Economist. com Economist. com n FINANce ECONOMICS Emerging economies Coming into flower Oct 14th 2004 From The Economist print edition Growth in emerging economies is running at its fastest for at least three decades. Can the pace be maintained? International Monetary Fund expects"emerging market and developing countries"to grow by e THE old third world" is knocking spots off the rich world when it comes to economic growth 6.6% this year, the fastest pace for at least 30 years. Indeed, all of the 25 emerging economies tracked each week by The Economist are currently enjoying positive gDP growth for the first time since we launched our emerging-market indicators over a decade ago (see article). Even this year's laggard, South Africa, is growing at a reasonable rate of 2.5% In the past, as one region sprinted, another usually stumbled, but today rapid growth is more evenly spread across emerging economies. Asia and the former Soviet Union are both expected to see GDP increase by close to 8% this year. Latin America, central and eastern Europe, the Middle East and Africa are all tipped to grow by around 5%. Top of the league are Turkey and venezuela oth countries' GDP shot up by more than 13% in the year to the second quarter. China continues to grow at an annual rate of almost 10%. More surprising, given their history are the performances of India, Argentina and Russia, which all enjoyed gdp growth of 7% or more in the year to the second quarter. Emerging economies have been outpacing their richer brethren for a while: since 2000 they have grown two and a half times as fast as the developed world(see chart). The latest spurt is the result of several favourable factors. strong demand in America and China has m/Printer Friendly. cfm? Story ID=3292842
Emerging economies Coming into flower Oct 14th 2004 From The Economist print edition Growth in emerging economies is running at its fastest for at least three decades. Can the pace be maintained? THE old “third world” is knocking spots off the rich world when it comes to economic growth. The International Monetary Fund expects “emerging market and developing countries” to grow by 6.6% this year, the fastest pace for at least 30 years. Indeed, all of the 25 emerging economies tracked each week by The Economist are currently enjoying positive GDP growth for the first time since we launched our emerging-market indicators over a decade ago (see article). Even this year's laggard, South Africa, is growing at a reasonable rate of 2.5%. In the past, as one region sprinted, another usually stumbled, but today rapid growth is more evenly spread across emerging economies. Asia and the former Soviet Union are both expected to see GDP increase by close to 8% this year. Latin America, central and eastern Europe, the Middle East and Africa are all tipped to grow by around 5%. Top of the league are Turkey and Venezuela: both countries'GDP shot up by more than 13% in the year to the second quarter. China continues to grow at an annual rate of almost 10%. More surprising, given their history, are the performances of India, Argentina and Russia, which all enjoyed GDP growth of 7% or more in the year to the second quarter. Emerging economies have been outpacing their richer brethren for a while: since 2000 they have grown two and a half times as fast as the developed world (see chart). The latest spurt is the result of several favourable factors. Strong demand in America and China has Alamy Economist.com Page 1 of 3 http://www.economist.com/PrinterFriendly.cfm?Story_ID=3292842 10/22/2004
Economist com Page 2 of 3 boosted global trade and triggered a surge in commod rices:The Economists metals index is at a ten-year From budding to blooming high. This has been a fillip to raw-materials producers GDP growth, annual average such as Brazil, South Africa and Russia. Low global %2001-04 interest rates have also reduced debt service costs and the fall in the dollar has improved the competitiveness of Emerging economies those currencies, notably in Asia, that follow the CIST and Mongolia greenback Thanks in large part to higher commodity prices, even Middle East Africa's prospects are better than for many years. The Amca continent is also benefiting from a recovery in agricultur after severe droughts in 2003 and from greater polit/ o Latin America stability. The IMF forecasts growth of 5.8% in sub- Advanced economies Saharan Africa in 2005, which would be the highest rate in three decades. The fund admits however that its Emerging economies net borrowing from abroad forecasts have consistently overestimated African growth% of GDP because of political turmoil and natural disasters Emerging economies' improved health is not only due to favourable external factors. their basic financial health has also improved Structural reforms and sounder macroeconomic policies have made them more able to sustain strong growth and to withstand adverse external shocks ⊥⊥⊥⊥ ⊥⊥⊥⊥⊥⊥⊥ Thus inflation has been tamed and budget deficits have 1980 85 90 95 2000 03 been trimmed: emerging economies are, on average running much smaller deficits than rich countries .2004 forecast commonwealth of Independent States Sources: IMF: UB According to a recent study by UBS, a bank, emerging economies are less dependent on foreign capital than ever before. Collectively they have run a current-account surplus for six consecutive years, having