World’s money is flooding emerging markets

Published on September 30, 2009

Economists warn of financial disaster if investors suddenly pull out when conditions deteriorate

By PAUL BLUSTEIN, Washington Post
First published: Monday, December 26, 2005

Remember the financial crisis that laid waste to the Mexican economy in 1995? Or Thailand’s meltdown in 1997, which soon spread to Indonesia, South Korea, the Philippines, Russia and Brazil? Or the implosion of Argentina’s economy in 2001, which left millions of people destitute?

Just distant memories, unlikely to recur — or so the world’s investors seem to have concluded.

International money managers are pouring funds at a record pace into the emerging markets of Latin America, Asia, Eastern Europe and Africa. Cash is gushing into mutual funds that specialize in emerging markets, and billions of dollars more are flowing into such countries from giant insurance companies and pension funds.

Turkey’s stock market is up more than 50 percent this year; Mexico’s is up more than 30 percent; Egyptian stocks have more than doubled. And investors are snapping up bonds issued by emerging-market governments with remarkable gusto.

Therein lie the makings of future disasters, in the view of many economists, market veterans and policymakers. Having pumped large sums into emerging markets at a time of low interest rates and high prices for the commodities that many developing countries produce, investors may well bolt when conditions deteriorate, with the sudden outflow of cash devastating economies and plunging governments into default.

“I worry that there’s this perfect storm coming for emerging markets,” said Kristin J. Forbes, a Massachusetts Institute of Technology economics professor who served until early this year on President Bush’s Council of Economic Advisers.

To hear professional investors tell it, their current bullishness is based on the vastly more prudent economic policies that emerging-market nations have adopted. They cite the higher ratings bestowed by credit agencies such as Moody’s and Standard & Poor’s on countries that only a few years ago were plagued by defaults and currency devaluations. For example, government bonds issued by Mexico, Russia and Poland now qualify as “investment grade.”

“Those ratings have come from fundamental improvements in monetary and fiscal policy,” said Dario Pedrajo, senior portfolio manager at Biscayne Americas Advisors. “Deficit spending has declined considerably in emerging-market countries.”

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