Emerging Focus: Eurozone Debt Crisis – An Imminent Concern for Emerging Market Economies

After remaining resilient to global economic uncertainties throughout 2011, emerging market economies face the mounting threat of contagion from the eurozone debt crisis in 2012. This is likely to reverse progress made in 2011 owing to spillovers such as increased risk aversion, poor credit availability, large capital outflows, and weak external demand for exports. Nonetheless, these economies continue to have significant potential and will be amongst the fastest growing economies in the world.

Key points

  • The eurozone’s three-year-old debt crisis is threatening growth in emerging market economies (EMEs) in 2012. The crisis has led to a weaker external environment and a sharp deceleration in domestic demand that is marred by low market confidence in EMEs. Euromonitor International forecasts that real GDP growth in 25 key EMEs will grow by 5.3% (fixed 2011 US$ constant) in 2012, marginally lower than the projection of 5.8% in January 2012;
  • The eurozone debt crisis, which started with Greece and Ireland, has spread to other nations like Spain, Italy and Portugal. The inability of these countries to manage their government finances has led to a contagion within the economic bloc that is causing a region-wide banking crisis and having serious ramifications on the global economy, including EMEs. Many of these countries are amongst the major economies in the world – in 2011, eurozone countries accounted for 18.7% of global GDP in 2011;
  • EMEs, particularly emerging Eastern Europe (which includes Hungary, Poland, Romania, Russia and Ukraine), are highly dependent on the euro area for their external sector demand and capital inflows. In 2011, the EU-27 received 23.2% of total exports from EMEs compared to 26.7% in 2006. In addition, contagion risks emanating from the euro area have resulted in a sharp deterioration in global financial markets leading to low credit availability in EMEs;
  • This has created an environment of high-risk aversion. As a result, investors sought safety in the US dollar, leading to an excessive depreciation of many currencies in EMEs. For example, the Indian rupee depreciated by 23.1% annually in June 2012 to reach Rs55.2 per US dollar, negatively affecting the country’s import bill and export sector;
  • According to the IMF, domestic fiscal and financial vulnerabilities have made EMEs “less able” to deal with the spillovers from the eurozone debt crisis. Nonetheless, these economies, particularly emerging Asia, will play an integral role in achieving global economic stability. Over the coming years EMEs will continue to have significant potential.

Increased vulnerability to eurozone debt crisis

The eurozone debt crisis is the single biggest threat facing EMEs in 2012:

  • EMEs are increasingly vulnerable to the eurozone debt crisis due to their high dependence on the region. These countries are not only susceptible to weak external demand from the euro area but also have a heavy financial dependence on the euro area. According to the World Bank’s International Finance Corporation, investors and lenders in eurozone countries were the world’s chief sources of private capital and were important lenders to emerging markets between 2000 and 2008;
  • As a result, annual real GDP growth forecasts across EMEs have been revised downwards compared to projections made in January 2012. In 2012, annual real GDP growth in 25 key EMEs is expected to slow to 5.3% (fixed 2011 US$ constant terms) in 2012 from the projection of 5.8% in January 2012. Emerging Asia will continue to lead the global recovery but growth will moderate to 7.4% (fixed 2011 US$ constant terms) in 2012, from the earlier projection of 7.9%;
  • Emerging Eastern Europe, on the other hand, will be most affected amongst EMEs due to its close ties to the economic bloc. Annual real GDP growth is forecast to rise by 3.2% (fixed 2011 US$ constant terms) in 2012, lower than the 3.6% forecast in January 2012. Romania and Ukraine are amongst the EMEs that recorded the sharpest revision in real GDP growth for 2012, down to 0.1% and 1.8% respectively from the earlier projection of 2.1% and 3.8% respectively.

