Emerging Markets Could Trigger Global Currency Devaluations
Oxford Analytica warns of a global race to devalue currencies as emerging market economies run out of options to deal with the effects of the recession.
With the global economy shrinking at a rapid rate, all economies — emerging and mature — are searching for policies that generate domestic demand, rather than export competitiveness, OxAn says in Emerging markets face dwindling options.
“However, policymakers in emerging markets therefore have few options. They can stretch their fiscal position, but most have already utilised this option extensively; hence, it promises to yield little more, while at the same time worsening capital market vulnerability and the confidence of creditors. Some emerging markets are better able than others to cope with this situation. Singapore, during crises of the past decades, is a textbook case. Singapore always managed to improve the structural factors for its economy’s competitiveness, arguably the most effective method in the long term.”
“However, those countries that would require major — and very costly — structural adjustment (thanks either to the inefficiency of the public sector, or to inefficient and high taxes, or to high levels of bureaucratic waste and corruption) will find it very difficult to invest the resources in reforms amidst the crisis.”
Some emerging markets are quickly running out of policy options to respond to the crisis.
A global race to devalue currencies might ensue, together with — depending on the particular social structure — potentially serious political unrest.
“As it becomes clear that many emerging markets are failing in their efforts to boost exports and domestic demand, there are two risks:
- A wave of very significant currency devaluation from the emerging markets could trigger a global competition towards devaluation. The impact of such a race to devalue would be detrimental for any prospect of a speedy global recovery.
- Furthermore, falling fiscal resources impede emerging-market governments from keeping up their public services, and importantly, the redistribution that provides important social services and wellbeing. As a consequence, a wave of serious social discontent can be expected in the economically weaker emerging markets.
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April 23rd, 2009 at 12:00 pm
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