Today, investors and economists might scratch their heads and wonder whether Mark Twain was correct when saying that “history never repeats itself, but it does often rhyme”, especially when they assess the current events in Sri Lanka and Argentina. I cannot blame them as these fears are exacerbated by everyday headlines that emphasise slowing global growth as well as the impact of elevated food and fuel prices on companies and individuals around the world. But, upon closer inspection, things look very different compared with two decades ago.
For one, fewer EMs have dollar pegs (like the one that Thailand had) today than ever before. In addition, EMs are less dependent on international financial institutions for financing: Only about 60% (down from 80% in 2006) of financing comes from the International Monetary Fund (IMF). China has replaced a large part of this financing and has become such a large lender to other EMs that its lending habits rival that of the World Bank in scale. And then finally, the countries most at risk of defaulting on their debt today only account for 5% of the global gross domestic product (GDP) and 3% of global public debt, figures much lower than two decades ago.
A bigger threat to global and EM stability today is China, where non-financial sector debt has risen at a breakneck speed since 2008. For now, a silver lining to China’s debt problem is that foreign investors hold only about 11% of Chinese sovereign debt, and with interest rates still relatively low, China still has some room to manoeuvre. Investors must, however, know that the situation can change quite quickly. It would, therefore, be prudent for countries who recently applied for BRICS membership and are struggling with their own woes, such as Iran and Argentina, to not consider China as their saving grace.
Whilst investors might be concerned about how the situation is unfolding in the world right now, it is important to remember that the probability of another EM crisis seems a lot lower than in the past. Also, the impact would almost certainly be more limited than before.
*The Thai Central Bank pegged the baht to the US dollar from the mid-1950s until 1997.