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The author is chairman of Rockefeller International
Emerging global powers such as India and Indonesia have weathered the turmoil of recent years well and are widely recognized for their success. Now, many of the most troubled emerging economies are on the road to recovery with reforms, and markets are starting to reward them for it.
These include Turkey, Argentina, Egypt, Nigeria and Kenya, and they carry some weight. All five of these reforming countries are among the 40 largest emerging economies, so their turnaround for the better is also strengthening the global economic recovery.
Battered by high inflation, debt and deficits, their foreign exchange coffers emptied as global interest rates rose sharply in 2022. As higher borrowing costs pushed their debt deeper into distress, they had no choice but to change. Their leaders – newly elected in Argentina, Kenya and Nigeria with a reform mandate – aren't saying it out loud, but their plans come straight from the pages of the old and much-maligned Washington Consensus. Fiscal discipline and attention to market forces are the only policy decisions that work when a country runs out of money.
The five reform nations are still largely underestimated. Just a year ago they had deficits of over 5 percent of gross domestic product. Their inflation rates averaged in the high double digits, in Argentina it was over 200 percent. Investors either demanded a huge premium to hold their Treasuries, driving yields to 15 percentage points above U.S. bonds, or they shunned them. If the term “emerging markets” were still in vogue, these economies would have been called the “fragile five” of this decade.
As capital flowed out, their foreign exchange reserves reached new lows, declining on average by a maximum of a third. The governments initially resisted this pressure and tried to stabilize the currencies through controls. That only pushed investors to the black markets, where the five currencies traded on average 45 percent below the official exchange rate.
Then the turning point came. The beleaguered countries began to bow to the realities of the market, most recently in Egypt under Abdel Fattah al-Sisi. After a decade in power, he announced his latest reforms last month. His regime took steps to reduce the deficit by cutting spending on new megaprojects. It attempted to stabilize the pound, raising interest rates to combat inflation and allowing its value to fluctuate so that bootleggers no longer had a reason to exist.
If that sounds like Washington consensus orthodoxy, it is. Egypt is reforming in part to meet the conditions for relief from consensus advocates, including the IMF and the World Bank. The same goes for Kenya and Argentina, which in many respects had sunk deeper than the other four: Buenos Aires had to pay the highest premiums for its bonds and faced the largest black market discount for its currency.
In response, Argentina became the most aggressive reformer. Last November, a new president was elected – Javier Milei, a populist who promised to “chainsaw” his country's dysfunction. He has devalued the peso by more than half, halved the number of government agencies to nine, slashed the public payroll, eliminated private jets and other official perks, while selling off hundreds of state-owned companies. In January, the budget posted a surplus in a country that has run deficits in all but 10 years since 1900.
Even the cases that did not seek international legal protection – Turkey and Nigeria – had to rethink. Turkey under Recep Tayyip Erdoğan, once a candidate most likely to reform, has hired serious technocrats who have raised interest rates by more than 35 percentage points and curbed excessive credit growth.
Now capital begins to return to the five reformers. For them, the global decline in foreign direct investment is unusually resilient. Bond premiums have fallen at least 40 percent from their highs. Argentine stocks rose sharply in the run-up to Milei's presidency and have risen another 60 percent in dollar terms since he took office. The black market currency discount has disappeared in Nigeria and has all but disappeared in Egypt. Financial life is starting to look more normal.
That doesn't mean a bright future. Nations often reform in crises and then return to old ways when the storms have passed. Escaping this cycle requires leadership that recognizes the need to prevent relapse and is committed to ongoing reform. It is too early to say that any of the recovering countries are on this path. But for now they are on the mend, and as a result the global economy feels less vulnerable.
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