Rogoff: 'There Is Ample Reason for Concern' About Emerging Markets

Tuesday, 03 Sep 2013 01:01 PM

By Michael Kling

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Be worried about emerging markets, warns Harvard University professor Kenneth Rogoff.

"Yes, there is ample reason for concern," Rogoff, former chief economist at the International Monetary Fund (IMF), writes in an article for Project Syndicate.

"The fact that relatively moderate shocks have caused such profound trauma in emerging markets makes one wonder what problems a more dramatic shift would trigger."

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The emerging markets are better positioned now than in previous crises, with flexible exchange rates, more international reserves, better monetary regimes and less foreign-currency debt. Still, more local-currency debt won't prevent a crisis, and printing money to pay debts could make matters worse by causing high inflation, he cautions.

The countries could impose stricter capital controls and regulations "to lock in savers," Rogoff writes. But that kind of financial repression would harm credit markets and long-term growth.

"If the emerging market slowdown were to turn into something worse, now or in a few years, is the world prepared? Here, too, there is serious cause for concern," he states, adding that how the IMF would handle an emerging market crisis after its experience in eurozone problems is unclear.

Massive inflows of foreign investments and strong commodity prices covered up weaknesses. And now the plunge in emerging markets has exposed vulnerabilities created by years of political paralysis and delayed structural reforms, he notes. The slide has been especially severe for countries with sizeable current account deficits.

Recent volatility in asset prices has grabbed the headlines, but the growth slowdown is a much greater cause for worry, Rogoff warns.

"The emerging market slowdown ought to be a warning shot that something much worse could happen. One can only hope that if that day should ever arrive, the world will be better prepared than it is right now."

The good news for emerging markets, he says, is that investors are unlikely to completely abandon them, given that they look good relative to advanced countries, especially those in Europe.

Steve Ashley, head of global markets at Nomura, tells Bloomberg that the worst is over for emerging markets, although some countries may "continue to suffer significant challenges."

Others disagree, saying investors will continue to flee as the Federal Reserve tapers its stimulus.

"What we are seeing in emerging markets is a very fragile investor sentiment," Rohit Arora, a fixed-income strategist at Barclays, tells Bloomberg Television.

"The focus has been countries with higher current-account deficits and investors are questioning how those countries will fund their deficits in an environment of tight liquidity when the Fed starts to tighten the monetary policy."

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