US macro risks for emerging markets

1. OECD EMnet Business Meeting
“Global Challenges for Business in
Emerging Markets”
Helmut Reisen
Former Head of Research, OECD/DEV
Professor Emeritus, Basel University
Associate Fellow, German Development Institute

2. The Setting for EM in 2019
• The US Fed has turned ´dovish´ recently. Will emerging
markets (EM) cheer?
• Or will we have other EM currency crashes in 2019, like in
Turkey and Argentina last Summer?
• Argentina & Turkey crises were 1st generation.
• Hypothesis: Don´t fear so much the Fed, fear global policy
uncertainty.
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3. US Yield Curve Inversion
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4. Argentina & Turkey Crashes 2018
Figure 1:
Current account, % of GDP
Figure 2:
A Tale of Two Crashes 2018: TurkLira/$
(green) ArgPeso/$ (blue)
Currency index, 1/1/2018 = 100
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5. EM Cycles & US Monetary Policy
• While Argentina and Turkey idiosyncratic,
• EM cycles do depend on US FED.
• Three channels: global interest rates, the dollar, and global output.
• China, so far the global ´growth machine´, has become another
cyclical determinant for emerging-market (EM) output.
• In historical perspective, US monetary shocks have been minor
recently (Figure 3).
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6. Figure 3: The US Federal Funds Rate (red) and US
Dollar Index (blue) 1974-2019
Source: https://fred.stlouisfed.org/series/TWEXBPA#0
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7. Global Economic Policy Uncertainty
Index at extreme levels:
- Trump isolationism
- Euro fragility
- Brexit
- China containment =>
- Impaired EM growth.
- Thucydides trap:
- Military tensions/war.
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8. Shocks to EM Compared
Figure 5: US Drivers of EM Volatility (z-scores), 2007-18
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