Donald Trump's electoral triumph has stoked expectations for a fiscal stimulus that will propel U.S. economic growth and spread to the rest of the world. For emerging markets, though, his presidency ends a long party. For some of them, it's about time economic reality hit home. For others, the future looks a bit brighter.
Early in this economic recovery, investors leaped into emerging-market stocks and bonds as those economies and markets promised faster growth than in the developed world. There was plenty of money to do so as the U.S. Federal Reserve and other central banks flooded the world with liquidity.
In 2009 and 2010, those economies grew much faster than the United States. As foreign direct investment surged, investors who'd bought into emerging-market stocks were rewarded with much higher returns than were available in the broader market.
That trend, which began to falter at the beginning of last year, is now being reversed. In the week ended Nov. 16, a record $6.6-billion (U.S.) flowed out of emerging-market debt, according to data from EPFT Global, halting 18 consecutive weeks of inflows. In the second full week of November, exchange-traded funds that buy emerging-market securities saw withdrawals around the world worth $1.4-billion. While the surging U.S. dollar would seem to help emerging markets by boosting their exports, that is more than offset by other negatives, such as rising interest rates that are sucking money out of those economies.
Mr. Trump's "America First" protectionist plans may soon add to the pain. He has promised to abandon the tariff-cutting Trans-Pacific Partnership trade agreement between the United States and most Asian countries. He may force changes in the North American free-trade agreement that will hurt the United States' southern neighbour, Mexico. On the campaign trail, he branded China as a currency manipulator and talked of a 45-per-cent duty on Chinese imports. Even though he's toned down that rhetoric, investors are wary.
But not all emerging markets are equally vulnerable. Those that can weather a protectionist storm and higher interest rates are those with current-account surpluses, including the Philippines, South Korea, Malaysia, Taiwan, China and Poland. Their foreign-currency reserves provide the money to fund any outflows of hot money without provoking a collapse in their own currencies. China's reserves, for example, are down 22 per cent from their mid-2014 peak.
The losers are those emerging markets without that crucial buffer – Brazil, India, South Africa, Argentina, Egypt, Indonesia, Mexico and Turkey. They have current-account deficits, so are importing capital to fill the gaps and have to take stringent measures as foreign money flees. Their foreign-exchange reserves tend to be slim, about half the size of those of the first group in relation to gross domestic product.
In contrast to the healthier emerging-market economies, the deficit countries have currencies that have been falling against the U.S. dollar for the past five or six years, spectacularly so in chaotic Argentina. Economic growth among the deficit economies has also been weak except for India, which may in time join the healthy group if Prime Minister Narendra Modi succeeds in curbing corruption, eliminating economy-distorting subsidies and reducing business-retarding regulations.
With inefficient economies, slow growth and more entrenched corruption, the deficit economies also have much higher inflation levels than the surplus economies. And, with inflation problems and pressure to support their currencies, all except India have seen central-bank rate hikes in recent years, in contrast to rate declines in the healthier group.
All emerging-market leaders aim, of course, to spur economic growth and curtail foreign capital flight while controlling political and social unrest and avoiding the effects of increased global protectionism.
The International Monetary Fund estimates that a surge in global protectionism could reduce global GDP by more than 1.5 per cent over the next several years. That would make the job even harder and helps explain why emerging markets are out of favour. But investors would be wise to differentiate between those countries best able to weather the storm, and those whose participation in the good times was less justified.