Photo: Alvimann. Source: Morguefile
Two decades ago, emerging countries were facing economic pressure from a rising dollar, slowing domestic economies, and huge financing needs. The Asian Financial crisis caused local stock markets and currencies to plummet. There was massive economic hardship, with riots and political turmoil in Indonesia and the Philippines. Developed markets looked like they might catch the “Asian Contagion,” and our stock markets fell by 20% or more.
Is something similar happening now? Turkey, Ukraine, and Argentina have significant financing needs, and Venezuela is falling apart. China’s economy may be slowing – a factor for any economy that provides raw materials for their $10 trillion economy.
But the differences between now and 1997 are huge. Back then, the Asian Tigers, as we used to call them, had fixed exchange rates relative to the dollar. A rising dollar lifted their currencies, making their exports uncompetitive even as it raised their financing costs. Government borrowing in Thailand had grown from 100% of GDP to 180%. This simply wasn’t sustainable. Balance sheets can’t grow like that.
Emerging markets’ current challenges are nothing like this. Yes, they have difficulties. But for the most part, they’ve learned the lessons of 20 years ago. Their currencies aren’t fixed to the dollar of Euro. Their borrowing is mostly in their own local currencies. The countries with the most risk aren’t in one particular geographic zone, like Southeast Asia. Instead, they’re all over the map: South Asia, Latin America, Eastern Europe, the Middle East, and Africa.
I’m not saying that emerging markets don’t have issues. But for most, their problems are with their income, not their balance sheets. While their credit quality is at risk, they’re not all turning into junky credits – at least not yet. This is not a re-run of 1997 and 1998.
In a world where technology and consumer services are the focus, resource-based economies will follow – not lead – the rest of the world. They’ll get past these latest challenges due to their superior demographic and economic growth. It will just take some time.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”