All is not well in the world of emerging markets. For the third time in little over a year, the asset class has been shaken by rapid falls in currencies and equity prices. The “taper tantrum” – the reaction to a promised rise in US interest rates – has returned.
After a decade of fast and sometimes spectacular economic growth, and remarkable resilience during the global financial crisis, is this the end of the party? And when the Federal Reserve starts to take away the punchbowl of easy credit and ample external financing, will emerging markets suffer the symptoms of acute liquidity withdrawal? In reality the festivities have been winding down for a while. While advanced economies, particularly in Europe and Japan, have been suffering their well-advertised travails over the past couple of years, emerging market growth has underperformed expectations. Forecasts by the International Monetary Fund and others have been ratcheted down repeatedly.
This is saddening because the signs were that better macroeconomic policy had prepared many emerging markets well for the financial crisis. With ample foreign exchange reserves and strengthened monetary authority credibility, many were able to ride the crisis fairly well.