By Kenneth Rogoff
When did these serial defaulters become bastions of economic resilience?
The single biggest factor in emerging market resilience has been the increased focus on central bank independence.
As finance ministers and central bankers gathered in Marrakesh last month for the annual meetings of the International Monetary Fund and the World Bank, they faced an extraordinary confluence of economic and geopolitical catastrophes: wars in Ukraine and the Middle East, a wave of defaults by ever fewer creditors – Middle-income economies, a real estate-led downturn in China and a rise in long-term global interest rates – all against the backdrop of a slowing and fracturing global economy.
But what surprised veteran analysts most was the expected catastrophe that hasn’t materialized, at least not yet: a debt crisis in emerging markets. Despite the significant challenges posed by rising interest rates and the sharp appreciation of the US dollar DXY, none of the major emerging markets – including Mexico, Brazil, Indonesia, Vietnam, South Africa and even Turkey – appear to be in debt crisis. both according to IMF data and interest rate spreads.
This result puzzles economists. When did these serial defaulters become bastions of economic resilience? Could this just be the proverbial calm before the storm?
Several mitigating factors come to mind. First, although monetary policy in the United States is tight, fiscal policy is still extremely loose. The U.S. is expected to have a deficit of $1.7 trillion in 2023, compared to about $1.4 trillion in 2022. And excluding some accounting irregularities related to President Joe Biden’s student loan forgiveness program would the federal deficit will be nearly $2 trillion in 2023.
China’s deficits have also skyrocketed; Its debt ratio has doubled in the last decade and the IMF expects it to exceed 100% in 2027. And monetary policy is still loose in Japan and China.
But the political decision-makers in emerging countries also deserve recognition. In particular, they wisely ignored calls for a new “Buenos Aires Consensus” on macroeconomic policy and instead adopted the far more prudent policies advocated by the IMF over the past two decades, which amount to a thoughtful refinement of the Washington Consensus.
A notable innovation was the accumulation of large foreign exchange reserves to ward off liquidity crises in a dollar-dominated world. For example, India’s foreign exchange reserves are $600 billion, Brazil’s is about $300 billion, and South Africa has accumulated $50 billion. Crucially, emerging market companies and governments took advantage of the ultra-low interest rates that prevailed through 2021 to extend the maturity of their debt, giving them time to adjust to the new normal of elevated interest rates.
Emerging markets have never bought into the idea that debt is a free lunch.
However, the single biggest factor in emerging market resilience has been the increased focus on central bank independence. Once an obscure academic term, the concept has become a global norm over the past two decades. This approach, often referred to as “inflation targeting,” has allowed emerging market central banks to assert their autonomy, although they often place more emphasis on exchange rates than any inflation targeting model would suggest.
Because of their greater independence, many central banks in emerging markets began raising interest rates long before their counterparts in advanced economies. This meant they were one step ahead and not behind. Policymakers also introduced new regulations to reduce currency mismatches, such as requiring banks to align their dollar-denominated assets and liabilities to ensure that a sudden appreciation of the greenback does not threaten debt sustainability. Companies and banks will now have to comply with significantly stricter reporting requirements on their international credit positions to give policymakers a clearer understanding of potential risks.
Furthermore, emerging markets have never bought into the idea that debt is a free lunch, which permeates the US economic policy debate, including in academia. The idea that sustainable deficit financing is free due to secular stagnation is not a product of sober analysis, but rather an expression of wishful thinking.
There are exceptions to this trend. Argentina and Venezuela, for example, have rejected the IMF’s macroeconomic guidelines. While this earned them much praise from American and European progressives, the results were predictably disastrous. Argentina is a growth laggard and is struggling with soaring inflation that is above 100%. After two decades of corrupt autocratic rule, Venezuela has experienced the deepest peacetime production collapse in modern history. Apparently the “Buenos Aires Consensus” was dead on arrival.
Of course, not every country that rejected macroeconomic conservatism collapsed. Turkish President Recep Tayyip Erdoan has kept interest rates under control despite rising inflation and fired every central bank chief who favored rate hikes. Despite inflation approaching 100 percent and widespread predictions of an impending financial crisis, Turkey’s growth has remained robust. While this shows that there is an exception to every rule, such anomalies are unlikely to last forever.
Will emerging markets remain resilient if, as is expected, the period of high global interest rates remains a long way off thanks to rising defense spending, the green transition, populism, high debt and deglobalization? Maybe not, and there is a lot of uncertainty, but their performance so far has been nothing short of remarkable.
Kenneth Rogoff, former chief economist at the International Monetary Fund, is a professor of economics and public policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics. He is co-author (with Carmen M. Reinhart) of This Time is Different: Eight Centuries of Financial Folly” (Princeton University Press, 2011) and author of “The Curse of Cash” (Princeton University Press, 2016). .
This commentary was published with permission from Project Syndicate – The Amazing Resilience of Emerging Markets
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-Kenneth Rogoff
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04/23/11 1224ET
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