Commentary: Routed Emerging Markets Unlikely to Become Center of New Crisis

BEIJING, June 25 -- With some emerging economies encountering capital outflow, market crash, currency devaluation and even rumors of a cash shortage in banks, some institutions are warning that the developing world could become the cradle of a new round of financial crisis.

 

But the worry of these institutions is not justified, as the emerging markets are unlikely to repeat the tragedy of the Asian financial crisis in the late 1990s.

 

From a historical perspective, the warning holds some water as the reversion of capital flow and plummeting stock markets in emerging countries did cause financial crises in the past.

 

In the past few weeks, funds are indeed fleeing emerging markets as the U.S. Federal Reserve hints to gradually withdraw its unprecedented stimulus measures.

 

The capital outflow also caused a rapid currency devaluation in many countries. India and Turkey were hit hard as their currencies fell to record lows against the U.S. dollar in the last week.

 

Even worse, stocks in the emerging markets continuously fell in the past month after hitting this year's high in May.

 

These problems, however, should not be taken as signs of a looming financial crisis in the emerging markets.

 

First of all, decision-makers in the emerging countries have gained in past crises valuable experience of dealing with financial risks.

 

Capital outflow has been a recurring problem facing many emerging markets in the past few years as global investors reacted to the latest market developments. Many emerging economies are kind of used to it.

 

Secondly, economic growth in the emerging markets is still projected to remain dynamic in the foreseeable future.

 

According to latest forecasts from the International Monetary Fund (IMF), the average annual economic growth rate in the emerging economies could reach 6 percent in the next five years.

 

Thirdly, the Fed's exit from stimulus measures may not be bad news for the emerging markets after all.

 

The Fed will only exit from the stimulus measures when its economy is in steady recovery. A strong U.S. economy will benefit the rising economies.

 

In the meantime, capital does flee from the emerging markets in the short term, but the return on investment in the emerging markets is still higher than that in Europe and the United States.

 

Fourthly, most of the emerging economies, with relatively strong current account balance sheets and deeper foreign exchange reserves, have the capability to intervene the market if things do go wrong.

 

Finally, in China's case, the market turbulence is rather a result of government policies designed to restructure the financial sector and root out possible systematic risks caused by the country's so-called "shadow banks."

 

Such policies, if carefully implemented, will help the world's second largest economy complete its much-needed economic restructuring and stand on a more sustainable path in the long run.

 

At the end of the day, the economic fundamentals in most of the emerging markets are still healthy, and risks could also be reduced by financial firewalls such as the foreign exchange reserves of the ASEAN and the BRICS countries.

 

This, together with wise policies, will probably help the emerging markets avoid another crisis in the years to come.