Emerging Market Imports and Exports have suffered a Crippling Blow in Recent Months!
The slump in emerging markets cannot be ignored for much longer
Several years ago emerging markets were prospering, but market forces had other designs. In the wake of the 2008 financial crisis, emerging market economies took a serious hit. Developed economies such as the U.S., Europe and Australia became safer investment havens than the volatile and less favorable emerging market economies. Back in 2010, Brazil was thriving, but since then the Brazilian economy has suffered irreparable damage and now ranks among the worst-performing emerging market economies.
As a matter of fact, the performance of emerging market economies has hit its lowest level since the global economic crisis of 2008. Added to the decline is the slumping demand from China – once considered an unstoppable economic powerhouse. Chinese demand for oil, copper, gold, iron ore and other commodities is on the decline, and this has hampered economic growth for all of China’s trading partners, too. The Russian economy is in ruin and the country has experienced major capital flight following credit rating declines and increasing isolation in the international markets.
Major declines in annual percentage trade growth: Then and now
Countries like Russia, India, Brazil, Malaysia, Chile, Indonesia, South Korea, Turkey, Thailand, Mexico and China have all experienced negative annual changes to their trade growth over time. The latest import and export figures peg all but China in negative territory since the start of 2015. The worst-performing country is Russia with over 35% negative change in its annual trade growth, fueled no doubt by punishing sanctions against the country as a result of the Ukraine Crisis.
This begs the question: Are developed economies also at risk?
Banc De Binary analysts are of the opinion that the decay that now characterizes emerging market economies is not limited to these markets alone. The rot is spreading to developed economies. Since the global economy is a system of interrelated components, there is no way to isolate individual parts and hope that they will not affect the larger overall system. BRIC countries (Brazil, Russia, India and China) are considered the world’s dynamo in terms of the growth potential they hold. But since these nations are now sputtering along economically, the world can no longer rely on them for sustained growth, development and economic stability. If the global economy cannot overcome the burdens being placed on it by emerging markets, we could very well be staring down the barrel of an emerging markets induced global recession. As it stands, Brazil, Russia, India and China are responsible for a full 20% of global output – sufficient to cripple the world economy at a moment’s notice. Presently, Russia and Brazil are in recession and China is balancing on a knife-edge.
Crunching the numbers: Are emerging markets performing?
The numbers don’t lie: of the 17 biggest emerging markets in the world, global trade was reduced by almost a percentage point during January, February and March of 2015 compared to the 2.5% growth in global trade these countries added between 2000 and 2014. During that period of time, these emerging market economies accounted for an estimated 43% of global trade. With Chinese exports slipping by as much as 2.5% year on year in May 2015, declines are abundant. One of the most noticeable declines for the Chinese market is evident in the dollar value of their imports: there has been a 17.6% contraction for the Chinese economy.
Since emerging markets have lost favor with investors, it is safe to say that these economies have become a drag on the global economy. This is clearly evident in the forex arena where the exchange rates of these countries have plummeted in recent months. The Russian ruble, the Turkish lira, the Brazilian real, the South African rand, the Ukrainian Hryvna and other currencies have experienced crippling losses. These devaluations have served to improve their export competitiveness with global trading partners but have done precious little to stave off inflationary pressures, balance of payments crises and overall economic uncertainty.
To further compound the economic stresses is the fact that economic growth across Europe, the U.S. and Australia is sub-standard. Analysts often point to the fact that EMs grew at a healthy pace when the global crisis hit. Figures of 6% annual growth were bandied about for these economies while developed countries only managed an anaemic 2% annual growth. The reversal has been stark and already the growth rate in EMs has been cut virtually in half during Q1 2015. In terms of dollar value growth from emerging market economies in the world, the figure is hovering around zero.
Where is the safe money going?
In times of economic uncertainty, it is clear that the safe money is staying in developed economies. The high risks associated with investments in emerging economies are simply too much to bear for many financiers, investors and traders. Since developed countries have been subject to low interest rates for quite some time, the higher interest rates in emerging markets were enticing. But now that the Fed is going to be increasing interest rates there is little appetite for risking capital in the highly volatile emerging markets across Africa, Asia and Latin America. Capital outflows are commonplace in these countries, and this is eroding and accelerating the declines in currency values and investor confidence.
It must be remembered that emerging market countries are an integral component of the global economy. Nowadays these countries account for over 50% of worldwide Gross Domestic Product (GDP). Back in 1999, when the Asian crisis hit, these countries accounted for less than 38% of GDP purchasing power. What this means is that any weakness in these economies is going to have a far more pronounced effect on global prosperity. The South Korean Finance Ministry is deeply concerned about the domino effect of failing to stimulate global growth. The OECD cut its global growth forecast to 3.1% from 3.7% for 2015. Global exports are now declining and imports are coming under serious pressure too.
The bottom line
Binary options traders at the leading trading sites foresee increased stimulus measures being adopted to initiate pro-growth sentiment. EMs will also likely raise their interest rates to bring in much-needed foreign capital to shore up their resource holdings and stabilize their national currency. The big problem is balancing the books – balance of payments. With rising interest rates in the U.S. and the slowdown in China, it is difficult to predict how emerging markets will start to prosper in the face of such overwhelming odds.
