Macroscope | Why emerging market investors must hold their nerve in 2017
Although three separate year-end developments bode ill for developing economies, a full-blown crisis is unlikely
As 2016 draws to a close, emerging market investors would be well advised to reflect on the implications of three separate developments that occurred at the end of this year. Taken together, they augur badly for market sentiment towards developing economies in 2017.
The first, and most recent one, is the decision on Monday by Argentina’s reform-minded president, Mauricio Macri, to sack the country’s well-regarded finance minister, Alfonso Prat-Gay, because of disagreements over economic policy and growing criticism of the depth and duration of the country’s recession.
This is troubling given that Argentina - Latin America’s second-largest economy which was locked out of the capital markets for 15 years because of a debt default and bitter conflict with its creditors - has been hailed by international investors as the most exciting economic and political “turnaround story” in emerging markets, underpinned by a new business-friendly government that has abolished currency controls and pledged far-reaching reforms.
Prat-Gay was fired because of opposition to his tax reforms in Argentina’s parliament, or Congress, and a protracted contraction in economic output that shows little signs of abating.
His departure reflects the huge political challenges faced by even the most reform-minded governments in emerging markets.
The second development is the prospect of a hefty fiscal stimulus programme in the US in the wake of the upset victory of Donald Trump in the country’s presidential election. The “Trumpflation” trade has exacerbated a sell-off in global bond markets, fuelled by the Federal Reserve’s more hawkish outlook for monetary policy.