In addition to the benefits of having pursued sounder macropolicies, the emerging markets as a group are enjoying a far healthier composition of the money that's been pouring into emerging markets assets recently, attracted by better returns than in more developed markets.
In a study released last week, Christian Stracke of CreditSights, a research firm, compares emerging economies’ dependence on portfolio inflows now and eight years ago. (Portfolio investment—as opposed to foreign direct investment—is generally fast and easy to liquidate, and so includes the sort of “hot money” that travels fast and upsettingly.) Looking at 25 countries, he finds that dependence is generally much lower, but patchily so.
As the table shows, portfolio liabilities in the 18 months to June 2005 for the group as a whole were $118.5 billion, far less than the $170.7 billion that came in before June 1997. This averages out some very different experiences: both Argentina and Brazil have seen liabilities decrease sharply, while India, Poland and Hungary have had just the reverse. What is more, the “hotter” sort of portfolio investment—debt securities—has fallen most (from $116.6 billion to $66.7 billion) while equity investment has stayed almost the same.
On another measure, the ratio of foreign-exchange reserves to recent inflows, things look sturdier still. In June 2005, the median emerging country had enough reserves to cover 529% of the past 18 months’ portfolio inflows, compared with just 222% in June 1997. This average again masks some big differences: oil-rich Russia’s reserves are a staggering 2,093% of flows, while Turkey has either 161% or 249%, depending on how one treats the bulky “errors and omissions” category of its current-account figures.
Buttonwood speculates on what might generate changes in investor sentiment:
But it would not take much to produce that—higher real interest rates in America, for a start (and rate rises look likely to continue). The impact of dearer oil is harder to judge. High oil prices should be a plus for emerging producers such as Russia and Venezuela, while heavy importers such as South Korea have enough other attractions to get away with it. But money managers are beginning to look askance at emerging-market guzzlers who have subsidised energy use and may no longer be able to afford it. [Brad Setser has an interesting post on the differential impact of rising oil prices on various emerging markets]
Paradoxically, globalisation may also dim the appeal of emerging markets by increasing the correlation between developed and developing assets. Mexico, some say, is beginning to pay the price for its lockstep with the United States. A sharp increase in risk aversion would make that matter more: at the moment, investors ask only to be led to the next frontier, but a few more terrorist attacks in big financial centres could change that.
Yet for those of us who have long followed the emerging markets, it's hard not to be hopeful that this time it's different in the sense that hard-won gains in attracting long-term investment won't be wiped out by another round of emerging markets contagion. At the very least, a more mature market for emerging markets assets may produce greater discrimination by investors among countries when the inevitable turn in sentiment arrives. As Buttonwood concludes:
The broad picture is nonetheless revealing, and, within limits, encouraging: a sell-off rather than a rout may be the worst that happens if foreign investors turn tail.
Of course, all bets are off if long-delayed global adjustments -- with the US deficits at the center of the process -- produce the end of the current "Bretton Woods II" regime, as discussed by Nouriel Roubini and Brad Setser. Few emerging markets, regardless of their reserve positions or low portfolio liabilities, will find themselves unscathed in that scenario.
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