Severe Challenges Ahead for Emerging Economies

GDP growth of emerging and developing economies slowed for five consecutive years between 2010 and 2015. Growth slowed from 7.5% in 2010 to 4.0% in 2015. Although the growth rates of these economies were still higher than those of developed economies,growth in developed economies hit bottom in 2012 and rebounded afterwards. In addition,in 2014 and 2015,trade growth of emerging and developing economies remained below their economic growth rate - an abnormal phenomenon. And from 2013 to 2015,the trade growth of developed economies outpaced their economic growth. In other words,the growth of emerging market economies has not been as good as that of the developed economies in recent years. Will this situation persist in 2017?

Emerging market economies will face more severe challenges in 2017 for the following reasons.

First of all,the global economic growth rate in 2017 will remain sluggish,meaning that external demand will be weak. That will put a brake on exports,crimp employment and limit economic expansion. In 2016,global economic growth remained at about the level of 2015,which was the fifth consecutive year of weakening growth. The reasons for this long-term stagnation of the global economy include an aging population in China and developed countries,the decline in the marginal rate of return on investment,the decline in the growth rate of total factor productivity and increased inequality in income distribution. These structural constraints will not change in the near term,and the global economy may still be trapped in long-term stagnation this year. Emerging market economies are mostly export-oriented. Slower global economic growth means that external demand will remain weak,and this will make it difficult for emerging market economies to boost growth and employment through exports.

Meanwhile,the US dollar will remain strong in 2017 while global financial markets encounter turbulence. These two factors suggest that emerging economies will continue to face capital outflows and downward pressure on their currency. Some economies may even be confronted with economic or financial crisis. The US dollar's effective exchange rate overall has been appreciating since the Federal Reserve made clear in 2013 that it was considering an end to its quantitative easing policies. The US dollar index has reached about 103,taking into account the large-scale tax cuts and infrastructure spending promised by President Trump. These moves will likely boost expectations for inflation and interest rates and keep the dollar index at high levels in 2017. Moreover,a substantial increase in the index is possible under the right combination of circumstances. Studies by the author of this article show that when there is a rise in the US dollar index,emerging market economies face greater pressure than developed economies. In fact,as previously mentioned,the dilemma faced by emerging economies already began in 2013 when the US dollar index began making its climb. This pressure is reflected in the the current account with weak export growth as well as increased capital outflows under the capital account.

In 2017,global financial markets will continue to see turbulence. Germany,France,Italy,the Netherlands and other European countries will hold general elections,and in some of these countries right-wing political parties may take power. These right-wing parties are exploiting sentiment towards leaving the European Union. If we look at Italy,for example,the banking sector is currently in a precarious state,and this could lead to a banking crisis. If the risk of a banking crisis increases,that could boost the chances of a right-wing victory at the polls,and that in turn could lead to new efforts to leave the EU. At the same time,the numerous political conflicts and terrorist attacks around the world could also result in more economic instability. In quick succession recently,the world witnessed the assassination of Russia's ambassador to Turkey,the Berlin Christmas market attack and attacks on mosques in Switzerland. Incidents like these can boost market sentiment for risk aversion. As emerging market countries are generally considered to be riskier than developed markets,there could be a shift away from these financial markets. That could drive short-term capital from emerging markets and toward developed economies,resulting in greater pressure from capital outflows and currency devaluation for emerging economies.

Emerging market economies are generally in better shape than they were at the time of the Asian financial crisis in 1997-1998. Many emerging economies,particularly those in Southeast Asia,now enjoy a current-account surplus and relatively large reserves of foreign exchange. They are therefore more capable of dealing with capital outflows and maintaining a stable exc