Risks outweigh opportunities for emerging markets in 2014. Their growth is set to average 4.6%, down from the recent peak of 7.4% in 2010. Major emerging markets in particular – Brazil, Russia, India, China, Indonesia, Mexico and Turkey – have all seen their growth prospects revised downwards since January.
Downside Risks Abound
The key risks for emerging markets in the second half of 2014 are:
- Geopolitical risks – for instance tensions in Ukraine, ISIS in Iraq and the continued civil war in Syria. These have important risks for both specific countries – Russia and Ukraine, Turkey and Iraq for example, but also have wider ramifications and potential flow-on effects from trade linkages, commodity price rises and general contagion effects from the instability.
- The China slowdown – China is a major trade partner of many emerging and developing markets. A significant lowering of demand will have an impact on those countries heavily reliant on China as an export market.
Top 20 China-Dependent Emerging and Developing Exporters: 2013
Source: International Monetary Fund (IMF), Direction of Trade Statistics
- For commodity exporters, a key risk is stable or declining prices. Particularly for those who have seen a large part of their success based on high and rising commodity prices. With those whose main export market is China particularly exposed. Chile is a good case in point with metalliferous ores accounting for 26.7% of export revenues and exports to China accounting for 23.2% of total exports.
- As well as being a positive factor, the recovery in developed economies is leading to tighter monetary conditions. This is a particular risk for those relying on external financing – especially short-term, easily reversible, funds such as portfolio inflows – as opposed to something more enduring such as foreign direct investment. Turkey is a key example here. As a rough rule of thumb, those running a large current account deficit are most vulnerable – although the situation is more nuanced than this as it depends on the composition of the current account balance as well as the country’s level of foreign exchange reserves and other factors.
Current Account Balances of Major Emerging Markets: 2014
Source: Euromonitor International from national statistics/IMF
Note: Data are forecast
Long-Term Prospects Remain Good
Risks to emerging markets are elevated in 2014 and developed economies are expected to contribute 40% to global real GDP growth this year, up from 31% in 2013. Yet in the long term, the fundamental growth drivers of emerging markets are stronger than those of developed economies – so if they can get their houses in order – emerging markets should remain the engine of global growth in the long term.