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Emerging markets thrive despite struggles

February 3rd, 2016

 

 

Commodity prices plummeted in 2015, resulting in oil prices hitting a 7-year low last December.

 

Low commodity prices aren’t good for emerging markets, but stable prices are better than volatile ones. This encourages investors to come back into emerging markets.

 

Additionally, the world’s second largest economy was a serious headache for emerging markets this year.

 

For years, China had been a foremost importer of raw commodities from Southeast Asia, Europe and Latin America.

 

Now China is transitioning to a consumer-led economy from one led by manufacturing and construction, meaning its demand for commodities has plummeted.

 

This year, China posted its worst economic growth since 2009. The big concern was how quickly the economy was slowing.

 

Chinese officials are pumping money into their economy and cutting interest rates, which could trickle down and help China’s trade partners.

 

Many experts believe China’s growth may slow down more in 2016, but not at a faster pace. The dollar also got a lot stronger this year against many currencies in Latin America, Europe, Southeast Asia and the Middle East.

 

Brazil’s real fell 31 percent against the dollar, Russia’s ruble dropped 17 percent and Indonesia’s rupiah lost 10 percent according to Bloomberg.

 

A weak currency lets emerging markets sell products abroad more cheaply, making them more attractive to foreign buyers.

 

That eventually boosts exports and, in turn, economic growth.

 

The bad news is that emerging markets have to pay off some debt in U.S. dollars.

 

There’s $3 trillion of emerging market debt denominated in dollars, according to The Chicago Sun-Times. As the dollar rallies, that debt gets more expensive to pay back.

 

Overall, emerging markets have less dollar debt than they did in past decades, making them less vulnerable to the dollar’s rise.

 

India is the fastest growing major economy in the world, and its government expects it to grow even faster this year because it is significantly benefiting from the sharp drop in global oil prices.

 

Kenya grew 6.5 percent last year and is forecast to grow 6.8 percent this year. The country is enjoying a technological boom and has benefited from low oil prices according to The New York Times.

 

Unlike many other emerging markets, Kenya doesn’t need to worry much about slowing growth in China because of its limited exposure to the country.

 

Vietnam grew 6.5 percent last year and is expected to grow by 6.4 percent this year, according to Bloomberg. The country is benefiting from its growing workforce because 60 percent of the population is under 35-years-old.

 

In addition, Vietnam will likely gain an extra boost from the Trans Pacific Partnership, which is the trade deal between the United States and 11 other nations.

 

Investors are upbeat about Chile, because the country has managed to diversify its economy in last five years.

 

Chile has a part of the Trans Pacific Partnership agreement as well, which should help boost its international trade in the coming years.

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Mexico is a prime example of the Latin American success story. Its economy grew 2.3 percent last year, and is projected to accelerate to 2.8 percent this year according to the Chicago Sun Times.

 

Unemployment is falling and the country’s debt was upgraded last year, after the government passed economic reforms.

 

Indonesia has focused on improving its economic profile since it was hit by the last financial crisis.

 

It has cut down its foreign debt, making it less vulnerable to rising interest rates in the U.S.

 

The country has also successfully tamed its spending, and imposed limits on its budget deficit.

 

The middle class represents over half of Indonesia’s population.

 

Editor’s Note: Information from The New York Times, Chicago Sun Times, and Bloomberg were used in this report.