Paul Gruenwald was working on the International Monetary Fund’s Argentina team just after Christmas in 1997 when he was told to get on a plane and head to Seoul. He arrived in South Korea to find a country in shock as the Asia financial crisis raged.
That was then. These days Asia is the biggest contributor of global economic growth and Gruenwald is chief economist for S&P Global Ratings, based in Singapore. While South Korea has its challenges, it remains mostly insulated by a global technology boom.
Because Gruenwald had a front row seat for the Asia crisis, Bloomberg News asked for his analysis of the current selloff in emerging markets, which has rattled Argentina and Turkey and prompted other leading economists such as Carmen Reinhart to forecast a rocky period ahead.
The following are edited excerpts of an exchange conducted by email:
Is the selloff a brewing crisis or a correction?
The current emerging market tensions reflect the stronger dollar and higher U.S. rates, both of which reflect a relatively strong U.S. economy. Countries with some combination of high external financing requirements, high U.S. dollar-denominated debt and large foreign investor pools will be most affected. Under the assumption that markets are discriminating across these vulnerabilities, there shouldn’t be a crisis.
Do strong underlying fundamentals matter if the market turns?
If markets are discriminating then EM countries with strong fundamentals should be OK. But that doesn’t always happen. However, such episodes of generalized, non-discriminating risk reduction should be short-lived so countries with good fundamentals –- including ample reserve buffers (see, for example, Korea in 2008-09) should be able to weather the storm.
Are you concerned about debt? If so, can you detail where?
The debt levels become more of a concern if funding conditions become tight and debt needs to be rolled over and/or rates rise more quickly than expected, which leads to debt servicing issues and less spending on other goods and services. We would need a much quicker pace of policy normalization — a Fed-behind-the-curve scenario — to see this happen.
Is there a risk to central bank independence?
I don’t think so. Central banks may need to use some combination of higher on-shore rates and reserve drawdowns to help battle any storms. This does not necessarily compromise their independence, unless they are being ordered to do so by the government.
What’s your biggest concern? Who is most vulnerable?
We really don’t have a list of countries, but we do have a list of characteristics. We would note that in Asia Pacific, India and Indonesia –- two victims of the 2013 Taper Tantrum -– are better placed this time around with lower current-account deficits, although they have seen some modest pressures and Bank Indonesia did raise rates.
How would you describe overall conditions today versus 1997?
I see markets as much more discriminating as regards EM. In the old days we would see a generalized EM selloff, sometimes with significant collateral damage hitting countries that were well-run but lumped together with all emerging markets, good and bad. With much more and more timely information now available, it is a good thing that markets are more discriminating.