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How Fragile are Emerging Markets?

CAMBRIDGE – Emerging-market equities and exchange rates are again under severe downward pressure, but are the underlying economies really as fragile as global traders seem to fear? The short answer, for a few, is probably “yes,” but for most, “not just yet.”

For most countries, what we are seeing is a recalibration as investors incorporate the risk that China’s GDP might rise more slowly, the US Federal Reserve might start tightening monetary conditions more quickly, and policy backsliding in many countries might undermine potential growth. At the same time, Europe’s massive shift to a trade surplus (a key factor underpinning the region’s new-found stability) and the Japanese yen’s sharp depreciation are among myriad factors squeezing countries seeking to rein in current-account deficits.