Emerging markets are facing heat in 2018

The global financial crises of 2008 and 2011 took their time to reach Brazil. However, when they did, it plunged the country into its worst recession on record, which only ended in the second quarter of last year. Since, recovery has been desperately slow. Growth figures have not exceeded 1.2 percent in the first two quarters of 2018, while the Brazilian Real has slid 21 percent against the U.S. Dollar.

In 2013, Morgan Stanley lumped Brazil alongside Indonesia, India, Turkey, and South Africa in a group known as the Fragile Five – a quintet of emerging economies deemed over-dependent on foreign investment for their domestic growth. As the U.S. economy began to recover and the Federal Reserve decreased money stimulus, investors moved their money out of these markets and went back to USD, causing substantial current account deficits in these five countries.

</span></p> <p><span style="font-weight: 400;">However, five years on, even with <a href="https://brazilian.report/money/2018/09/10/2008-crash-brazil-economy/">Brazil’s pitiful recovery figures</a>, is the country still one of the Fragile Five? Alongside desperate news stories from fellow emerging markets, is Brazil&#8217;s economy really in such bad shape in comparison with its peers?</span></p> <p><span style="font-weight: 400;">Around the world, the currencies of emerging markets are falling against the USD. Much of these problems are caused by the massive dollar debts of these countries. As the USD strengthens, these obligations become more expensive to pay back. Furthermore, these markets require a steady entry of foreign investment to avoid creating huge deficits.<br /> </span></p> <hr /> <p><img class="alignnone size-large wp-image-9167" src="https://brazilian.report/wp-content/uploads/2018/09/export-2px24-1024x662.png" alt="How does Brazil measure up to other emerging markets?" width="1024" height="662" srcset="https://brazilian.report/wp-content/uploads/2018/09/export-2px24-1024x662.png 1024w, https://brazilian.report/wp-content/uploads/2018/09/export-2px24-300x194.png 300w, https://brazilian.report/wp-content/uploads/2018/09/export-2px24-768x496.png 768w, https://brazilian.report/wp-content/uploads/2018/09/export-2px24-610x394.png 610w, https://brazilian.report/wp-content/uploads/2018/09/export-2px24.png 1238w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <p><span style="font-weight: 400;">In Brazil, the issue lies with public finances and a budget deficit which has gone through the roof. Corruption scandals and widespread political uncertainty have forced the BRL to slip 21 percent against the dollar this year, but the hole doesn’t go much further beyond that. Its current account deficit has improved, and Brazil also has one of the largest foreign currency reserves in the world, measured at USD 359.1 billion earlier this year. As opposed to many other emerging markets in crisis, Brazil is owed money by the United States, to the tune of USD 299.7 billion.</span></p> <h2>Argentina is running out of tools</h2> <p><span style="font-weight: 400;">The situation in <a href="https://brazilian.report/money/2018/09/16/eu-mercosur-trade-agreement/">neighboring Argentina</a> is far worse. The budget and current account deficits hit record highs last year, and with fears the country may default on its sovereign debt, the Argentinian peso tanked 52 percent against the dollar this year. Inflation has hit 31.2 percent, while interest rates have gone up to 60 percent.</span></p> <p><span style="font-weight: 400;">This week’s news of Argentina&#8217;s central bank chief Luis Caputo stepping down from his post, after only three months in the job, has hurt investor confidence further. President Mauricio Macri, who won the 2015 election as a pro-market candidate, is now set to face an uphill task winning another term in next year’s election – political uncertainty which is set to run the economy into the ground further. </span></p> <hr /> <p><a href="http://etfdb.com/index/jpmorgan-embi-global-diversified-index/"><img class="alignnone size-large wp-image-9169" src="https://brazilian.report/wp-content/uploads/2018/09/export-cqLhs-1024x683.png" alt="How does Brazil measure up to other emerging markets?" width="1024" height="683" srcset="https://brazilian.report/wp-content/uploads/2018/09/export-cqLhs-1024x683.png 1024w, https://brazilian.report/wp-content/uploads/2018/09/export-cqLhs-300x200.png 300w, https://brazilian.report/wp-content/uploads/2018/09/export-cqLhs-768x512.png 768w, https://brazilian.report/wp-content/uploads/2018/09/export-cqLhs-610x407.png 610w, https://brazilian.report/wp-content/uploads/2018/09/export-cqLhs.png 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></a></p> <hr /> <p><span style="font-weight: 400;">The country has recently agreed to a massive emergency bailout package from the International Monetary Fund (IMF) to the order of USD 57.1 billion. In comparison, Brazil paid off its debt to the IMF in the 2000s.</span></p> <p><span style="font-weight: 400;">Turkey, one of the original members of the Fragile Five, is facing similarly severe problems. With a potential recession on the horizon, inflation has gone out of control, not helped by the Turkish lira plummeting 43 percent against the dollar this year. </span></p> <p><span style="font-weight: 400;">One aggravating factor to Turkey’s economic woes has been the sanctions imposed on the country by the U.S. in an attempt to free jailed American pastor Andrew Brumson, on trial for accusations of terrorism and espionage.</span></p> <p><span style="font-weight: 400;">A new refinancing loan deal for one of the country&#8217;s largest private banks, Akbank, has held off some immediate fears and stabilized the currency, but fears of an upcoming recession are real.

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MoneySep 28, 2018

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BY Euan Marshall

Euan Marshall is a Scottish journalist living in São Paulo. He is co-author of A to Zico: An Alphabet of Brazilian Football.