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Emerging Markets Face Heightened Risk of Financial Crises as Rates Rise: Nomura

Many emerging market economies face a combination of chronically weak growth, rising inflation and deteriorating fiscal finances, said head of Global Macro Research Rob Subbaraman.

Nomura plans to stop prime brokerage services using US and European cash stocks. Photo: Reuters

(AF) Deteriorating economic fundamentals in many emerging market countries over the past year are likely to worsen in the coming 12 months, heightening the risk of financial crises as global rates rise, says Nomura Holdings.

Many emerging market economies face a combination of chronically weak growth, rising inflation and a marked deterioration in fiscal finances, said Rob Subbaraman, Nomura’s head of Global Macro Research, in a research note on August 25. And at the same time they’re battling with new waves of Covid-19 with limited access to vaccines and overburdened health systems, he added.

The prospect of the US Federal Reserve normalizing monetary policy amid China’s slowing economy is a ”dreadful combination” for emerging market nations while three additional vulnerabilities worsen the outlook further, Subbaraman added, citing the following issues:

•A rising bank-sovereign debt nexus increases the risk of the type of ”doom feedback loop” that was at the heart of the 2009-10 European debt crisis.

•Portfolio liabilities show several emerging market countries are susceptible to large capital flight if investors lose confidence in their economic fundamentals.

•Emerging markets’ extraordinarily large fiscal deficits will likely leak into sizable current account deficits.

“We disagree with those who believe EM is in a more resilient position now than it was on the eve of the 2013 ‘taper tantrum,”’ Subbarman said. ”It is true that, compared to 2013, many countries have smaller current account deficits (or surpluses), larger FX reserves and attracted only modest cumulative portfolio inflows in recent years, but EM has developed new sources of vulnerability, with a combination of chronically weak growth, rising inflation and a marked deterioration in fiscal finances, and yet real policy rates remain deeply negative in many EM countries.”

Many central banks in emerging markets may have overreached by easing monetary policy too far, including delving into quantitative easing for the first time, which has left foreign investors poorly compensated for the weakened economic fundamentals, the report said.

Whereas during the 2013 taper tantrum there were the so-called ‘fragile five’ nations of Brazil, India, Indonesia, Turkey and South Africa, Subbarman said there are now 10 troubled nations: Brazil, Colombia, Chile, Peru, Hungary, Romania, Turkey, South Africa, Indonesia and the Philippines.

“It is looking increasingly likely that EM countries will ultimately be the hardest hit by Covid-19, as was the case with the Spanish Flu a century ago,” Subbaraman said.

• Jim Pollard and Kevin Hamlin

 

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Jim Pollard

Jim Pollard is an Australian journalist based in Thailand since 1999. He worked for News Ltd papers in Sydney, Perth, London and Melbourne before travelling through SE Asia in the late 90s. He was a senior editor at The Nation for 17+ years and has a family in Bangkok.

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