Emerging Markets – Quick Commentary
The risk of running high current account deficits (CAD) has hit hard several emerging markets in the Asia-Pacific.
With FIIs withdrawing to invest in US bonds and supply of dollars dipping, national currencies in several of these emerging markets have gone for free falls. The Indian Rupee has been one of the worst hit, along with the South African Rand, Brazilian Real, the Mexican and Chilean pesos and the Indonesian Rupiah.
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For quite some time now, CAD’s have been steadily rising in these markets and have crossed 5% of national GDPs for most. It’s high time these economies realize that high CAD’s cannot be financed for eternity through short-term capital flows. Unless they discipline their trade and current accounts by compressing imports. And succeed in soliciting long-term stable capital flows, outbound FII investments will produce currency volStronges.
No wonder India’s Finance Minister has requested Indians to stop buying gold and is contemplating more liberal measures for FDI.
