Extract from our "Mind the Falling BRIC" research paper, published on the 13th January, 2012. Register for a free trial* to access the full paper.
A good part of the out-sized growth in many EM economies in recent years has been propelled by a massive credit and liquidity cycle – not too dis-similar to the story of the US in the 2000s and that of Japan in the 1980s. Credit extension in these EM economies in recent years has in turn been driven both by indigenous lending as well as foreign capital inflows. The extraordinarily stimulative monetary policies in the US (QE1 and QE2) and Japan have played an important role in helping to fuel these credit cycles. However, we suspect there is a good chance that this massive credit cycle in much of EM may turn this year, potentially violently, due to an economic slowdown in Europe, deleveraging by European banks, a prospective rise in the dollar, and the maturity in the EM credit cycles themselves. Prospective QE3 by the Fed may postpone this turn, but would also make the credit bubble even bigger when it turns. In 2012, the economic and financial risks to the BRIC countries are biased to the downside, in our view. If this scenario we painted above materializes, EM currencies should weaken substantially against the dollar.
The full report contains the following sections:
- The experience of Thailand in the 1990s
- The cases of the ‘BRIT’: Brazil, Russia, India, and Turkey
- The likely triggers for the EM credit cycle to reverse
- Shock 1. A slowdown in DM
- Shock 2. A decline in capital flows into EM
- Shock 3. A more assertive US dollar
- Bottom line
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