EMERGING MARKETS
mature industrial economies. Still, the tightening of rates came at a time of challenges for economic growth. Brazilian GDP year-over-year growth is estimate in the 2.0 - 2.5% range for 2013, which is down from 7% during 2010. The slower economic growth, which started well before the currency turmoil, was likely part of the cause for the poor equity performance last year, made worse by the currency sell-off associated with asset allocation shifts away from EM.
India
India has difficult underlying structural issues. The magnitude and continued growth of subsidies in India are concerning for the government’s fiscal health. Oil subsidies in particular are one of the culprits of a widening current account deficit. Currently, India imports a staggering 80% of its oil, which is then heavily subsidized for its citizens. Gold imports are also a factor in the current account deficit even though the tariffs on gold imports have been raised. The Indian current account deficit has been getting larger, with the red ink around 5.8% of GDP.
The role of the current account in currency determination
is given added importance by the relatively strict currency and capital controls that India has in place. When countries restrict capital flows, it is much more of a challenge to attract the offsetting capital flows when deficits grow in the current account. For example, India is highly dependent on Foreign
Direct Investment. FDI flow can be temperamental with regards to market participant’s preferences and appetite for risk, especially regarding the government’s attitude towards foreign ownership of businesses operating inside India. Shorter-
When countries restrict capital flows, it is much more of a challenge to attract the offsetting capital flows ...
term capital flows fill the gap when FDI slows, but only at the price of a lower rupee, which has the potential to push inflation pressures higher down the road. Meanwhile though, Indian equities rose modestly in local currency terms. The perceived benefits of a depreciated rupee as a longer-term positive factor for
earnings of many companies
involved in the export sector were not offset as they were in Brazil with rising fears of political risks.
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