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The Challenges of an Emerging Economy

Written by A Forex View From Afar on Wednesday, September 10, 2008

Not so long ago emerging economies were viewed as the areas that would support world growth, and were also to blame, (actually the speculators said this as they bid up the prices it seems), for high commodity prices.

Those times have quickly passed and the global slowdown has proven that the emerging economies have actually behaved in a very normal way as they too slow, and face the same problems as any other economy in this now global environment..

Emerging markets faces some well-documented problems, ranging from currency depreciation to unsupported deficit. Since the credit crunch began one year ago the emerging countries credit markets have suffered some of the largest declines recorded. The most famous may be the Chinese CSI 300, which practically lost almost 65% of its value in a little less than a year. Some currencies from the emerging markets are starting to feel a reverse money flow, investors taking money out of the country rather than investing. From the same problem, reverse money flows, the current account deficit starts to become unsupported, a big problem for most emerging countries. The reverse money flows comes usually when the world is facing a period marked by uncertainty. To some extend, it is similar to the carry trade un-winding.

The global slowdown had some advantages too for the emerging markets; Firstly, it allowed some economies to avoid overheating, something that is very dangerous over the long period (read boom and bust cycle). Secondly, it helped the BRIC economies reduce the large trade surplus numbers. Ironically, trade surpluses are known to contribute to inflation, and in an emerging country, inflation is a big concern.

Overall, at the end of the global crunch (when ever that may be) economist and analysts will have to draw a line and decide if the emerging countries actually have something to win from this period, since its pretty clear the developed economies had only to lose from it.

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