Every day is a debacle, comments Les Echos bitterly. The French newspaper thus summarizes the bitterness of investors for the domino effect that is hitting emerging countries, the new promises of the economy that today seem to have to pay for more than one problem. The climate of disappointment, which has been pervading for some time now, is made up of contradictions: today, on the same day in which all the indices of emerging markets are positive, the International Monetary Fund declares that emerging economies are too vulnerable, due to the tightening of conditions of US monetary policy.
The specter of the 30s – punctuated by the Mexican, Asian, Russian and Latin American crises – is haunting markets around the world. Investors, attracted by the high yields of recent years, are now on the run. Capital outflows from industrializing nations are equaling the $2012 billion that arrived after the summer of 13. Since the beginning of the year, emerging market stocks have overall lost more than 11 percent, according to MSCI indices, while those of the old (sometimes obsolete) economic powers gained 25 points. The Bombay Stock Exchange collapsed by 28 percent, that of Sao Paulo by about 27, that of Istanbul by XNUMX. And currencies also ended up in free fall, with the Indian rupee in the lead.
After the announcements of the US Federal Reserve, which intends to reduce its liquidity injections, the Syrian crisis has given the coup de grace. The prospect of Western intervention in Damascus and instability in the region increases the risk too much and actually entails a return of capital to safer shores. A shock that many countries - especially India and Turkey - may not be able to deal with due to lack of means.
The problem is the fragility of emerging economies. “We are seeing the illusions we had been shattering,” Bruno Cavalier, chief economist at Oddo Securities, told Les Echos. “By dint of paying attention to the difficulties of Europe and the United States – continues Cavalier – investors have forgotten the critical issues of emerging countries. These have remained dependent on the demand of developed economies and have never reformed their growth model”.
Waking up was painful. “The Brazilian and Indian economies have such deep-rooted structural handicaps that it is difficult to understand why investors have become so excited in recent years,” comments fund manager Stephen Gen. According to the expert, if a currency crisis hits emerging markets, rupee and real will risk going the way of the Thai bah, which collapsed with the great Asian financial crisis of 1997.
However, there still don't seem to be all the ingredients for a crisis like that of the XNUMXs. “Today many emerging countries have floating exchange rates – explains Cavalier to the French newspaper – so they are not forced to defend the value of their currency at all costs, as in the past. Furthermore, their external debt has decreased in recent years and this reduces the risk of insolvency linked to the collapse of currencies”.
To recover – or at least to try to do so – emerging markets will have to restore their credibility and carry forward the reforms that propelled them during the boom years, marked by more than abundant liquidity. In doing so, concludes Les Echos, they will have to rely on their already very active central banks and expect nothing from the Fed.
