Emerging markets: Hardier havens than before?

A report from Franklin Templeton Investment explains how emerging markets have become more robust against systemic shocks

Investors concerned about emerging markets need not worry about contagion and widespread collapse, especially since past lessons have made them stronger.

A topic paper entitled “Emerging Markets: Mapping the Opportunities,” prepared by economists at Franklin Templeton Investments, explains that historical crises have provided valuable experience for emerging markets.

“We’ve really evolved a long way in the emerging markets, and part of that evolution has been from the lessons learned. Now the Asian financial crisis is a great example… [T]here you had a toxic combination of pegged exchange rates combined with external debt vulnerabilities combined with macro imbalances led from an investment boom and current account deficits, and they really all came to a head in a complete collapse of exchange rates. And those, because other countries didn’t have buffers in place, quickly spread through confidence shocks throughout the entire region,” explains Dr. Michael Hasenstab, CIO, in a video interview. “The good news though is that in that process of going through such a horrific experience, policymakers have learned their lessons.”

The paper, which takes on the uncertainty many investors feel about emerging markets, discusses several other case studies of emerging market countries that have come out better than before. Mexico, for example, has adopted a flexible exchange rate, built up foreign exchange reserves reduced short-term debt, and taken on several other policy instruments to reduce their external vulnerability. Brazil also currently has a flexible exchange rate, strong foreign exchange reserves, and limited short-term debt; improvements in policy mix and structural reforms are also anticipated. Malaysia and Indonesia are also noted as emerging markets that have used past experience to shape present and future economic policy.

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