The Federal Reserve is still buying $85bn-worth of securities a month. But hints that the spree may soon slow down have put markets on edge – the more so the further they are from the US. The economic transformation in emerging countries, however, runs too deep to be undone by a mere market gale. If bad times lie ahead, the long-term horizon for most of them is bright.
There is ample bad news. The Indian rupee has lost another 2.5 per cent so far this week against the dollar and is at a record low. Indonesia’s rupiah is down 3.6 per cent; its stock market 9 per cent. The sell-off spans countries from Thailand to Turkey, South Africa and Brazil. A broad disaffection is becoming entrenched: equity funds have seen outflows in eight of the past 12 weeks; bond funds have been bleeding since May.
Worries that this presages a full-scale financial meltdown are premature. Although many emerging countries are experiencing credit bubbles caused by the rich world’s crisis management, the composition of capital flows is healthier than before the Asian financial crisis. On average more than half of inflows to emerging markets are equity capital, much of it direct investment. Many countries have big reserves or floating currencies with which to mitigate portfolio flow reversals – lessons learnt in Asia’s last crisis. Even India, with a large current account deficit, has a tolerable net asset position (but many other problems). Things look worse for countries on the European fringe, such as Turkey.