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BNP Paribas finds emerging markets subject to degrees of vulnerability


Insights into key themes in the global emerging markets come from the BNP Paribas Investment Partners new quarterly publication, What's Really Happening in Emerging Markets?

Under the editorship of Patrick Mange, Head of Strategy Emerging Markets, BNP Paribas Investment Partners, the firm finds that although the US Federal Reserve is in no great hurry to raise interest rates, it will ultimately have to do so and examines which emerging markets are the least vulnerable to tightening US monetary conditions. 
BNP Paribas believes that countries that have low debt levels, small fiscal deficits, little borrowing in US dollars and ample international currency reserves are the most cushioned from external funding shocks, while countries that have embarked on a clear reform process also have a premium attached to them. 
“However, there are degrees of vulnerability” the report says and focuses on three of the ‘Fragile Five’ emerging markets whose economies have become overly reliant on foreign investment to finance growth and whose currencies are most under pressure against the US dollar.
Starting with Brazil, the report notes that the newly elected government has announced several budgetary and fiscal measures to structurally improve macroeconomic conditions, including boosting national savings, improving external accounts and reducing inflation expectations. “These painful economic adjustments should ultimately lead to falling real interest rates, but in the meantime are likely to result in a big fall in domestic demand.”
Economic fragility in Turkey, is based more on the appetite for political reform than on macroeconomic performance, the bank says. “Sustained economic and market recovery will therefore depend on the will of the incoming government following the June elections to prioritise structural reform over internal debate and to demonstrate that they are market-friendly.”
 In India, the Modi government has the strongest mandate in 30 years to deliver on its promise of growth and development, giving it the room to focus on economic efficiency rather than politically-motivated decisions, the report says.  “From the outset, the government has been vocal about the reform measures it plans to implement during its term in office, and these reforms, easier monetary policy and commodity prices add up to a positive outlook over the next two to three years.”

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