Rebirth Of Emerging Economies

By M. Isi Eromosele

The global economy is slowly expanding again. With leadership from Asia, emerging economies are further ahead on the road to economic recovery and thus leading the way in the global recovery. Emerging markets weathered the recent global financial crisis a lot better than the developed nations. This has helped boost their inflows and valuations.

The recent financial crisis was created when the developed economies led the world into a global downturn because of their excessive financial leverage. Emerging markets equities were impacted by this downturn in the fourth quarter of 2008 and trade financing and development funding evaporated. However, emerging market stocks bounced back much more strongly than stocks in developed countries, once credit markets began to heal.

Contrary to assumptions that emerging market equities would be most affected by the crisis, China and other major emerging economies turned out to be well positioned for the recovery with sound economic frameworks, well built-up currency reserves, low interest rates, lower that average inflation and improved terms of trade for commodity imports.

During the past decade, emerging markets have indeed experienced transformational structural financial reforms and better macroeconomic policies have been established. In response to global recessions in the 1980s and 1990s, many developing economies successfully revamped their economies, engendering budgetary surpluses, rather than deficits, built up considerable foreign exchange reserves, inaugurated effective Central Bank policies and achieved investment grade credit ratings.

There have been profound changes at the corporate levels as well. Companies in emerging markets have improved their balance sheets, implemented corporate governance reforms and improved the quality of their management, resulting in a more stable investment environment. While the above trends were taking hold in emerging markets, the same cannot be said for the developed markets and the emerging markets in Europe. The cause for this is excessive financial leverage and incredibly high budgetary deficits.

Emerging Asia, especially China is flush with robust liquidity, thanks to flexible monetary policies. Indeed, China has sufficient reserves to continue promulgating expansionary measures for the foreseeable future. Rebound in equity markets and the resumption of capital inflows within the context of a decline in risk aversion is providing further impetus for the Asian economies.

The global economy is expanding again, albeit slowly, being pulled up by strong economic performance of emerging countries and modest recovery among advanced economies. The International Monetary Fund (IMF) estimates that emerging markets will generate two-thirds of global Gross Domestic Product (GDP) growth in 2011 and it is forecasting GDP growth of approximately 1 per cent for the advanced economies versus 5 per cent for developing countries.

The long-term pillars of support for the emerging markets asset class remain the same, notwithstanding the recent financial crisis. The demographic profile of emerging markets remains favorable, urbanization continues unabated as the middle class is continually growing.

Additionally, personal consumption is still relatively low on a per-capital level, with considerable room for growth. Continued shift of population to urban centers portend requirement for a huge investment in much needed infrastructure, an area where some emerging economies, such as China, has stepped up spending.

The emerging economies face the challenge of providing their bludgeoning urban population with productive employment that would create incomes to help increase domestic consumption as well as produce tax revenues for the government. Fortunately, the major emerging economies are well positioned to support continued infrastructure investment as a result of their accumulation of significant foreign exchange reserves.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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