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Nothing stays the same: EM's dramatic external rebalancing

The Emerging View

04 November 2015

A yet-to-be realised bullish narrative of exit velocity and rate hikes in the US has pushed the US dollar up by nearly 40% against Emerging Markets (EM) currencies since 2011, aided by plentiful QE liquidity from Western central banks. This surge in the Dollar quickly triggered panic about EM’s abilities to cope with the resulting capital outflows, falling commodity prices, higher inflation via FX pass-through and possible FX mismatches on corporate balance sheets. EM growth did slow in response to these drags, but EM countries have spectacularly failed to implode. There are no widespread defaults or balance of payments crises. Instead, there is mounting evidence that EM economies have undergone significant adjustment because most EM countries were able to control inflation when their currencies weakened, thus restoring competitiveness. Nowhere is this more evident than in their current account balances.

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