Don’t expect emerging markets to be flooded in cheap money

Analise interessante do Sharma sobre a guerra cambial cantada em verso e prosa, mas que ainda não se materializou.



The easy money policies of the US and Japanese central banks are inspiring worried talk of “currency wars”. The fear is that newly printed dollars and yen will flood into fast-growing emerging markets, driving up their currency values, undermining their exports and creating local asset bubbles. In this analysis, emerging market leaders are fighting in vain to hold back a destructive tide.
It is true that capital chases growth, but the big emerging economies are slowing. Far from fighting off a deluge of foreign capital, leaders from India to South Africa are struggling to attract a greater share of global capital flows in order to fund widening current account deficits. Over the past decade, the foreign exchange reserves of the developing world grew at an average annual rate of 25 per cent, swelling from $570bn in 2000 to $7tn in 2011. But over the past year, the average rate slowed to a crawl of barely 5 per cent.
The idea that money is still flooding emerging markets misses the big picture, which is that global cross-border capital flows are down 60 per cent from their 2008 peak. The largest shares of cross-border capital flows are in bank loans, trade and foreign direct investment, which are slowing worldwide. This has not been obvious before because commentary tends to focus on the relatively small share of capital flows represented by portfolio investment, which drives stock prices and which continued to flow into emerging markets at a brisk pace last year. But those flows are slowing, too.
The shifts are clear in data from the International Institute of Finance. Between 2002 and 2007, net private capital inflows to emerging markets skyrocketed from $100bn to $970bn – peaking at about 6.6 per cent of their gross domestic product. After collapsing in 2008 and 2009, these flows have only partially recovered, to about $770bn – about 3.2 per cent of emerging market GDP. The decline is largely due to a decrease in loans from banks and other western creditors.
There is a parallel decline in trade flows, which has triggered talk of “deglobalisation”. Across the emerging world, export growth has slowed even as import growth has remained strong, pushing down the external balances as measured by the current account. The current account surpluses of the emerging world have fallen from 4 per cent of GDP in 2007 to below 2 per cent.
These trends reverse the conditions of the past decade, when foreign money rushed into the emerging economies, driving up the value of their currencies. That started to change in late 2010, which is also when the Brazilian finance minister Guido Mantega – in a classic case of fighting the last war – raised the alarm that US policies could trigger a “currency war”.
The currency war theme still haunts finance, even though emerging currencies have depreciated by an average of 10 per cent against the dollar since 2011, with the Brazilian real falling by about 20 per cent. The rebalancing of capital flows is reducing the supply of credit in emerging markets, dragging on their economic growth. This is the opposite of the past decade, when growing current and capital account surpluses fuelled record credit growth in the developing world.
As the printing presses continue to hum, however, the question remains: where will the money go? Policy makers cannot assume it will flow to the emerging markets, the way it did in the 2000s. That was an exceptional decade, when all emerging markets boomed, attracting huge new capital flows. Now the blind optimism about growth in many emerging markets has dimmed, as many face serious structural problems.
Brazil, Russia and South Africa may grow more slowly than the global average over the next few years. However, inflows remain high in some of the more reform-oriented emerging economies such as the Philippines, Thailand and Turkey. The reality is that excess American and Japanese central bank liquidity does not have to flow abroad. It will go wherever growth prospects are improving and beating expectations. So, for now, much of the money is going where confidence is growing – which means keeping it back home in the US and Japan. And this implies that, in the larger emerging markets where growth is slowing, there will be no tide to hold back.

Ruchir Sharma,head of emerging markets and global macro at Morgan Stanley Investment Management

Fonte: FT