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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.