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Symposium 2014

Virtual Library File - To See the Problem of Emerging Markets, Look to Turkey

The Challenge

For over a year, the economic outlook and growth prospects in emerging markets, particularly in Asia, have failed to meet expectations. Indeed, it now seems that emerging markets deceleration is bec ...

For over a year, the economic outlook and growth prospects in emerging markets, particularly in Asia, have failed to meet expectations. Indeed, it now seems that emerging markets deceleration is becoming conventional wisdom among economists and market participants. It remains unclear whether all emerging markets will match the most developed countries in our lifetime. Many emerging markets face substantial headwinds to growth, ranging from governance issues to credit excesses. In most of Asia, credit intensity – the amount of debt needed to create one unit of economic growth – has risen sharply over the past few years, suggesting that the pattern of using debt to fund growth is not viable. Meanwhile, countries with large current account deficits may fall victim to sudden capital outflows. In the short-term, the greatest threat does not come from an external balance-of-payments shock, but stems from domestic credit risk. Longer-term, the key question is whether the growth slowdown is transitory or not. Those who believe it is cyclical argue that growth will soon pick up in conjunction with the (slow) improvement in developed markets. Those who think the deceleration is structural argue that much-needed structural reforms will not be implemented because they collide with the vested interests of the elite.

Morgan Stanley’s head of global macro says that Turkey crystallizes the three critical flaws of emerging markets: rising indebtedness, large current account deficits and stale political regimes. He observes that when well-informed locals flee (as they are doing at the moment in Turkey), this is an unmistaken sign that trouble is brewing. (Financial Times, March 2, 2014)