Worse Than 2008? Here's What the Emerging Market Numbers ShowBy and
Harvard’s Carmen Reinhart gives a downbeat assessment
Exposures and vulnerabilities vary from economy to economy
Harvard economist Carmen Reinhart turned heads this week with her comments on emerging markets, saying they’re in worse shape now than during the global financial crisis in 2008.
Her assessment comes at a time when investors are turning more cautious on the asset class -- and downright bearish on markets like Argentina, Indonesia and Turkey. But opinions differ on whether the recent turbulence is just a blip or the start of something bigger. The picture also varies from economy to economy, with some in better shape than others.
Below is a look at how some of the key emerging-market indicators have evolved since 2008.
Healthy current-account balances are the front line of defense for emerging markets. While the group boasted a big current-account surplus in 2008, it now has a small deficit -- in large part due to a significant drop in China’s surplus. But the picture isn’t uniform. Some countries, such as Thailand, are notable for their strong positive balances.
The world economy is enjoying its broadest upswing since 2011, and growth in emerging market and developing economies is tipped to accelerate further before leveling off over the next few years, according to the International Monetary Fund. That’s providing a buffer against headwinds such as rising interest rates, even if growth rates aren’t quite as high as they were on the eve of the global financial crisis.
Emerging-market governments have borrowed steadily over the past decade amid rock-bottom interest rates. Companies have also binged: U.S. dollar credit to non-bank borrowers in developing countries reached $3.7 trillion at the end of last year, up from $1.5 trillion a decade earlier, according to the Bank for International Settlements.
The JPMorgan Emerging Market Volatility Index, a measure of currency fluctuations, remains well below levels seen in 2008 despite pockets of turbulence in Argentina and Turkey. China’s yuan stands out for its stability over the past few months.
The MSCI Emerging Markets Index is trading around 12 times estimated earnings for the next 12 months. While slightly above the historical average, that’s not an extreme reading. The gauge fetched about 15 times projected earnings in 2007, before the following year’s market slump sent the ratio to just under 6.
Yields on emerging market dollar bonds are below their historical average, a sign that investor stress levels are still subdued. The current yield-to-worst reading on the Bloomberg Barclays EM USD Aggregate Index is about 5.6 percent, up from 4.5 percent at the beginning of the year. In 2008, the rate surged from 6.6 percent in January to a high of 14.3 percent in October as investors rushed for the exits.
It’s worth noting again that there’s a lot of variation within the emerging world, and that’s particularly true when it comes to foreign exchange reserves. While China has a massive stockpile, reserves in countries like Argentina and Indonesia are dwindling after their central banks intervened to defend their currencies.
|Country||YTD FX||Current Account||Reserves Cover||Reserves||Adequate Level|
|(%)||(% GDP)||(%)||($ Billion)||($ Billion)|
— With assistance by Tomoko Yamazaki, Masaki Kondo, and Ben Bartenstein