Emerging economies
Coming into flower
Oct 14th 2004
From The Economist print edition
Growth in emerging economies is running at its fastest for at least three decades,Can
the pace be maintained?
THE old,third world” is knocking spots off the rich world when it comes to economic growth,The
International Monetary Fund expects,emerging market and developing countries” to grow by
6.6% this year,the fastest pace for at least 30 years,Indeed,all of the 25 emerging economies
tracked each week by The Economist are currently enjoying positive GDP growth for the first time
since we launched our emerging-market indicators over a decade ago (see article),Even this
year's laggard,South Africa,is growing at a reasonable rate of 2.5%,
In the past,as one region sprinted,another usually stumbled,but today rapid growth is more
evenly spread across emerging economies,Asia and the former Soviet Union are both expected to
see GDP increase by close to 8% this year,Latin America,central and eastern Europe,the Middle
East and Africa are all tipped to grow by around 5%,Top of the league are Turkey and Venezuela,
both countries'GDP shot up by more than 13% in the year to the second quarter,China continues
to grow at an annual rate of almost 10%,More surprising,given their history,are the
performances of India,Argentina and Russia,which all enjoyed GDP growth of 7% or more in the
year to the second quarter,
Emerging economies have been outpacing their richer
brethren for a while,since 2000 they have grown two
and a half times as fast as the developed world (see
chart),The latest spurt is the result of several favourable
factors,Strong demand in America and China has
Alamy
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boosted global trade and triggered a surge in commodity
prices,The Economist's metals index is at a ten-year
high,This has been a fillip to raw-materials producers,
such as Brazil,South Africa and Russia,Low global
interest rates have also reduced debt-service costs,and
the fall in the dollar has improved the competitiveness of
those currencies,notably in Asia,that follow the
greenback,
Thanks in large part to higher commodity prices,even
Africa's prospects are better than for many years,The
continent is also benefiting from a recovery in agriculture
after severe droughts in 2003 and from greater political
stability,The IMF forecasts growth of 5.8% in sub-
Saharan Africa in 2005,which would be the highest rate
in three decades,The Fund admits,however,that its
forecasts have consistently overestimated African growth
because of political turmoil and natural disasters,
Emerging economies' improved health is not only due to
favourable external factors,Their basic financial health
has also improved,Structural reforms and sounder
macroeconomic policies have made them more able to
sustain strong growth and to withstand adverse external
shocks,
Thus inflation has been tamed and budget deficits have
been trimmed,emerging economies are,on average,
running much smaller deficits than rich countries,
According to a recent study by UBS,a bank,emerging
economies are less dependent on foreign capital than
ever before,Collectively,they have run a current-account surplus for six consecutive years,
having been in deficit for most of the previous 20,Unlike previous debt-financed booms,which
were often followed by financial crises,the current expansion has been financed largely by
domestic saving,allowing them to repay foreign debt,
Emerging economies' ratio of total foreign debt to exports of goods and services has dropped from
172% in 1998 to 93% this year; the ratio of debt-service costs to exports has fallen from 26% to
15%,Foreign-exchange reserves have swollen to eight months' import cover,compared with only
five months' worth just before the Asian crisis in 1997,Moreover,most emerging economies no
longer have the unsustainable,fixed exchange rates that have contributed to past financial crises,
Officially,floating rates are now the norm,Many Asian countries do use foreign-exchange
intervention to maintain informal pegs against the dollar,but as a result their currencies are,if
anything,undervalued,In 1997,they were grossly overvalued,
If emerging economies are doing so splendidly,why aren't their stockmarkets racing? Morgan
Stanley Capital International's emerging-market index has risen by a modest 7% this year in
dollar terms,Latin American shares have enjoyed strong gains,but several Asian markets,notably
in China and India,have actually fallen,Today share prices remain,on average,20% below their
1994 peak,Many investors who got their fingers burnt in the Mexican,Asian,Russian and
Argentine crises remain understandably wary,
Yet many of those markets currently look like a bargain,The Bank Credit Analyst,a Canadian
investment-research firm,calculates that the average price-earnings ratio for emerging-market
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equities (based on forecast profits for the next 12 months) is only eight,the lowest on record and
40% below the ten-year average,The equivalent ratio for American shares is 17,Of course,
shares in emerging markets should be cheaper because their prices are more volatile,However,
more stable economic fundamentals have made these stockmarkets less bumpy than they were,
There's always a but
Despite all this,there are lots of risks that might trip up emerging economies,A slump in demand
in America or China and a consequent fall in commodity prices is one possibility,A further rise in
oil prices is another,A sharp rise in global interest rates is a third,However,some of the risks
offset one another,For example,weaker demand in America would mean lower interest rates,Or
suppose China's investment boom turns to bust,then global oil prices should fall,So although
countries would see their exports to China falter,they would pay less for fuel imports,
Higher oil prices are clearly squeezing oil importers,but Jonathan Anderson,the chief Asia
economist at UBS,argues that their effect tends to be exaggerated,It is commonly argued that
higher prices hurt emerging economies more than developed economies because poorer countries
are more oil-intensive,Indeed,their oil consumption is higher relative to GDP measured at market
exchange rates,However,this version of GDP understates the true size of emerging economies
relative to rich ones,because non-traded goods and services are much cheaper in poorer
countries,Once this is taken into account,says Mr Anderson,Asia's oil intensity is roughly the
same as America's,
In any case,sounder policies and current-account surpluses mean that many emerging economies
are better placed than in the past to withstand an oil-price shock,Some are in better shape than
others,though,Latin American and central and eastern European economies still look more
vulnerable than Asia,Brazil,for instance,despite its first current-account surplus in a decade,still
has a huge foreign debt,and its exchange rate looks overvalued,Any fall in the real against the
dollar would inflate the cost of servicing its floating-rate,dollar-denominated debt,
Emerging European economies have the least healthy external position,Hungary's frighteningly
large current-account deficit,of 9% of GDP,and its reliance on short-term capital inflows are
ringing alarm bells,The Czech Republic and Turkey also have big current-account deficits,In
contrast,the surge in oil and commodity prices has brought Russia a current-account surplus of
8% of GDP,
There are almost certain to be more troubles in emerging markets over the coming years,But
from the promising buds,fine flowers may blossom,
Copyright? 2004 The Economist Newspaper and The Economist Group,All rights reserved,
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