uploads///Risks Ahead for Emerging Markets

What Is the Outlook for Emerging Economies?


Aug. 26 2015, Published 3:43 p.m. ET

The road ahead for emerging economies

The path forward for countries heavily dependent on exports and commodity prices seems turbulent. Many central banks across continents have taken actionable decisions regarding monetary policies and currency pegging mechanisms. In times of increased competition and intertwined trade paradigms, invariant functional strategies can have the tendency to undermine growth. Also, the unwinding of the carry trade between Europe and emerging economies is leading to an outflow from developing countries to safer havens like the developed markets.

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Earlier, investors were borrowing at lower costs from Europe and putting it in high return developing nations. The falling value of the euro was an added beneficial factor giving rise to the carry trade. However, at the current stage, capitalists are taking money out and paying back the loans taken from European lenders, thus causing the euro to move upwards due to increased demand.

Risks going forward in other currencies

The Egyptian pound has been kept steady by Egypt’s central bank at levels of 7.73 per US dollar. The central bank’s strategy is to allow the currency to weaken in a controlled manner. Nigeria is following a similar strategy for its currency, the naira, which is also pegged to the US dollar. The manufacturing sectors of these economies are under pressure, as they might lose competitiveness if the respective currencies avoid devaluation against the US dollar.

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Over-reliance on a particular commodity or business sector has also led to increased risk in such tumultuous times. Considering declining oil prices throughout the globe, maintaining the peg with the US dollar can hurt the currencies of oil-exporting nations like the Saudi Arabian riyal and the UAE diham to the extent that they might go for de-pegging or devaluation of their domestic currency. The case in point here is the Kazakhstani tenge, which has lost approximately a quarter of its value in the two weeks between the close of August 7 and August 21.

On the other hand, UAE has diversified its risk well by not relying highly on its oil reserves and investing in other sectors like construction and tourism. The Hong Kong dollar, also pegged to the US dollar, faces risk from export competitiveness.

Impact on the market

Now we’ll look at ETFs in emerging economies between August 7 and August 21. The iShares MSCI Emerging Markets ETF (EEM) fell 9.77%. Similarly, the Vanguard FTSE Emerging Markets ETF (VWO) was down 9.80%.

Among major American depository receipts (or ADRs), South Korean LG Display (LPL) fell by 12.28%. Semiconductor manufacturers like Semiconductor Manufacturing (SMI) and Taiwan Semiconductor Manufacturing (TSM) fell during the period by 4.72% and 10.22%, respectively.


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