Macquarie: Emerging Markets Are Not Facing a 1997-Style Crisis—They're Facing Something Worse

"A far more painful and insidious process."

Are Emerging Markets Close to a Crisis?

If the 1997 Asian financial crisis was a heart attack for emerging markets, the current situation is akin to chronic cardiovascular disease, according to Macquarie analysts led by Viktor Shvets and Chetan Seth.

In 1997, speculative attacks against the Thai baht forced the country to float and devalue its currency in a move that was swiftly followed by the Philippines, Malaysia, Singapore, and Indonesia. Then came a massive decline in Hong Kong's stock market that led to losses in markets around the globe.

While parallels exist between 1997 and the current emerging market selloff (notably in the form of a stronger dollar, which makes it more expensive for emerging-market countries to finance their debts, plus lower commodity prices and slowing trade), the Macquarie analysts reckon the current situation might actually be worse.

Instead of sharp heart attack (a la 1997), it is far more likely that EM economies and markets would face an extended period that can be best described as a “chronic disease”, with limited (if any) cures or exits, punctuated by occasional significant flare-ups (short of an outright heart attack). In many ways it is likely to be a far more painful and insidious process. In the meantime, any signs of significant strain (either at a country or corporate level) could easily freeze up the emerging market universe. 

The crux of their argument is that despite the difficulties of 1997, its effects were mitigated by rising global leverage, liquidity, and trade shortly thereafter. This time around, those factors might not be there.

[A c]ombination of excessively loose monetary policies (particularly post 2000 bursting of dot-com bubble) and China’s integration into global trade systems has enabled both EMs and DMs to recover quickly. This does not describe the environment facing EMs and DMs over the next five to ten years. The combination of long-term structural shifts (primarily driven by the grinding deflationary progress of the Third Industrial Revolution, which first became apparent in early 1990s but matured into a global phenomenon over the last decade), is aggravated by the more recent impact of overleveraging and associated overcapacity.

The chart below takes into account such things as gross domestic product, external debt, and current account deficits in an attempt to identify which emerging-market countries might be most at risk from a prolonged slump.

Such countries as Turkey, South Africa, and Malaysia appear the most at risk on this basis, while China, the Philippines, and South Korea seem better positioned. Although Brazil and Russia score well on the chart, Macquarie argues that their low exposure to external debt could still be undermined by slumping commodities and slowing trade.


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