Emerging from the storm

Any belief that emerging markets are at all disconnected from downturns in the developed markets has likely been erased. As a number of major developed economies around the world slip into recession in 2009, growth forecasts for emerging markets are also showing a downward trend. Predictions from the International Monetary Fund (IMF), World Bank and the Asian Development Bank (ADB) suggest that there are difficult times ahead for emerging markets, with lower commodity prices and weakened demand for their exports being major contributing factors.

If there was any doubt about this, the IMF's announcement in October 2008 that it was creating a £61bn emergency fund to help emerging market economies through the financial turmoil is evidence that all is not rosy in developing markets. Emerging market economies of today, however, are likely better suited to weather an economic downturn than the emerging Asian economies following the Asian market crash of 1997, thanks to improved fiscal policies. In its World Economic Outlook published in October 2008, the IMF said that, in the mid 1990s, the main emerging economies were on the whole running current account deficits that left governments with no reserves to draw upon in difficult times.

Today, the economic situation for most countries is much different. Countries in emerging Asia are have been building up large current account surpluses, averaging around 5% of GDP according to IMF figures from 2007. This is compared to emerging Europe, where deficits in 2007 were sometimes approaching 10% of GDP.

The big question, then, is to what extent emerging markets will be affected by the economic problems coming from North America and Europe. With a number of the major emerging markets being reliant upon the export market for much of their gross domestic product (GDP), a reduction in demand for goods from developed countries is taking its toll and a slump in world commodity prices could spell trouble for countries that rely on the natural resources sector.

Emerging Asia

Growth across all of Asia is expected to wane in the coming year, with the Asian Development Bank predicting in September 2008 that growth for the region would be 7.5%, down from its estimate of 7.6% in April. For 2009 the outlook is for growth to fall even further, down to 7.2%.

Adding to the problems in the region is the prediction for increased inflation, fuelled partially by rising food and commodity prices, with the expectation that it will rise to 7.8% for 2008 from 4.3% last year, before retracting slightly to 6% in 2009.

This is a change from the last time Money Management covered emerging markets, in February 2000. Back then, Asia had only just rebounded from its crash in the late 1990s. For example, in 1998 it dropped to 2.3% from 6.1% the previous year, but by the end of 1999 it had clawed its way back, with the ADB predicting growth of 5.7% for 2000.

More importantly, fiscal reforms have helped to improve the financial affairs of various Asian economies. Claire Simmonds, client portfolio manager at JP Morgan, says that the emerging Asian economies have adopted better economic policies, floating foreign exchange rates, improved GDP growth and simultaneously increased real wages and disposable income. This has also resulted in greater demand for consumer goods and infrastructure, which creates further growth.