More than a trillion dollars of investment flows has fled emerging markets over the past 18 months but the exodus may not even be halfway done, as once-booming economies appear trapped in a slow-bleeding cycle of weak growth and investment.
While developing economies are no stranger to financial crises, with several currency and debt cataclysms infecting all emerging markets in waves over recent decades, leaders gathering for this year’s World Economic Forum in Davos in the Swiss Alps are fearful that this episode is much harder to shake off.
“The global backdrop and the drivers for emerging markets are very different from 2001,” David Spegel, head of emerging markets at ICBC Standard Bank said.
“Back then all the stars were aligned for globalisation and emerging markets benefited the most. This time around, we just don’t have those multiple catalysts.”
The chief catalyst in 2001 was of course China. Its entry to the World Trade Organisation unleashed a decade-long export and investment miracle that propelled its economy from sixth place globally, to the world’s second biggest.
Its ascent hauled up much of the developing world. But its slowdown is whacking these countries equally hard.
The gloomy conclusion some are reaching is that the China effect was possibly a once-in-a-lifetime shift, whose effects are now dissipating forever.
One feature of the “golden years (2002-2007)” was the extraordinary amount of capital that poured into the developing world; according to the Washington DC-based Institute of International Finance net inflows in 2001-2011 totalled nearly $3 trillion.
Some of this is starting to reverse as last year saw the first net capital outflow since 1988, a $540 billion loss, says the IIF which predicts more flight in 2016.
Other forecasters such as JPMorgan reckon nearly a trillion dollars have fled China alone since mid-2014; its central bank reserves alone declined more than $500 billion last year.
There are some bright spots such as India and Mexico. But with China fears on the rise and Brazil and Russia in recession for the second straight year, investment returns across the sector are unlikely to recover soon, many fear.
The fear of large-scale outflows is clearly on policymakers’ minds. To combat such an exodus, emerging economies may have to resort to radical measures such as coordinated securities market interventions, of the kind done in the West after 2008, Mexican central bank head Agustin Carstens has suggested. Ultimately though he said that to boost long-term growth, there was only one solution – tough economic reform.
