Threats surrounding developing economies have been recurrent talk in market circles over the last few years. Leaders of the financial world are continuing to discuss this theme on the sidelines of the World Economic Forum in Davos, as per reports.
The latest dark cloud on the horizon is the IMF’s quarterly update to its World Economic Outlook. In the report, the IMF has reduced its 2016 growth forecast for developing and emerging economies. However, such economies have staved off multiple headwinds over the last three years. This means that it still makes good sense to invest in select stocks from these countries.
Multiple Headwinds
The IMF lowered its projections for developing and emerging economies to 4.3% for 2016. Last October, it had estimated that growth for this year would come in at 4.5%. However, this is still higher than the 4% rate experienced in 2015.
China’s economic woes are at the root of the developing world’s problems. The second-largest economy is a major consumer of a variety of materials. On the other hand, relatively smaller economies are part of its massive supply chain.
A major outcome of these troubles is the flight of capital from such economies. According to Washington-based Institute of International Finance, nearly $3 trillion had entered these markets during 2001–2011. This inflow of capital continued until last year, when nearly $735 billion flowed out. Structural issues related to their economies and large buildups of debt are other factors plaguing these countries.
Economies Showing Resilience
However, things may not be as tough as they seem. For instance, the debt burden of these countries has not been particularly dismal when considering historical standards. A study conducted by research firm Capital Economies last year concluded that it was the rate at which such debt continued to grow rather than the actual volume of debt which triggered crises.
Over the last few years, debt levels of most emerging economies have increased only marginally relative to their size, according to the company. For instance Malaysia’s private debt-to-GDP ratio has increased by 18.5% over the last 10 years. During the crisis of 1997, this metric had increased by almost a 100 percentage points.
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