Asia | Funds Hub

Jan 26, 2012 10:51 EST

from Global Investing:

Emerging markets facing current account pain

Emerging markets may yet pay dearly for the sins of their richer cousins. While recent financial crises have been rooted in the United States and euro zone, analysts at Credit Agricole are questioning whether a full-fledged emerging markets crisis could be on the horizon, the first since the series of crashes from Argentina to Turkey over a decade ago. The concern stems from the worsening balance of payments picture across the developing world and the need to plug big funding shortfalls.

The above chart from Credit Agricole shows that as recently as 2006, the 34 big emerging economies ran a cumulative current account surplus of 5.2 percent of GDP. By end-2011 that had dwindled to 1.7 percent of GDP. More worrying yet is the position of "deficit" economies. The current account gap here has widened to 4 percent of GDP, more than double 2006 levels and the biggest since the 1980s. The difficulties are unlikely to disappear this year, Credit Agricole says, predicting India, Turkey, Morocco, Tunisia, Vietnam, Poland and Romania to run current account deficits of over 4 percent this year.

Some fiscally profligate countries such as India may have mainly themselves to blame for their plight. But in general, emerging nations after the Lehman crisis were forced to embark on massive spending to buck up domestic consumption and offset the collapse of Western export markets. For this reason, many were unable to raise interest rates or did so too late. As the woes of the Turkish lira and Indian rupee showed last year, the yawning funding gap leaves many countries horribly exposed to the vagaries of global risk appetite.

There are some supportive factors however. The Fed's signal this week that U.S. interest rates are unlikely to rise before 2014 shows that central banks in Europe and the United States will continue to gush money for now. So there should be enough cash available to plug the gaps in emerging nations' balance sheets. Second, as growth eases, so will the deficits. For these reasons, Credit Agricole says the market will be forgiving of large current account deficits this year. But it warned:

What will happen once (developed market) rates are raised is another story, and emerging markets would better have fixed their main imbalances when the global monetary normalisation begins.

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Oct 5, 2010 03:27 EDT

Cecilia Valente

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Sep 28, 2010 01:57 EDT

Joel Dimmock

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Mar 30, 2010 08:34 EDT

Claire Milhench

Don’t all rush at once

Currency managers nurture the view that emerging market central banks need to diversify their holdings away from the US dollar but so far there seems to have been little movement in this direction. Ousmene Mandeng, head of public investment advisory at emerging markets specialist Ashmore, notes that historically central banks act unilaterally to reallocate their reserves, especially when they are concerned about a possible impairment due to devaluation.

The problem for central banks with very large US dollar reserves – such as China – is the lack of a viable alternative reserve currency. “For the inertia to be overcome we will need a common framework so that countries can get out of the dollar in an orderly fashion,” Mandeng says.

If the dollar weakens in a secular manner over the next decade, this will hit several percentage points of GDP in countries where it accounts for a large proportion of central bank FX reserves. “That’s a considerable impairment of public wealth – no-one wants a disorderly unwinding or greater forex market volatility,” says Mandeng.

In the absence of a common framework, however, a disorderly unwinding is what we are looking at. Michael Power, chief strategist at Investec Asset Management, believes that smaller central banks like Singapore will look for every opportunity to move before China. “There is plenty of evidence that the secondary and tertiary central banks are jumping the queue if they can.”

Countries like Russia, Qatar, Indonesia, Singapore, India, Korea and Sri Lanka are all thought to be quietly diversifying from US dollars, trying to avoid telegraphing what they are doing. “Everyone realises that they are going to lose a little bit of money on the way but over the medium term everyone recognises that it is the prudent thing do,” Power says.

Don’t all rush at once, now.

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Feb 23, 2010 03:31 EST

Cecilia Valente