Updated January. 27, 2014 01:53
Economic experts forecast that although the currencies of emerging countries will continue to weaken for some time, situations may vary depending on economic fundamentals of each country. In particular, many of them projected that countries with sufficient foreign exchange reserves and a current account surplus such as Korea may experience some difficulties, but that will not deal a serious blow to their economic growth.
Capital Economics, a U.K.-based market survey firm, has divided 56 emerging countries in the world into five groups according to economic vulnerability on its report released on Friday. The first group includes the most vulnerable countries that have suffered an economic crisis due to populism policies and inadequate foreign exchange reserves, such as Argentina, Ukraine and Venezuela. For instance, Argentina blindly put public funds into various governmental policies as exports of its major products such as beans and corn increased during the booming period for commodities in the early 2000s. However, the global financial crisis and a slowdown in Chinas economic growth have decreased demands for commodities and dramatically devalued the peso, combined with the U.S. decision to withdraw quantitative easing. Concerns over a sovereign default after 2001 are rising in 13 years.
The second group includes Turkey, South Africa, Indonesia, Thailand, Chile and Peru that are not capable of redeeming short-term debts due to credit bubbles and large deficits in current account and thus relatively vulnerable to the effect of U.S. tapering. Some of these countries were also selected as the Fragile Five (Turkey, South Africa, Indonesia, Brazil and India) by Morgan Stanley, a U.S. investment bank, and as the Edge Eight (Fragile Five plus Hungary, Poland and Chile) by Financial Times based in U.K. and Schroders, a U.K.-based asset management firm.
The third group includes Hungary, Romania and Bulgaria, past communist countries that are suffering legacy problems. As the banking system of these three Eastern European countries are so vulnerable that they are likely to experience great suffering if the European Central Bank begins to increase interest rates.
The fourth group includes the so-called BRICs Brazil, Russia, India and China that were once considered a growth engine of the world, but whose growth has recently slowed down. Although these countries account for 27 percent of the world economy, they have faced the limits of past growth model focusing on the export of low-cost labor-intensive products based on abundant raw materials and labor forces. They need intensive economic reforms.
Despite currency crises in emerging markets, countries including Korea, the Philippines, Mexico and the Czech Republic are expected to be promising for 2014 and 2015. Capital Economics forecast that businesses exporting to advanced countries may benefit from the current trend of the rise of advanced economies and slowdown of emerging economies. Korea recorded a surplus in current account for a whopping 22 consecutive months from February 2012 to November 2013. At the end of 2013, Koreas foreign exchange reserves stood at 346.46 billion dollars, the seventh largest in the world.
Neil Shearing, chief emerging markets economist at Capital Economics, said that though everyone talks about crises in emerging markets, situations vary depending on countries, pointing out that the differentiation among emerging markets has never been larger.