Emerging markets: the great reckoning
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20th February 2014
As pessimism grows around emerging markets, how will Latin America fare?

Big mammals are hypersensitive, just like international investors. They behave like a herd. They instinctively respond to opportunities and danger. Investment banks are the interpreters, and often the source of the bursting bubble. For six years financial markets in developed countries were the sources of bad news. But now it is time for emerging markets to feel the impact of risk aversion.


There is a great deal of generalization in such movements. The MSCI index of emerging markets, for instance, includes countries as different as Egypt, Mexico, the Czech Republic, Qatar, South Korea and Greece. In order to avoid more superficiality, Wall Street frequently switches on the acronym-producing machine and points to the losers. The current falling stars are the so-called Fragile 5: Brazil, Indonesia, South Africa, India and Turkey, which were identified by Morgan Stanley as the most vulnerable due to their fiscal weaknesses.


A series of factors beyond the control of emerging markets generally result in aversion. This may include the resumption of economic growth in developed countries, the tapering of monetary stimulus in the United States, the much talked about slowdown in China, etc. All of these factors are being emphasized.


The rich countries are not doing that well. Even though the World Bank estimates that the US will grow by 2.8 percent this year, the euro zone will expand by only 1 percent, and Japan by 1.4 percent. Meanwhile, emerging markets will grow by 5.3 percent.


Between 2004 and 2006, emerging market countries accounted for 70 percent of world growth. Meanwhile, US base rates (Fed Funds) increased from 1 percent to 5.25 percent. Today they stand between 0 and 0.25 percent, and asset repurchases stand at $65 billion per month. Is the machine sucking liquidity out of the global system really that powerful?


When one talks about the nature of the Chinese landing, the sheer weight of the Asian dragon in the world must also be taken into account. Between 2004 and 2006, the Chinese economy grew 11.4 percent a year on average. Its GDP jumped from $2 trillion to $2.7 trillion. Its contribution to the global economy amounted to $700 billion.


Now, if China grows by 7 percent a year on average between 2014 and 2016, its GDP will rise from the current $9 trillion to $10.3 trillion. The net difference is almost twice as much as what China added to world GDP 10 years ago.


In terms of demand, China was importing $560 billion in 2004. This year it will import more than $2 trillion.


There is in fact a lot of “monkey see, monkey do” effect in the current conventional wisdom about emerging markets. Superficial reactions will fade. We will not have a remake of the old North-South divide. There will be nothing like a new fever gripping emerging markets, though. Following on from such an over-generalization, we should see a period of differentiation that will point to those emerging markets that have greater potential.


The focus will go beyond macro-economics. It will not be enough to compare the international liquidity scenario with the short-term fiscal situation in one country or another. The differential will be the choice of a political economy model that can deal with a scenario of global productive chains, a selection of trade and investment agreements and the race for innovation. How will Brazil and other Latin American economies fair in the coming emerging markets reckoning?

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