Can Emerging Market Economies Pull Out of Nose Dive?

Signs of financial trouble in emerging markets appear when investors take their money and leave. A slowing economy in China has caused the country to reduce the number of commodities that it usually purchases. The glut of oil on the world market has significantly hurt exporters in emerging markets.

Understanding the Scope of Capital Outflow

CNN Money reports that investors have withdrawn approximately one trillion dollars from emerging markets since mid-2014. After sinking about two trillion dollars into the markets in the five years after 2008, investors realized the need to reverse the trend. Russia saw more than $52 billion leave in the first six months of 2015, in addition to the $150 billion that departed the year before. Brazil watched as investors reclaimed $48 billion in the first half of the year. China did not make statistics on its losses available, but economists know that the country experienced similar losses. However, the government’s decision to devalue the yuan led Chinese firms to repay foreign debt, increasing capital outflow.

Setting the Stage for Recovery

Sluggish growth in emerging markets slows global economic advances, but economists expect a slight uptick in the world economy from the 2.4 percent in 2015 to 2.9 percent in 2016. Global growth suffered from capital outflows, low volume of trade, financial volatility and falling commodity prices in emerging markets last year. However, developing economies may expand by as much as 4.8 percent while Brazil, China and Russia remain in recession in 2016.

Considering Regional Outlooks

The World Bank expects economic conditions to improve in several regions of the world. Sub-Saharan Africa may grow from a modest 3.4 percent in 2015 to 4.2 percent in 2016 as commodity prices achieve stability. Levels of economic activity may vary across the region, with Nigeria faring a little better and South Africa considerably worse. South Asia may have some basis for optimism, with growth in India reaching 7.8 percent as the region’s dominant economy.

In the Middle East and North Africa, growth may accelerate to 5.1 percent, a notable increase from the 2.5 percent in 2015. Iran’s relief from economic sanctions may allow it to have some influence on the region. A continuing decline in the price of oil and the risk of conflict may affect economic recovery. A stabilization of the price of oil may allow the rate of growth to increase to 3.0 percent in Europe and Central Asia. Russia’s economy may contract by 0.7 percent after suffering a decrease of 3.8 percent in 2015.

Countries that may experience modest economic gains include Central Asia, South Caucasus and Eastern Europe. Moderate growth may occur in the western area of the region. In East Asia and the Pacific, growth may continue to slow. Growth in Viet Nam in 2015, as well as Thailand’s moderate recovery, may offset weaker growth in commodities. Economists expect China to continue to experience a modest decline.

Looking for an Upswing

A lessening of strong headwinds in emerging markets may create an opportunity for modest growth, according to Barron’s. Commodity prices that have fallen since 2011 with an increase in the rate of decline in 2015 may create a less significant negative impact in 2016. Global trade may increase with a rebound in global manufacturing. Nonetheless, Barron’s cautions that risks still exist.

Acknowledging Stumbling Blocks

The anticipated effect of hikes in interest rates by the Federal Reserve System may generate capital outflows that result in a continuation of financial tightening in emerging markets. The high level of private debt since 2008 creates a concern among economists. Debt seems to center in emerging Asia, Brazil, Turkey and Chile. The concentration of debt with rising interest rates may curb growth and depress demand. However, global growth may show an upswing that is better than economists expect if it finds support in an increase in exports or commodity prices.

Bloomberg points to a lack of enthusiasm among European investors who rely on developing nations for income-producing products. Bullish prospects for improvement in emerging markets have diminished. Concerns about the status of China’s economy and the decline in the value of emerging market currencies create a drag on global growth. For more information regarding this topic, visit us at the Personal Money Store.

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