been in deficit for most of the previous 20. Unlike previous debt-financed booms, which were often followed by financial crises, the current expansion has been financed largely by domestic saving allowing them to repay foreign debt. Emerging economies ratio of total foreign debt to exports of goods and services has dropped from 172% in 1998 to 93% this year; the ratio of debt-service costs to exports has fallen from 26% to 15%o. Foreign-exchange reserves have swollen to eight months import cover, compared with only five months worth just before the Asian crisis in 1997. Moreover, most emerging economies no longer have the unsustainable, fixed exchange rates that have contributed to past financial crises Officially, floating rates are now the norm. Many Asian countries do use foreign-exchange intervention to maintain informal pegs against the dollar but as a result their currencies are, if anything undervalued. In 1997, they were grossly overvalued If emerging economies are doing so splendidly why arent their stockmarkets racing? Morgan tanley Capital Internationals emerging-market index has risen by a modest 7% this year in 1994 peak. Many investors who got their fingers burnt in the Mexican, Asian, Russian ano w the dollar terms. Latin American shares have enjoyed strong gains, but several Asian markets, notabl China and India, have actually fallen Today share prices remain, on average, 20% belor Argentine crises remain understandably wary Yet many of those markets currently look like a bargain. The Bank Credit Analyst, a Canadian investment-research firm, calculates that the average price-earnings ratio for emerging-market m/Printer Friendly. cfm? Story ID=3292842
boosted global trade and triggered a surge in commodity prices: The Economist's metals index is at a ten-year high. This has been a fillip to raw-materials producers, such as Brazil, South Africa and Russia. Low global interest rates have also reduced debt-service costs, and the fall in the dollar has improved the competitiveness of those currencies, notably in Asia, that follow the greenback. Thanks in large part to higher commodity prices, even Africa's prospects are better than for many years. The continent is also benefiting from a recovery in agriculture after severe droughts in 2003 and from greater political stability. The IMF forecasts growth of 5.8% in subSaharan Africa in 2005, which would be the highest rate in three decades. The Fund admits, however, that its forecasts have consistently overestimated African growth because of political turmoil and natural disasters. Emerging economies' improved health is not only due to favourable external factors. Their basic financial health has also improved. Structural reforms and sounder macroeconomic policies have made them more able to sustain strong growth and to withstand adverse external shocks. Thus inflation has been tamed and budget deficits have been trimmed: emerging economies are, on average, running much smaller deficits than rich countries. According to a recent study by UBS, a bank, emerging economies are less dependent on foreign capital than ever before. Collectively, they have run a current-account surplus for six consecutive years, having been in deficit for most of the previous 20. Unlike previous debt-financed booms, which were often followed by financial crises, the current expansion has been financed largely by domestic saving, allowing them to repay foreign debt. Emerging economies' ratio of total foreign debt to exports of goods and services has dropped from 172% in 1998 to 93% this year; the ratio of debt-service costs to exports has fallen from 26% to 15%. Foreign-exchange reserves have swollen to eight months' import cover, compared with only five months' worth just before the Asian crisis in 1997. Moreover, most emerging economies no longer have the unsustainable, fixed exchange rates that have contributed to past financial crises. Officially, floating rates are now the norm. Many Asian countries do use foreign-exchange intervention to maintain informal pegs against the dollar, but as a result their currencies are, if anything, undervalued. In 1997, they were grossly overvalued. If emerging economies are doing so splendidly, why aren't their stockmarkets racing? Morgan Stanley Capital International's emerging-market index has risen by a modest 7% this year in dollar terms. Latin American shares have enjoyed strong gains, but several Asian markets, notably in China and India, have actually fallen. Today share prices remain, on average, 20% below their 1994 peak. Many investors who got their fingers burnt in the Mexican, Asian, Russian and Argentine crises remain understandably wary. Yet many of those markets currently look like a bargain. The Bank Credit Analyst, a Canadian investment-research firm, calculates that the average price-earnings ratio for emerging-market Economist.com Page 2 of 3 http://www.economist.com/PrinterFriendly.cfm?Story_ID=3292842 10/22/2004
