Remember the '90s? Emerging markets then and now

April 14, 2015


Part of Vanguard's Global Macro Matters research series

Understanding the current—and potentially future—state of the global economy helps investors put market movements into context. To promote that understanding, researchers from Vanguard's Investment Strategy Group examine the economic trends that impact the investing environment in this new series. Below is their latest insights into Global Macro Matters.

Macroeconomic conditions today are similar to those of the 1990s . . .

Two headwinds to emerging market growth—lower commodity prices and the relative strength of the U.S. dollar—are evoking comparisons between emerging market crises of the 1990s and the current situation.

Given today's diverging global central bank policies, an environment of falling commodity prices and a rising U.S. dollar may persist for the foreseeable future. Although these factors play a major role in emerging markets' growth, the growth outlook also depends upon individual emerging countries' unique characteristics and changes that have occurred in each since the 1990s crises.

. . . and some concern is warranted

Since June 2014, the U.S. dollar has appreciated 17%, while commodity prices (ex-energy) have fallen –15% (as of February 28, 2015). Although concerning, the growth implications for specific emerging markets can differ based on many factors.

The relative strength of the U.S. dollar is generally a negative for economies that are reliant on international dollars to fund their domestic credit markets and to finance imports. Economies such as South Africa and Brazil that run current-account deficits are more vulnerable in a period of sustained USD appreciation than nations less dependent on foreign financing, such as China.

Similarly, weak commodity prices have been detrimental to many emerging markets, especially for exporters that are less diversified. In Russia, a fall in commodity prices can inhibit real GDP growth more than in India, a nation less dependent on commodity exports.

But fundamentals don't suggest 1990s-style crises

Appreciation in the dollar and falling commodity prices provided the backdrop for financial crises in several emerging economies in the 1990s. In that environment, central banks' ability to defend local currencies was tested, and many countries were forced to break their hard-currency pegs.

Since then, emerging markets have improved their monetary and financial structures. Notable positives include a buildup of foreign exchange reserves and use of floating currencies, which increase countries' ability to withstand market stress and to avoid currency runs.

Most emerging countries now have lower sovereign debt to GDP ratios than during the crises of the 1990s. For nations that increased their debt load, this generally reflects a maturation of domestic financial markets and better access to local-currency funding by the private sector.

Nevertheless, headwinds of lower export growth in many emerging market economies should be expected to persist for a time, even if commodity prices and the U.S. dollar stabilize. The biggest factor is China's ongoing slowdown, which arguably represents the largest downside risk to emerging market performance.


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