Monday, June 2, 2014

Slow growth in US, Europe affects Emerging economies

These countries, whether they're in Asia or Latin America or Eastern Europe, they depend on exports for growth. And where do those exports go? They go to Western Europe and North America. If you’ve got slow growth in both those areas, growth in demand for everything is weaker. And that's why the Chinese, for example, are trying to convert from an export economy to more of a domestic-driven economy.

But then within the developing countries, you have specific differentiations between them. And some of these countries are very well-managed, like South Korea or Malaysia. They tend to have a current account surplus. This means that the internal savings by business, consumers, and government all combined exceeds domestic investment. Now, if saving exceeds investment, what do you do to with the excess? You export it.

If a country’s exporting capital and then the hot money that’s rushing in and out of these countries leaves, it means the current account surplus is going to be less, but they’re still going to be exporting capital. They’re not going to be in a troubled condition. And those well-managed countries that tend to have current account surpluses also tend to have stable currencies, low inflation rates, and stock markets that have been stable in the last decade and low interest rates.