SINGAPORE (Oct 15): Emerging economies have faced a perfect storm in the past few months, and things are going to get worse. Currencies and asset prices have plunged, with Argentina and Turkey worst hit, but many other emerging economies are suffering collateral damage, even those whose policy and economic fundamentals have been good. There seem to be many causes for the difficulties the emerging economies are facing. Countries with external deficits have suffered the most, but political concerns have also escalated, especially in the Middle East and Venezuela. Both the International Monetary Fund and the World Bank have downgraded global growth prospects, while the IMF has also warned about rising risks of financial stresses. If this was not enough, oil prices have also spiked up.
What are the underlying forces causing the turmoil in emerging economies, will the troubles deepen, and how will our own region be impacted?
The deeper cause: tightening global financial conditions
Ten years of ultra-low interest rates and substantial liquidity injections encouraged substantial flows of capital into emerging economies. Their governments and companies borrowed heavily, quite often in US dollar-denominated loans. Money flowed into their bonds and equities as large global funds sought yields that were extraordinarily low in the developed economies in the wake of... (Click here to read the full story)