer in Brazil, Russia and

Cimpeanu Lucian
Gr. 1005

other emerging markets are so tempting to rich-world investors, says Kit Juckes of Socit
Gnrale, a French bank.
The improved conditions for emerging markets may prevail for a while, but not
indefinitely. Chinas policy of loose credit only adds to its alarming debt pile. The Fed will
eventually resume tightening. Even so, there is a bit more to the emerging-market rally than
just a favourable backdrop.
To understand why, go back to May 2013, the start of the taper tantrum, when hints
from the Fed that its bond-buying would soon tail off prompted a stampede out of emerging
markets. Before the Feds shift their trade deficits had been growing, leaving them more
reliant on foreign borrowing to fill the gap. So when the exodus got going, the hardest hit
were economies that depended most on foreign capital.
Jump forward to 2016, and the picture is very different. Emerging markets in
aggregate are running a trade surplus. That is the case even if Chinas bumper surplus is
excluded (see chart 2). What is more, the countries whose trade balances have adjusted the
most, Brazil and Indonesia, are among the best recent performers, says Paul McNamara of
GAM, a fund manager. True, the improvement is the result of crushed demand for dearer
imports, not a revival in exports. But this is a typical pattern of adjustment: imports fall first;
exports recover later.

Sceptics counter that there is little that links the countries whose currencies have
bounced recently. Some are oil producers. Others export different commodities. A few do
neither. Some have made painful changes. Many have skirted them. Even the dogs have
rallied quite hard, sniffs another fund manager.
The quest for a Teflon-coated emerging market is probably futile. If investors become
chary of risky assets again, even those with half-decent fundamentals will get dumped. Still,
some traps seem avoidable. China is one obvious snare. Renewed trouble in its economy
would hurt commodity producers through lower prices, but probably will not lead to a further
drop in investment in drilling and mining, which has already been crushed. At greater risk,
perhaps, are the fairly rich economies that supply China with half-finished or finished goods

Cimpeanu Lucian
Gr. 1005

Singapore, South Korea and Taiwanthough all have ample protection in the form of trade
surpluses and foreign-exchange reserves.
A second concern is interest-rate increases in America. So few of them are expected
that even a turn in a mildly hawkish direction by the Fed might give the dollar a lift. Countries
with biggish current-account deficits, such as Colombia and South Africa, or big stocks of
dollar debt, such as Chile, seem most vulnerable. Turkey is at risk on both counts, as well as
from political upheaval, which caused the lira to slump this week. Manoj Pradhan of Morgan
Stanley stresses a third potential pitfall: overly rapid credit growth. China, which has huge
and still-growing debts, is Exhibit A. Malaysia, Thailand and South Korea may also face
credit hangovers. They all have strong trade links with China, too.
Once these traps are taken into account, there are just a handful of emerging markets
to feel fairly sanguine about. Russia has already endured a deep recession. It has a cheap
currency, a current-account surplus and a capable central bank. Better yet, with inflation likely
to fade, interest rates there are expected to fall this year.
India is a net commodity importer; it is tied only loosely to Chinas economy; it has a
smallish trade deficit and credit has been slowing for years, even if its banks are weighted
down by souring corporate debts. Indonesia has similar merits. Mexicos economy has been a
let-down (in part because Americas economy also has), but it has fewer weak links than its
peers. It is testimony to the still parlous state of emerging markets that such lukewarm
investment cases are the best on offer.
http://www.economist.com/news/finance-and-economics/21698268-recovery-emerging-marketslooks-fragile-all-handful

Cimpeanu Lucian
Gr. 1005

Emerging markets
The article above discusses the prospects of recovery for emerging markets and the
effects of their political and economic links on their future possibilities of development. The
article starts from the premise the many of the current emerging markets have seen an
uplifting during recent years (starting from 2013).
The main reasons for their rise are pointed out from the very beginning of the
discussion. First of all, Chinas decline has been finally stabilized. While they faced a lack of
credibility in front of investors, Chinese authorities backed up their promises not to let the
economy slip through capital control and economic stimulus which led to a proper adjustment
in prices of raw material and raising exports. Secondly, we have to consider the slump in the
American dollar and the raise in the interest rates imposed by The Federal Reserve, which are
both reasons for investors to look in countries such as Brazil or Russia that offer high yields
on offer.
Even if the status quo looks promising for the emerging markets, critics consider it to
remain the case only for a relatively reduced period of time. First of all Chinas policies to
reduce the decline of their economy are only adding to their already huge debt. Moreover, the
cause of dollar devaluation was mostly caused by the trade deficit run by the American Gov.
in 2013, which led to The Fed being more reliable on foreign capital. Thus countries with
strong ties to these big world economies, may also suffer in the future. It is, however, well
pointed out that many of these agents have also great prospects for the future, by not having
strong links to the above mentioned facts. Therefore this article takes into account the
prospects for both cases.
On one hand, there might be countries suffering from the prospects of Chinese
economy shrinking further on. Due to the prospects of lower prices, investments in drilling
and mining were already crushed and producers of many other good may also withdraw. This
may negatively affect countries such as Singapore, South Korea and Taiwan that are important
suppliers of raw or half finished products for China. Moreover, if the American dollar gets a
lift, countries with dollar based debt, such as Chile or account deficits such as Colombia and
South Africa may also suffer from increased required payment. China, with its huge debt,
Malaysia or Thailand may also face a potential credit hangover.
On the other hand, we have Russia, which has already suffered a deep recession and
has cheap labor and weak currency. With inflation fading, the interest rates are also expected
to fall and its central bank looks capable to maintain the situation favorable. India and
Indonesia have a smallish trade deficit and credits have been slowing for a while. Mexico,
too, has a weak and economy, mostly due to Americas economy being in trouble, but has
fewer weak links than others.
All in all, emerging markets, such as Brazil, South Africa and Russia, look promising
for the time being. But their success is also cause by the mistakes or rise of the big world
economies. Those with tight links to them, may also suffer from the shift in the certain
policies, but the ones who are weakly linked to big powers, may remain of big interest for
foreign investors.