At first Prof Krugman had a rather reassuring view on the INR weakness even concluding "So at first examination this doesn’t look like as big a deal as some headlines are suggesting". He also had a good explanation for the current weakness of em assets: "We more or less know the story here. First, advanced countries plunged
into a prolonged slump, leading to very low interest rates; capital
flooded into emerging markets, causing currency appreciation (or, in the
case of China, real appreciation via inflation). Then markets began to
realize that they had overshot, and hints of recovery in advanced
countries led to a rise in long-term rates, and down we went."
But here is a list of op-eds that are much less optimistic and that suggest further adjustments may be in the cards.
Back in July Trouble in emerging market paradise by Nouriel Roubini who concluded "These factors explain why
growth in most BRICS and many other emerging markets has slowed sharply.
Some factors are cyclical, but others – state capitalism, the risk of a
hard landing in China, the end of the commodity super-cycle – are more
structural. Thus, many emerging markets’ growth rates in the next decade
may be lower than in the last – as may the outsize returns that
investors realized from these economies’ financial assets (currencies,
equities, bonds, and commodities).
Of
course, some of the better-managed emerging-market economies will
continue to experience rapid growth and asset outperformance. But many
of the BRICS, along with some other emerging economies, may hit a thick
wall, with growth and financial markets taking a serious beating."
A bumpy ride for emerging markets from Laura Tyson with a key message "when the Fed tightens monetary policy to manage macroeconomic
conditions in the US, there are large unintended spillover effects on
capital flows to emerging markets". Though EM are nowadays better equipped to weather the storm than in the past she mentions "some countries are at risk, especially those with large current-account
deficits, large foreign capital inflows relative to the size of their
financial markets, and low foreign-exchange reserves. Among the most
vulnerable are Turkey, South Africa, Brazil, India, and Indonesia – a
group that Morgan Stanley researchers have dubbed the “Fragile Five.""
The end of the emerging market party from Ricardo Hausmann who concludes "The same dynamics that inflated the dollar value of GDP growth in the
good years for these countries will now work in the opposite direction:
stable or lower export prices will reduce real growth and cause their
currencies to stop appreciating or even weaken in real terms. No wonder
the party is over."
Danny Leipziger on Brazil's growth imperative which states: "Brazil has lost its swagger. Growth estimates for this year put Latin
America’s largest economy above only Venezuela and El Salvador in the
region, and the outlook for next year is not much better. Brazil’s
currency, the real, has fallen to its lowest level against the US dollar
in more than four years, compelling the government to pump billions of
dollars into the foreign-exchange futures market and raise interest
rates to deter capital outflows – just a few years after imposing a new
tax to deter inflows."
Abenomics for Asia by Yuriko Koike who concludes: "Sixteen years ago, the Asian financial crisis erupted, following the
Thai government’s decision to float the baht in the face of speculative
attacks. The response of governments to that crisis has shaped much of
the region’s economic policymaking ever since. If Asia is to avoid
another crisis on a similar scale, or lost decades of growth, its
governments will need to embrace the type of all-encompassing reforms
that Japan is undertaking. Abenomics, it seems, is for everyone."
The Global QE Exit crisis by Stephen S. Roach who concludes: "Where this stops, nobody knows. That was the case in Asia in the late 1990’s, as well as in the US in 2009. But, with more than a dozen major crises hitting the world economy since the early 1980’s, there is no mistaking the message: imbalances are not sustainable, regardless of how hard central banks try to duck the consequences. Developing economies are now feeling the full force of the Fed’s moment of reckoning. They are guilty of failing to face up to their own rebalancing during the heady days of the QE sugar high."
The Global QE Exit crisis by Stephen S. Roach who concludes: "Where this stops, nobody knows. That was the case in Asia in the late 1990’s, as well as in the US in 2009. But, with more than a dozen major crises hitting the world economy since the early 1980’s, there is no mistaking the message: imbalances are not sustainable, regardless of how hard central banks try to duck the consequences. Developing economies are now feeling the full force of the Fed’s moment of reckoning. They are guilty of failing to face up to their own rebalancing during the heady days of the QE sugar high."
And finally Brad DeLong commenting on Mrs Tyson's piece above sums it up nicely: "The fear is, as Rudy Dornbush used to put it, that India and other
emerging markets are right now not North Atlantic but rather South
American economies".
A case of multiple equilibria? One day half full and filling up and the next half empty and leaking fast.
A case of multiple equilibria? One day half full and filling up and the next half empty and leaking fast.
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