THE fundamentals of emerging markets are stronger than they were 10 years ago, despite the meltdown sparked by the Mexican Government's peso devaluation last December, according to CreditWeek, a Standard & Poor's (S & P) publication. Nariman Behravesh wrote in CreditWeek that Mexico's handling of the situation turned what should have been 'a relatively straightforward devaluation into a full-blown crisis of confidence'. Mr Behravesh, a director of S & P parent DRI-McGraw Hill, said the fallout hit emerging markets when they were awash with investment capital. In the five years before Mexico devalued the peso, private capital flows to developing countries had more than quadrupled, rising to more than US$170 billion in 1994, from $42 billion in 1989, he said. 'In the wake of the Mexican crisis, international investors not only fled from Mexico but [from] other emerging markets as well,' he said. Asian victims of the stampede included Thailand, Indonesia, Hong Kong and the Philippines, Mr Behravesh said. 'As bad as this most recent world financial crisis was, the underlying economic fundamentals for emerging markets are still much stronger than they were during the debt crisis of the early 1980s,' he said. 'First, most of the capital flows have been from and to the private sector, which means that the overall stock of sovereign debt is not a problem this time around. 'Second, while the US is at or close to a cyclical peak, a large increase in real interest rates does not seem likely. 'Third, public borrowing and the overall size of the public sector are considerably lower now than a decade ago in many of the emerging markets, especially in Latin America. 'Fourth, inflation is also much lower now than in the early 1980s. 'Finally, thanks to market reforms and trade liberalisation in the past five years, export-led growth is more widespread now than during the debt crisis.' The financial turmoil surrounding the Mexican devaluation had a much smaller impact on the exchange rates and stock markets in other emerging economies, especially those outside Latin America, Mr Behravesh said. 'The growth rates in most of these countries will not be affected much by recent events,' he said. Countries with high domestic savings rates like Chile and most Asian countries had proved less vulnerable to international financial crises in the wake of the Mexican devaluation. Governments could further reduce their vulnerability to such sell-offs if they encouraged direct investment rather than portfolio investment, Mr Behravesh said. He criticised Mexico's handling of its situation. 'By delaying the devaluation until reserves were depleted, by allowing it to be tied to unrest in Chiapas, and by hitting the markets with a 13 per cent devaluation, followed two days later by a free float, the Mexican Government lost control of the situation,' he said. Mexico now had to control inflation, he added.
