Macroscope | Why post-Brexit Britain could be source of next financial crisis

Name: IMF agrees to bail Sri Lanka out with US$2.9 billion conditional package
Uploaded: 2022-09-08T17:30:28.000Z
Duration: 3 min 13 s
Description: IMF agrees to bail Sri Lanka out with US$2.9 billion conditional package

While there are signs of severe stress in developing economies across the world, developed economies are far from a safe haven

The next emerging-market-style crisis could erupt in the UK, as it reels from inflation, high energy prices, a tumbling pound and the consequences of Brexit

Reading Time:3 minutes

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Amended prices are seen at a self-service laundry in Manchester, England, on September 7. According to reports, more than 1 million more people will be forced into poverty this winter, pushing UK deprivation levels to their highest for two decades even if the government freezes energy prices at current levels. Photo: AP

Nicholas Spiro

Published: 1:30am, 9 Sep 2022

Throughout the developing world, signs of severe stress in financial markets and economies are increasing by the day. The triple whammy of a sharp rise in interest rates, the high cost of food and energy and the prospect of a global recession has hit emerging markets hard.

Foreign investors have withdrawn US$58.2 billion from emerging market bond funds this year compared with inflows of US$52 billion for the whole of 2021, according to JPMorgan data. The MSCI Emerging Markets Index, a gauge of stocks in developing nations, is down 22 per cent, leaving it just 13 per cent above its nadir in March 2020 when the Covid-19 pandemic erupted. The benchmark S&P 500 index, by contrast, is more than 70 per cent higher since then.

Some developing economies are already suffering full-blown financial crises. Sri Lanka, the first Asian country in decades to default on its foreign debt, just signed a preliminary bailout package with the International Monetary Fund. Argentina, a serial defaulter, is facing a run on its currency. Türkiye, another vulnerable economy, is lurching from one currency crisis to the next as the nation’s official inflation rate hit a staggering 80 per cent.

Bearish analysts are drawing parallels between today’s shocks and the emerging-market debt crises in the 1980s and 1990s. Then, as now, dramatic rises in energy prices, a sharp tightening in US monetary policy and domestic vulnerabilities caused severe turmoil.

Yet, the emerging-market asset class of 2022 is a far cry from the immature, illiquid and financially unstable one that began to develop at the end of the 20th century. Not only do most developing nations boast stronger fundamentals and credit ratings today, investors’ perceptions of risk have changed in the past two decades.

03:13

IMF agrees to bail Sri Lanka out with US$2.9 billion conditional package

Jerome Booth, a veteran emerging markets investor, said the main difference between developed and developing economies was that risks were priced in for emerging markets. While one can debate the extent to which these threats are factored in, many traders view developing economies – even those with stronger credit ratings than some developed countries – as riskier.

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.css-1m2rp1p{color:#34b8b5;}Macroscope | Why post-Brexit Britain could be source of next financial crisis

Macroscope | Why post-Brexit Britain could be source of next financial crisis