September 3, 2013

Roubini: 6 Reasons BRICS Are Taking a Beating

Dr. Doom wonders if the emerging-market honeymoon is over

Nouriel Roubini at a Nomura equity conference. (Photo: AP) Nouriel Roubini at a Nomura equity conference. (Photo: AP)

They’re back.

Fears of a “hard landing” in China, much discussed in the recent past, have once again flared, with famed NYU economist Nouriel Roubini arguing the BRICS will feel the brunt.

The often-irate prognosticator took to The Guardian’s website on Tuesday to describe the threat and explain six reasons why many emerging-market economies, once among the fastest growing in the world, have suddenly turned sour. 

“First, most emerging-market economies were overheating in 2010 [and 2011], with growth above potential and inflation rising and exceeding targets,” he began. “Many of them thus tightened monetary policy in 2011, with consequences for growth in 2012 that have carried over into this year.”

Second, he notes, the idea that emerging-market economies could “fully decouple from economic weakness in advanced economies was far-fetched.”

He added that recession in the Eurozone, near recession in the United Kingdom and Japan in 2011 and 2012, as well as slow economic growth in the United States were always likely to hurt emerging-market performance.

“Third, most BRICS and a few other emerging markets have moved toward a variant of state capitalism. This implies a slowdown in reforms that increase the private sector's productivity and economic share, together with a greater economic role for state-owned enterprises (and for state-owned banks in the allocation of credit and savings), as well as resource nationalism, trade protectionism, import-substitution industrialization policies, and imposition of capital controls.”

Fourth, the “commodity supercycle” that he noted helped Brazil, Russia, South Africa, and many other commodity-exporting emerging markets may be over.

The fifth, and most recent, factor is the Federal Reserve's signal of its eventual intentions to taper its quantitative easing. For example, the effects have already been seen in the accelerated descent of the Indian rupee from the beginning of the year.

Roubini concluded by explaining that while many emerging-market economies tend to run current-account surpluses, a growing number of them — including Turkey, South Africa, Brazil and India — are running deficits.

“And these deficits are now being financed in riskier ways: more debt than equity; more short-term debt than long-term debt; more foreign currency debt than local currency debt; and more financing from fickle cross-border interbank flows.”

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