At first glance it may seem strange that markets are obsessed with current account deficits. After all, emerging markets ought to be running current account deficits and importing capital to finance investment and speed up economic convergence with richer countries.
The reason is that current account deficits can also be a sign of domestic imbalances or a misaligned nominal exchange rate. For example, for too long Indonesia maintained a quasi-peg with the US dollar which was inconsistent with the pace of domestic demand. The result was a steady widening of the current account deficit and an accompanying steady loss of reserves. Thus domestic imbalances beget external imbalances.
The medicine typically consists of demand restraint to restore internal equilibrium (usually via tighter monetary or fiscal policies or a combination of both) and a currency adjustment which restores external balance by improving export competitiveness and slowing the pace of imports.
Indonesia, India, Brazil, Turkey, and South Africa have all undertaken precisely these types of macroeconomic adjustment in the past few months, and last week’s data showed their efforts are beginning to bear fruit.
In all five cases, the imbalances were largely self-inflicted, but in all five adjustment also began before deficits could turn into structural issues such as unsustainable debt burdens, loss of import FX reserve cover, or other legacies resulting from protracted periods of economic mismanagement.
All five economies have policy instruments, considerable arsenals of reserves, and generally sound debt dynamics. And herein lies the difference between a standard macroeconomic adjustment and a crisis. When a developed economy is experiencing a cyclical slowdown it is called a ‘business cycle’. When the same thing happens in an emerging market it is called a ‘crisis’.
The release of fresh global manufacturing data at the end of September showed the upturn in global manufacturing that took root in the second quarter of 2013 is continuing at a moderate pace.
In emerging markets, the manufacturing cycle recorded its second consecutive expansion. Turkey’s PMI reading rose from 50.9 in August to 54 in September. In Asia, China’s PMI rose modestly, while the manufacturing-intensive countries of Taiwan and South Korea both recorded stronger improvements. In Indonesia, manufacturing moved into expansion (50.2) versus 48.5 expected, while Brazil’s services PMI moved from contraction (49.7) to expansion (50.7).
What then, should we read into PMI cycles? Manufacturing cycles mainly reflect random shocks to demand and supply, or simply inventory corrections necessitated by inaccurate estimates of future final demand by purchasing managers. This means that the current uptick in the global manufacturing cycle is best regarded as a gentle and welcome tailwind, but not a development that is likely to unleash material and sustained changes in the global macroeconomic environment.
Jan Dehn is head of research at Ashmore