Academic journal article ABA Banking Journal

How Serious Is the Downturn in the Emerging Markets?

Academic journal article ABA Banking Journal

How Serious Is the Downturn in the Emerging Markets?

Article excerpt

Suddenly the tables have turned. Advanced countries are showing signs of life, while emerging markets are struggling and revealing signs of financial distress. Recent turmoil in emerging-market equities, currencies, and bond markets have drawn comparisons to the 1997-1998 Asian financial crisis and the Latin American debt crisis of the early 1980s. Certainly there are challenges ahead for emerging-market economies as they adjust to tighter monetary policies in the United States, but outside of a few trouble spots like India, the comparisons to past crises remain superficial and we do not see the emerging-market financial tremors intensifying into a full-blown, global financial earthquake.

At first blush, the financial carnage for emerging markets has been shocking, especially in comparison to the performance of the advanced economies. Brazil's, Turkey's, and Chile's equity markets have all dropped more than 15% year-to-date, and declines have accelerated in the wake of Fed Chairman Ben Bernanke's May 22 announcement that the Federal Reserve could begin to taper monthly asset purchases by the end of the year. In comparison, U.S. equities are up 16% year-to-date, and even the Eurozone markets have fared far better.

But before anyone starts throwing around terms like emerging-markets crisis, let's take a little walk down memory lane. During the Asian financial crisis, for example, South Korea's stock market index plunged 65% from its peak to its lowest point in a little over a year's time. South Korea this time around has dropped a mere 5.6% year-to-date.

The biggest concern centers around countries with the largest current account deficits, especially if they don't have a lot of currency reserves to ward off a speculative run on their currency. Turkey, South Africa, India, and Chile are running some of the highest current account deficits in the developing world at the moment. India's case is especially troubling. India's foreign exchange reserves have dropped to around $278 billion, the lowest among the BRIC countries and less than seven months of import coverage. …

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