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Emerging Markets a Decade and a Half After the Frenzy

Ichiro Suzuki

Absolutely nothing has been delivered since emerging markets reached their apex at the end of October 2007. Sixteen years later, EMs are still struggling at around the levels experienced in the beginning of 2007. History has repeated itself. Emerging markets are littered with episodes of breaking investors’ hearts by raising hopes by the lure of exotic land, only to dash such hopes with their inability to meet inflated expectations.


London-based Goldman Sachs chief economist Jim O’Neal coined an acronym BRICs at the outset of the 21st century. It went wild and became highly successful marketing propaganda that drove every player in the financial industry. They danced to the music of BRICs and emerging markets in general fiercely, driving EMs’ shares to dizzying levels. The Financial Times ran an article on Mr. O’Neal as “The man who named the future”. For BRICs and EMs, their future looked so bright, even ecstatic.


Then EMs were brought down by the 2007-09 Global Financial Crisis that was not their fault. After the storm was over, EMs bounced back strongly, as hopes still ran high, but then began to drift after a rebound. Prior to the crisis, a number of developing economies prospered on higher commodity prices that were sent soaring by ravenous appetite from China, which back then consumed resources in a very wasteful fashion. Crude oil prices reached $150 per barrel and then collapsed on their own weight. After the GFC, the Chinese economy struggled to register double-digit growth rates that were once taken for granted, and then began to decelerate markedly. That hit commodity producers hard. On top of it, the GFC crushed demand in the developed world, on which EMs were also dependent.


Fed chairman Ben Bernanke embarked on a fiercely aggressive monetary policy of quantitative easing in order to keep the struggling U.S. economy afloat. Ultra low interest rates in the U.S. drew EMs into a bad, old habit of borrowing excessively. As opposed to the past, those countries found a new generous lender who didn’t either attach conditions to loans or preach what should be done. So they felt free to borrow from China until one day they found themselves being drowned in accumulated debt. They certainly had forgotten that their economic boom in early years of the 21st century was ignited by debt forgiveness by developed countries’ lenders.

EMs drifted throughout the 2010s. Then, their slump was exacerbated in the 2020s by China’s woes. China today is following footsteps of Japan after the burst of a real estate bubble at the outset of the 1990s, which brought down economic growth potential with a mountain of bad debts in the banking system. Even worse, President Xi Jinping has severely damaged entrepreneurs’ spirits with in his quest for common prosperity.

Goldman Sachs was probably aware what was coming. As soon as Mr. O’Neal retired in 2013, the firm began to downplay EMs and BRICs while others kept dancing to the music the firm had originated. Instead Goldman Sachs began to stress ‘institution’ that enabled a country to exploit its growth potential rather than raw growth forecasts. Rule of law matters to those who do businesses more than economic growth rates. Property rights and sound policy frameworks also weigh heavily in making economic growth a lasting trend. Democracy tends to offer such attributes a great deal more than autocracy. Understanding these things has enabled Goldman Sachs to survive a number of turbulence since its foundation in the mid-19th century. That said, not even Goldman Sachs foresaw that the man who succeeded Hu Jintao as China’s president would inflict so much damage to the Chinese economy with his rigid dedication to communist dogma and refusal to listen to technocrats. In 2015, the House of Lords made Mr. O’Neal a life peer. Life of Baron O’Neal of Gatley is in good shape while EM investors are licking wounds from the past dance.

“Brazil is the country of the future and will always be” it is said on Wall Street. This saying has proved to be correct once again. After a boom created by selling commodities to China, Brazil has been growing more slowly than the U.S. for ten years. Even worse, the country’s working age population is expected to peak out at around the turn of the next decade. Time left for Brazil to take advantage of population bonuse is running out fast. Where has the promise of high growth BRICs? It has proved to be a mirage.

At the beginning of 2021, the MSCI emerging market index had eclipsed the 2007 high, driven by liquidity overdose by the Fed and other major central banks in response to COVID-19. The new high, however, proved to be a false dawn and the markets came back down rather hard. Since 2022, EMs are victims of rising U.S. interest rates and the mighty greenback that is exacerbating their debt burden. A new dawn of EMs still seems some time away.


About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.




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