Economist com Page 3 of 3 equities(based on forecast profits for the next 12 months)is only eight the lowest on record and 40% below the ten-year average. The equivalent ratio for American shares is 17. Of course, shares in emerging markets should be cheaper because their prices are more volatile. However more stable economic fundamentals have made these stockmarkets less bumpy than they were There's always a but Despite all this, there are lots of risks that might trip up emerging economies. a slump in demand in America or China and a consequent fall in commodity prices is one possibility. a further rise in oil prices is another. a sharp rise in global interest rates is a third. However some of the risks offset one another. For example, weaker demand in america would mean lower interest rates Or suppose China's investment boom turns to bust: then global oil prices should fall. so although countries would see their exports to China falter, they would pay less for fuel imports Higher oil prices are clearly squeezing oil importers, but Jonathan Anderson, the chief Asia economist at UBS, argues that their effect tends to be exaggerated It is commonly argued that higher prices hurt emerging economies more than developed economies because poorer countries exchange rates. However, this version of GDP understates the true size of emerging economes c are more oil-intensive. Indeed their oil consumption is higher relative to gDP measured at marke elative to rich ones because non-traded goods and services are much cheaper in poorer countries. Once this is taken into account, says Mr Anderson, Asia's oil intensity is roughly the same as Americas In any case, sounder policies and current-account surpluses mean that many emerging economies are better placed than in the past to withstand an oil-price shock. Some are in better shape than thers though Latin American and central and eastern European economies still look more vulnerable than Asia. Brazil, for instance, despite its first current-account surplus in a decade still has a huge foreign debt and its exchange rate looks overvalued. any fall in the real against the dollar would inflate the cost of servicing its floating-rate, dollar-denominated debt Emerging European economies have the least healthy external position. Hungary's frighteningly large current-account deficit, of 9% of GDP, and its reliance on short-term capital inflows are ringing alarm bells. The Czech Republic and Turkey also have big current-account deficits. In contrast, the surge in oil and commodity prices has brought Russia a current-account surplus of 8% of gDP There are almost certain to be more troubles in emerging markets over the coming years. But from the promising buds, fine flowers may blossom Copyright o 2004 The Economist Newspaper and The Economist Group. All rights reserved m/Printer Friendly. cfm? Story ID=3292842
equities (based on forecast profits for the next 12 months) is only eight, the lowest on record and 40% below the ten-year average. The equivalent ratio for American shares is 17. Of course, shares in emerging markets should be cheaper because their prices are more volatile. However, more stable economic fundamentals have made these stockmarkets less bumpy than they were. There's always a but Despite all this, there are lots of risks that might trip up emerging economies. A slump in demand in America or China and a consequent fall in commodity prices is one possibility. A further rise in oil prices is another. A sharp rise in global interest rates is a third. However, some of the risks offset one another. For example, weaker demand in America would mean lower interest rates. Or suppose China's investment boom turns to bust: then global oil prices should fall. So although countries would see their exports to China falter, they would pay less for fuel imports. Higher oil prices are clearly squeezing oil importers, but Jonathan Anderson, the chief Asia economist at UBS, argues that their effect tends to be exaggerated. It is commonly argued that higher prices hurt emerging economies more than developed economies because poorer countries are more oil-intensive. Indeed, their oil consumption is higher relative to GDP measured at market exchange rates. However, this version of GDP understates the true size of emerging economies relative to rich ones, because non-traded goods and services are much cheaper in poorer countries. Once this is taken into account, says Mr Anderson, Asia's oil intensity is roughly the same as America's. In any case, sounder policies and current-account surpluses mean that many emerging economies are better placed than in the past to withstand an oil-price shock. Some are in better shape than others, though. Latin American and central and eastern European economies still look more vulnerable than Asia. Brazil, for instance, despite its first current-account surplus in a decade, still has a huge foreign debt, and its exchange rate looks overvalued. Any fall in the real against the dollar would inflate the cost of servicing its floating-rate, dollar-denominated debt. Emerging European economies have the least healthy external position. Hungary's frighteningly large current-account deficit, of 9% of GDP, and its reliance on short-term capital inflows are ringing alarm bells. The Czech Republic and Turkey also have big current-account deficits. In contrast, the surge in oil and commodity prices has brought Russia a current-account surplus of 8% of GDP. There are almost certain to be more troubles in emerging markets over the coming years. But from the promising buds, fine flowers may blossom. Copyright © 2004 The Economist Newspaper and The Economist Group. All rights reserved. Economist.com Page 3 of 3 http://www.economist.com/PrinterFriendly.cfm?Story_ID=3292842 10/22/2004