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Tectonic Shifts Coming to Emerging Markets

By: VanEck
Harvest Exchange
October 11, 2018

Tectonic Shifts Coming to Emerging Markets

Turkey is experiencing a breathtaking post-devaluation current account reversal. The International Monetary Fund (IMF) is toning down its optimism on the global economy in general and emerging markets in particular.

We are at the IMF meetings in Bali this week, having a lot of interesting discussions, presentations, and an occasional earthquake (we experienced a 6.0 tremor at 4 a.m. this morning). It is obvious that the IMF is toning down its optimism, shifting away from the synchronized recovery narrative and talking about the risk of an emerging markets crisis, lower growth, and downside risks to pretty much everything, except the U.S. There is a lot of complacency about Europe, while attention in China is moving beyond trade and towards capital account, intellectual property, direct investment constraints, and geostrategic competition. Stay tuned for more tomorrow. 

The speed of Turkey’s post-devaluation external adjustment is breathtaking. The country’s current account flipped into surplus in August, and the surplus was larger than expected (USD2.59B). In theory, the massive current account reversal should strengthen fundamental support for the lira. However, a large outflow on the capital account side was a major offsetting factor in August and could still be a major issue going forward. Further, the current account reversal points to a major slowdown in domestic activity, which can create complications on the fiscal adjustment front.

There are still no signs of inflation in the U.S., despite robust growth and a very tight labor market. Headline inflation moderated more than expected in September to 2.3% year-on-year, while core inflation stayed unchanged at 2.2%. With the price growth expected to ease more into the year-end, there is little pressure on the Federal Open Market Committee to change its gradual approach to policy normalization.

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Originally Published at: Tectonic Shifts Coming to Emerging Markets