Reliance on exports to the bloc

  • Many EMEs strongly depend on the eurozone for their export revenues. For example, in 2006, over 50.0% of exports from Kazakhstan, Russia and Turkey were sent to the EU-27 while over 70.0% of exports from Hungary, Poland, Romania and Morocco also went to the EU-27;
  • EMEs are susceptible to weak external demand from eurozone countries which has led to a decline in export activity. The share of exports to the EU-27 from EMEs has dropped to 23.2% of total exports in 2011 from 26.7% of total exports in 2011. Between 2006 and 2011, EMEs like Russia, Morocco, South Africa and Turkey recorded a drop of over 10.0% in their share of exports sent to the EU-27;
  • In 2011, although total exports sent to EU-27 by EMEs on an aggregate basis at US$1.4 trillion surpassed the pre-crisis levels of 2008, in many EMEs like Chile, Malaysia, Morocco, Philippines, Russia, South Africa and Turkey they still remained below levels achieved in 2008;
  • South Africa and Russia’s exports to the EU-27 declined by 12.9% and 12.0% respectively between 2008 (pre-crisis level) and 2011 – the largest declines amongst EMEs. Russia has been consistently lowering its exports sent to the EU-27 each year from 60.7% of total exports in 2006 to 45.6% of total exports in 2011;
  • Lower demand for exports from the EU-27 can impact export businesses, decrease profitability, lead to job losses and reduce consumer expenditure. For example, consumer expenditure in emerging Eastern Europe on average stood at US$5,846 per capita (fixed 2011 US$ constant terms) in 2011, marginally lower than its pre-crisis level of US$5,977 in 2008.

Exports to the EU-27 from emerging Eastern Europe: 2011


Source: Euromonitor International from national statistics

Note: “Others” refers to all economies except those in the EU-27.

Impact of euro contagion on EMEs

There is a growing fear that the contagion within the economic bloc that is causing a region-wide banking crisis is spreading to EMEs:

  • The deleveraging of European banks is hurting bank lending and lowering credit availability in many EMEs. This is particularly affecting flows into emerging Eastern Europe where the financial sector is closely integrated with Western Europe. According to the Bank for International Settlements, the euro area bank loans to emerging Eastern Europe represented U$992 billion at the end of 2011, down by around 4.9% annually;
  • Mounting pressure from the eurozone debt crisis has sharply reduced investor confidence globally. As a result, stock markets in EMEs have witnessed increased volatility since 2008. For example, China’s stock market index declined by 27.4% and 10.6% annually in 2008 and 2009, rebounding marginally by 3.5% in 2010 before falling by 5.7% in 2011;
  • EMEs have suffered large-scale capital outflows since the advent of the crisis in 2008-2009 and interest spreads have increased. In 2011, aggregate foreign direct investments (FDI) inflows in EMEs stood at US$480 billion, down from a peak of US$530 billion in 2008;
  • According to the World Bank in mid-2012, capital flows into emerging and developing economies are expected to fall sharply in 2012. The drop in capital flows adversely impacts business and investment confidence creating financial uncertainties that affect overall growth;
  • With increased risk aversion prevailing over the global economy, investors sought safety in the US dollar, leading to an excessive depreciation of many currencies in EMEs since the beginning of 2012. For example, the Indian rupee and the Brazilian real depreciated by 23.1% and 25.9% annually in June 2012, negatively affecting the countries’ import bills and export sectors;
  • The weakening of domestic currencies has caused central banks in many EMEs, like India, Indonesia and the Philippines, to sell euros and US dollars since early 2012 to prevent the depreciation of their domestic currencies resulting in lower foreign exchange reserves. For example, in May 2012, India’s foreign exchange reserves dipped to US$249 billion from US$261 billion in the previous month.

Foreign Direct Investment Inflows in 25 Key EMEs: 2006-2011



Source: Euromonitor International from UNCTAD


  • The likelihood of a eurozone break-up and Greece exiting the euro have increased significantly as of mid-2012. This would affect global confidence and prove to be a drag on global expansion. As a result, EMEs will witness slower-than-expected growth in 2012 and 2013 at 5.3% and 6.0% respectively in real terms. According to the World Bank, FDI inflows into EMEs are likely to drop in 2012 and 2013 before rising in 2014;
  • Nonetheless, EMEs have weathered the crisis well and will continue to lead the global recovery. Emerging Asia in particular has witnessed limited financial spillovers from European banks de-leveraging and will continue to hold significant potential over the coming years. Between 2012 and 2020, consumer expenditure per capita in emerging Asia will grow by 54.1% on average (fixed 2011 US$ constant terms);
  • In addition to the uncertainties on the global front, EMEs face the challenge of domestic fiscal and financial vulnerabilities. According to the IMF in July 2012, there is room for monetary easing in EMEs but central banks should be wary of large policy-induced credit stimulus that could undermine real GDP growth and financial stability in the coming years.