Photographer: Dimas Ardian/Bloomberg

Emerging Markets May Have Squandered the Rock-Bottom Rates Era

  • Cheap borrowing costs not used to ramp up investment, IIF says
  • Growth shifted toward consumption, which tends to be weaker

You don’t know what you’ve got til it’s gone.

That’s the message for emerging markets, which have missed the opportunities thrown up by the period of historically low global interests that now appears to be coming to an end, according to the Institute of International Finance, a Washington-based non-profit that advises banks and hedge funds

In a report Thursday -- just as anxiety over the shift to tightening really started to take hold -- Robin Brooks and Jonathan Fortun at the IIF said developing nations failed to take advantage of low borrowing costs to really ramp up investment.

“Low rates should have been a boon to emerging markets, allowing them to invest to deepen their capital base and boost infrastructure,” they wrote. “The composition of growth should therefore have become more investment-heavy.”

The investment intensity of growth in developing markets has actually fallen almost across the board, according to the IIF. In some cases, the measure waned, while consumption intensity rose, which is a a less favorable formula for growth in an environment of normalizing interest rates.

Read more: Dalio Calls End of Central Bank Era, Time to Head to Party Exit

In their study, Brooks and Fortun compared the 2011-2016 period with 2002-2007 -- a time of strong economic expansion and higher rates. They found consumption intensity, defined as the growth contribution from consumption divided by overall growth, had grown to become more important than investment in many economies.

In Asia, China’s pivot toward a more consumption-driven economy, away from old industrial drivers, may have had an effect on the region, influencing a re-balancing from investment to consumption in India.

Such a shift could have “important implications,” says the IIF. In March 2017, the Bank for International Settlements’s quarterly review said consumption-led expansion tends to be significantly weaker than a broader-based growth.

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