Goldman Sachs expects emerging markets to continue to weaken
More capital outflows will hurt developing economies as the developed world recovers
Emerging markets will underperform developed markets this year, Goldman Sachs said, with capital expected to continue flowing out as more developed economies recover and the United States exits from its ultra-loose monetary policy.
"The emerging-market underperformance is going to continue in 2014," Goldman's chief markets economist, Dominic Wilson, told a press conference in Hong Kong yesterday.
"We've seen quite a lot of pressure on the emerging-market currency and bond markets. We think the adjustment process is not finished."
Emerging markets had paid a price as they took pretty aggressive actions, including excessive interest rate increases, to boost domestic consumption when export demand fell sharply after the 2008 global financial crisis.
Those measures gave their economies a short-term boost, Wilson said, but the underlying problems could not be underestimated.
"The cost is that the current account positions generally deteriorated, interest rates fell further than perhaps they should have done and credit growth, in many cases, boomed," he said.
Emerging markets were now facing "weaker currencies, domestic market demand restraints, higher interest rates and restraints on credit growth", Wilson said.
However, he added that emerging markets were better able to weather an investor retreat now than during the 1998 Asian financial crisis, when the currency turmoil spread and forced international bailouts.
Emerging markets outperformed developed markets for a few years from 2008 on the back of a loose global liquidity environment. But they began underperforming last year when the US Federal Reserve foreshadowed the trimming of its quantitative easing scheme.
The MSCI Emerging Markets Index fell 5 per cent last year.
As for the mainland, Goldman is projecting 7.6 per cent growth for the world's second-largest economy this year. Growth in developed markets was unlikely to match the pace before the global financial crisis despite their recent recovery, which would make export-led expansion on the mainland a structural challenge, it said.
"We won't go back to the 15 per cent or 20 per cent export growth of the past," said Andrew Tilton, the chief Asia-Pacific economist at Goldman in Hong Kong.
"The growth is slow, but the leverage continues to rise relative to [gross domestic product]. So the challenge for policymakers is to slow that growth in debt without slowing GDP growth too much.
"We think that would require some improvement in the export environment in the near term and some rotation towards more consumption growth in the long term."