Emerging markets aren’t what they used to be. Just look at the rise of companies from developing countries such as China’s Alibaba, India’s Bharti Airtel or Brazilian fintech Nubank, all basically unknown to foreign investors at the time of the last financial crisis. Something else has changed too, and for reasons that are not unrelated: emerging markets’ vulnerability to debt crises.
Not long ago, a war in the Gulf would have led global investors to dump bonds from developing countries en masse. Yet an old-fashioned debt crisis has not happened, and not for any lack of debt. The government borrowings of 62 emerging markets tracked by the Institute of International Finance have doubled, relative to their GDP, since 2008. The $35tn total is six times what it was then.
Yet large debts today are much less destabilising than smaller sums were in the past. In the 1990s, turmoil in Mexico, Asia and Russia spread quickly across the developing world. Now, the IMF finds that “risk-off” events have just a fifth of the impact on emerging markets’ borrowing costs, and a sixth of the effect on portfolio outflows, as they did before the 2008 crisis. The impact on exchange rates has, on average, evaporated entirely.