At a glance: Emerging markets: caught in a taper tantrum?

Transcript

Some emerging markets have been having a rough ride recently causing problems for businesses and investors.

Since May last year, when the Federal Reserve first raised the prospect of tapering its asset purchases, currencies in the Fragile 5 economies of Brazil, India, Indonesia, Turkey and South Africa have fallen by around 20% against the dollar.

However, we think tapering has been the catalyst, not the cause for the recent developments as it has exposed long-standing vulnerabilities.

The data shows that the external balances of the Fragile 5 have deteriorated over the past few years with current account deficits increasing by six percentage points.

A second area of weakness has been poor economic governance with little progress in reforming and opening up product markets and in building strong and independent institutions.

However, our focus on Malaysia shows that not all emerging markets are the same. In this edition we have taken a closer look at Malaysia where policymakers have been tackling their weaknesses head on by putting plans in place to reduce fiscal imbalances and reforming product markets by reducing subsidies for primary products.

Closer to home, the latest Eurozone flash estimates confirmed our view that a modest recovery is underway. But despite the recent pick-up the Eurozone recovery remains a tale of two halves Northern European economies like Germany are clearly bigger than their pre-crisis peaks but Southern European economies like Italy remain significantly smaller.

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:

  1. Economic growth in some emerging markets has become unbalanced. Since 2009, the current account deficits of the 5 most vulnerable emerging markets have grown by up to 6% of GDP.
  2. Failures to reform markets and build stronger institutions are contributing to volatility and uncertainty, damaging investment and future productive capacity.

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.

Chart of the month

Figure 1: An example of a successful emerging market, Malaysia scores highly on our ESCAPE index

Fig 1: An example of a successful emerging market, Malaysia scores highly on our ESCAPE index />