TalkingEconomics: Will FX falls save emerging markets?

The prospect of rising interest rates in developed markets and subsequent dollar strength have hurt trade and growth in emerging markets, so will currency depreciation come to the rescue or does the region's outlook depend more on global growth?

14 October 2015

Craig Botham

Craig Botham

Emerging Markets Economist

Dollar rise dents trade values

Emerging market trade and currencies have suffered a great deal over the last year.

A trade revival rests more on a resurgence in global growth than on further depreciation, which in any case carries risks.

Collapsing trade values have prompted concerns about the state of global demand, and particularly about the fate of emerging markets.

But trade in volume terms, though weak, has not seen the same precipitous decline.

The difference between the two highlights the role played by weaker commodity prices but more importantly the much stronger dollar.

As these effects drop out of the year-on-year comparisons, trade in value terms should begin to look better.

Trade revival hinges on global growth

Trade volumes, a better indicator of demand, are currently more or less in line with global growth. Any revival there hinges on a global recovery.

Trade weakness has prompted a return to competitive devaluations in an attempt to boost exports, but with limited signs of effectiveness so far.

The impact of depreciation on export performance has been declining over time, as global supply chains become more integrated, and so far larger depreciations are needed today than in the past to achieve a similar trade boost.

This poses risks to the domestic economy; dollar-denominated debt will become increasingly expensive to service, and inflation will climb as the cost of imported goods spirals.

We do find, however, that the degree of inflation pass-through varies considerably from economy to economy.


For related articles:

TalkingEconomics: Eurozone - Sino slowdown meets refugee crisis

TalkingEconomics: The macro impact of China

Or view the October 2015 Economic Infographic


Topics:

  • Emerging Markets
  • Craig Botham
  • GDP

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