The BRICs Have Hit a Wall

Major emerging markets are suffering — and frankly that’s not very surprising

Only a short time ago, the world’s emerging markets, especially the BRICs — Brazil, Russia, India and China — were supposed to be the saviors of the global economy. As the West sank into a recession in the wake of the 2008 financial crisis, China, India and many other developing economies continued to post strong growth, helping to prevent the world economy from tumbling into an even deeper and more painful downturn. As the U.S. and Europe struggled to recover, talk that the giants of the developing world were destined to take their place at the top of global economic and political affairs accelerated.

Now, however, with the opening of 2014, many emerging markets look like they’re the ones that need saving. Investors are fleeing markets from Latin America to Asia, tanking currencies, stocks and sentiment. The good money is now betting on the once battered advanced nations. While stock markets in the U.S. and Japan have soared, those in the developing world have slipped.

What’s gone wrong? Some of the turmoil has been inadvertently brought on by the U.S. Federal Reserve. After flooding the world with billions of dollars through unorthodox bond-buying programs to boost the U.S. economy, the Fed is beginning to scale back — or “taper” — those efforts, and jitters over the impact of that unprecedented unwinding is scaring investors from assets perceived as high risk. Especially vulnerable are emerging economies that have become dependent on cheap and easy foreign funds to finance current-account deficits, like Turkey and Indonesia. Turkey’s currency, the lira, hit a record low in recent days, while Indonesia’s rupiah has sunk to levels not seen since the Asian financial crisis of the late 1990s.

However, there are more fundamental reasons why investors have soured on emerging economies. Their prospects just aren’t what they used to be. China, the granddaddy of them all, is in the middle of its most severe slowdown since the late 1990s. Fears are rising that India could be trapped in stagflation — that nasty combination of slow growth and high inflation. Once high-flying Brazil is expected to grow no faster than the U.S. in 2014. Research firm Capital Economics forecasts growth in emerging markets overall to be around 4.5% in 2014 — well below the average of 6.0% since 2000.

Full article: The BRICs Have Hit a Wall (Time)

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