Emerging countries, to avoid the attack of the markets must hurry up with reforms

REPORT LOOMIS SAYLES & COMPANY - All countries must necessarily adapt to globalization 2.0 through a series of reforms - Those who choose not to do so, perhaps for electoral reasons, will have to face the attack of the markets, even if, from a general point of view, the economic health of emerging markets is much stronger than it was 15 years ago.

In what I termed “Globalization 1.0”, which began around 1998 after the crises in Mexico, Russia and Asia, emerging market currencies depreciated leading to an export boom and creating global growth in a virtuous circle.

But “Globalisation 2.0”, which began in 2008, has interrupted this process. Demand in the United States fell, as did US energy imports, and the level of international trade slowed.

All countries – both developed and emerging – must necessarily adapt to Globalization 2.0 through a series of reforms. Those countries that do not adapt will remain vulnerable and inevitably suffer from market volatility.

2014 is an election year in many emerging markets – among others Brazil, South Africa, Turkey, Indonesia. Few of the incumbent politicians intend to implement heavy reform packages that could jeopardize re-election. And the markets are punishing those who fail to reform.

Last week's news – a slowdown in China, steep devaluations in Argentina and Venezuela, chaos in Egypt, protests in Ukraine, terror alerts at the Olympic Games, steep declines in the currencies of South Africa and Turkey – give the general impression that the markets emerging markets are still in a state of crisis.

In this scenario, traders start selling and then see what happens next. Solid markets, where reforms have been initiated, such as Mexico, Russia and South Korea, have also been affected.

Much of this panic seems unwarranted. Compared to 1998, emerging markets hold more than $7.000 trillion more hard currency reserves to protect them from market volatility. For most emerging markets, today's problems are not like those of the mid-90s. Very few countries are close to default and those that can are relatively small.

Certainly some countries have difficulties – such as Argentina, Venezuela and Ukraine. But overall, the economic health of emerging markets is much more robust than it was 15 years ago.

The events of these days represent a wake-up call for some emerging governments: either the necessary reforms are implemented or they will have to face potential attacks from the markets.