According to Andrew Grantham, senior economist at CIBC Capital Markets, point out that the recent cracks that are starting to be seen in emerging markets should be a concern for investors, not just from an exchange rate viewpoint but also a global growth standpoint.
Key Quotes:
“In recent years global growth has increasingly become dependent on emerging markets. Indeed, the ten largest emerging markets have driven more than 50% of growth in the global economy since 2010, with nearly 30% from China alone. That compares with only around one third during the previous cycle, and 17% from China. So the cracks that are starting to be seen in emerging markets should be a concern for investors, not just from an FX viewpoint but also a global growth standpoint.”
“The efforts made to stem FX depreciations and curb inflation among the most vulnerable emerging markets have their own depressing impact on growth. While interest rates in developed markets are still well below prior-cycle norms, recent rate hikes in countries such as Turkey and Argentina mean that, on average, interest rates in emerging markets are much higher than they were a year ago and closer in line with the pre-financial crisis average.”
“Not all emerging markets are at risk of a currency crisis. Many have stable governments and some have actually become less reliant on foreign inflows in recent years. However, slowdowns could also be seen in emerging market economies even without a currency crisis.”
“With concerns of over-investment in some countries, and with foreigners less willing to fund such projects, growth will slow in the years ahead. Only in a few cases (Mexico, India, the Philippines) has GDP growth held up even without a higher investment share.”
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