Emerging markets have been having a rough ride recently. While advanced economies have picked up speed, emerging markets have been slowing down, posing challenges for international investors and businesses.
Tapering is the catalyst…
Since May last year, when the Federal Reserve first raised the prospect of tapering its monthly asset purchases, currencies in the “Fragile 5” vulnerable economies (Brazil, India, Indonesia, Turkey and South Africa) have depreciated by around 20%. Brazil and Turkey have had to intervene to stabilise their currencies.
…but it’s not the cause
However, we think tapering has been the catalyst for, rather than the cause of, these developments as it has exposed some underlying vulnerabilities:
Not all emerging markets are made equally
Following a strong performance in our recent ESCAPE index (see Figure 1), we interview Patrick Tay from PwC Malaysia to understand why his country, with economic growth of around 5% and unemployment of just 3.4% at the end of 2013, is one of the emerging markets that is bucking the recent trend.
The economic recovery in the Eurozone is proceding
We think the situation in the Eurozone is looking increasingly positive: the latest set of GDP growth figures suggest that the recovery is bedding down across the region.
At the heart of the bloc, Germany grew by 0.4% in the 4th quarter and France by 0.3%, while Italy recorded positive growth (albeit only 0.1%) for the first time in over two years.
Although activity is picking up, economic performance is still quite different between the North (e.g. Germany) and the South (e.g. Spain, Italy).
High unemployment rates continue to restrain domestic demand in the southern economies as they seek to regain competitiveness. Businesses are also being hampered by higher interest rates than those enjoyed by similar companies elsewhere in the region.
Figure 1: An example of a successful emerging market, Malaysia scores highly on our ESCAPE index