For many emerging economies, 2014 has gotten off to a grim start. Concern over the Chinese economyís marked slowdown and the Argentine pesoís steep slide against the US dollar has triggered heavy selling pressure on an array of emerging-market currencies. But the current volatility does not portend sustained weaker growth in emerging economies as a whole. Differentiation is needed, and that is what financial markets are now doing.
The scale of the battering varies widely from country to country. For example, the problems currently dogging Argentina are anything but a surprise. On the contrary, they are the near-inevitable result of years of policy mismanagement that has spawned high inflation, a badly overvalued currency, and massive erosion of foreign reserves.
By contrast, the currencies of Central and Eastern Europeís emerging markets have remained relatively stable. For example, thanks to Polandís robust economic performance, the zloty has essentially maintained its exchange rate against the euro, slipping 2.2% since the start of the year (as of the beginning of February). The Hungarian forint lost slightly more than 5% against the single currency over the same period, but this is less sharp than in the past, when the countryís macroeconomic problems made the exchange rate far more sensitive to shifts in market sentiment.
The stabilisation of the eurozone economy and the reduction of imbalances have helped to improve the growth outlook for Central and Eastern European countries. Furthermore, most of these countries have made progress taming their own imbalances. By contrast, the Russian rouble has continued its lengthy nosedive this year, tumbling by more than 5.5% against the euro by the beginning of February. The reasons are mainly homegrown: a poor investment climate, heavy capital outflows, and a shrivelling current-account surplus.
A look at Latin America also reveals wide regional differences. The Argentine peso, the regionís main culprit, has plummeted by 19% this year against the US dollar. In Brazil, the realís losses in 2014 have been comparatively mild, but this comes on the heels of the hefty depreciation last year. Capital is also heading for the exit in Mexico and Chile.
The regionís reliance on commodities is fraying