Dr Doom: Be afraid, but not very afraid of emerging market crises

Nouriel Roubini is often referred to as Dr. Doom (or 'Permabear') because of the many pessimistic economic predictions he's made in the past.

But ever since he accurately forecast the 2008 global financial crisis, people have tended to take the views of the Stern School of Business professor and IMF, World Bank and US Fed economist seriously.

Roubini, who now heads his own global economics consulting business, writes on Friday at Project Syndicate that emerging markets "are facing strong headwinds" which was triggered by a "mini perfect storm" after:

  • cutbacks in US economic stimulus
  • a slowdown in China and the end of the commodity supercycle
  • the currency crisis in Argentina
  • political unrest ┬áin Turkey, Ukraine and Thailand

But, says Roubini, these triggers should not be confused with the deeper causes of the problems in India, Indonesia, Brazil, Turkey and South Africa (dubbed the "fragile five") which include:

  • fiscal and current account deficits
  • falling growth rates
  • above target inflation
  • political uncertainty due to upcoming elections

Structural problems in the less fragile but still "overhyped" BRICS countries are only adding to uncertainty, but if China experiences a hard landing, the crisis will be deep enough to spread to developed economies and the US.

Despite these problems, Roubini is sanguine about the longer-term prospects of the fragile five and other vulnerable countries like Argentina, Venezuela, Ukraine, Hungary and Thailand:

"Nonetheless, the threat of a full-fledged currency, sovereign-debt, and banking crisis remains low, even in the Fragile Five, for several reasons. All have flexible exchange rates, a large war chest of reserves to shield against a run on their currencies and banks, and fewer currency mismatches (for example, heavy foreign-currency borrowing to finance investment in local-currency assets). Many also have sounder banking systems, while their public and private debt ratios, though rising, are still low, with little risk of insolvency.

"Over time, optimism about emerging markets is probably correct. Many have sound macroeconomic, financial, and policy fundamentals. Moreover, some of the medium-term fundamentals for most emerging markets, including the fragile ones, remain strong: urbanization, industrialization, catch-up growth from low per capita income, a demographic dividend, the emergence of a more stable middle class, the rise of a consumer society, and the opportunities for faster output gains once structural reforms are implemented. So it is not fair to lump all emerging markets into one basket; differentiation is needed."

Read more at Project Syndicate

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