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Emerging Markets Macro and Strategy Outlook
Capital Flows and Current Account Balances
Notwithstanding the failure of the G20 finance ministers and central bank governors
to agree a set of targets for where current accounts ought to go, we think there are
good reasons to expect current account balances in EM to deteriorate over time:
surpluses should fall, and deficits should rise, in many countries.
To some extent this process is already at work, and a number of big EM current
account balances have deteriorated in recent quarters: China, India, Brazil and
Turkey have all seen their current accounts worsen.
With the possible exception of Turkey, whose current account deficit now exceeds
6% GDP, the current account deterioration that we have seen has been pretty
modest. One way of explaining this is that policymakers still have a “fear of deficits”,
largely thanks to the role that big current account deficits have played in emerging
markets crises over the past 30 years.
We think there is plenty of room for this “fear of deficits” to diminish, for three main
reasons. In the first place, real exchange rate appreciation has accelerated recently,
and currency strength will in the end bias spending decisions towards imports.
Second, a change in the composition of GDP growth in emerging economies — with
domestic spending growth now leading GDP growth in many countries — means
that there should be more spillover to imports. And finally, we think EM
policymakers might find themselves more easily convinced that current account
deficits are still well short of levels that give any rise to concerns about external
vulnerability.
Deteriorating current account balances in EM might give rise to a debate about
whether we’re headed for another round of EM crises. This would be a valid debate,
but we think the risks are pretty low in the short run.
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