Over the past several decades, markets outside the major advanced economies have become increasingly important drivers of global growth, and are increasingly integrated into the global financial system. As such, the significance of these markets for both international investors, and those analysing global economic developments has risen. Though a strict definition of emerging markets has never existed, countries associated with the term are generally characterized by strong growth, strong inflows of FDI, a high degree of openness to external markets, and openness to reforms that strengthen political and financial institutions.
Emerging Markets on the Rise
Figure - Emerging markets’ share of world GDP (PPP) continues to rise
Emerging markets are in the spotlight right now after several months of market turbulence and losses. Although emerging markets as a whole are not a homogenous group of economies, many of them are vulnerable to the impact of the US Federal Reserve’s policy tightening cycle on net global capital flows and the strength of the US dollar.
Figure - Percent Change in Emerging Market Currencies vs USD
In particular, emerging markets with weak economic fundamentals, such as a high current account deficit, large public debt and deficit ratios relative to GDP, high levels of external debt, or high levels of dollar denominated debt, are suffering markedly. Some countries, such as Argentina and Turkey, stand out as prominent examples.
However, even for emerging markets with relatively healthy macroeconomic fundamentals, the near-term financial environment will remain challenging for as long as the Fed tightening cycle continues. For more detailed information about the vulnerabilities of specific emerging markets, please see: Emerging Market Vulnerabilities and Weaknesses.
In addition, concerns related to slowing growth and financial
stability issues in China are also important for emerging market
investors. China is in the process of transitioning from high-speed,
export-led growth to a model focused on high quality,
consumption-based growth. At the same time, headwinds from the trade
war with the U.S. and internal measures taken to address high leverage
in the economy, are weighing on activity. The Chinese authorities have
the means and the will to avoid any substantial adverse growth or
employment developments, but risks still remain and growth will
continue to moderate. As China becomes a more financially open
economy, the risk of spillovers from China to the rest of the global
economy will increase.