As finance ministers and central bankers convened in Marrakech for the International Monetary Fund and World Bank annual meetings on 9-15 October, they faced an extraordinary confluence of economic and geopolitical calamities: wars in Ukraine and the Middle East, a wave of defaults among low- and lower-middle-income economies, a real estate-driven slump in China, and a surge in long-term global interest rates – all against the backdrop of a slowing and fracturing world economy.
But what surprised veteran analysts the most was the expected calamity that hasn’t happened, at least not yet: an emerging market debt crisis. Despite the significant challenges posed by soaring interest rates and the sharp appreciation of the US dollar, none of the large emerging markets – including Mexico, Brazil, Indonesia, Vietnam, South Africa and even Turkey – appear to be in debt distress, according to the IMF and interest rate spreads.
This outcome has left economists puzzled. When did these serial defaulters become bastions of economic resilience? Could this be merely the proverbial calm before the storm?
Several mitigating factors come to mind. First, although monetary policy is tight in the US, fiscal policy is still extremely loose. The US is poised to run a $1.7tn (£1.4tn) deficit in 2023, compared with roughly $1.4tn in 2022. And, excluding some accounting irregularities related to President Joe Biden’s student loan forgiveness program, the 2023 federal deficit would be close to $2tn.
China’s deficits, too, have been soaring; its debt-to-GDP ratio has doubled over the past decade, and the IMF expects it to exceed 100% in 2027. And monetary policy is still loose in Japan and China.
But emerging market policymakers deserve credit as well. In particular, they wisely ignored calls for a new “Buenos Aires consensus” on macroeconomic policy and instead adopted the far more prudent policies advocated by the IMF over the past two decades, which amount to a thoughtful refinement of the Washington Consensus.
One notable innovation has been the accumulation of large foreign exchange reserves to fend off liquidity crises in a dollar-dominated world. India’s forex reserves, for example, stand at $600bn, Brazil’s hover around $300bn, and South Africa has amassed $50bn. Crucially, emerging market firms and governments took advantage of the ultra-low interest rates that prevailed until 2021 to extend the maturity of their debts, giving them time to adapt to the new normal of elevated interest rates.
But the single biggest factor behind emerging markets’ resilience has been the increased focus on central bank independence. Once an obscure academic notion, the concept has evolved into a global norm over the past two decades. This approach, which is often referred to as “inflation targeting”, has enabled emerging market central banks to assert their autonomy, even though they frequently place greater weight on exchange rates than any inflation-targeting model would suggest.
Owing to their enhanced independence, many emerging market central banks began to raise their policy interest rates long before their counterparts in advanced economies. This put them ahead of the curve for once, instead of lagging behind. Policymakers also introduced new regulations to reduce currency mismatches, such as requiring that banks match their dollar-denominated assets and liabilities to ensure that a sudden appreciation of the greenback would not jeopardise debt sustainability. Firms and banks must now meet much more stringent reporting requirements on their international borrowing positions, providing policymakers with a clearer understanding of potential risks.
Moreover, emerging markets never bought into the notion that debt is a free lunch, which has thoroughly permeated the US economic policy debate, including in academia. The idea that sustained deficit finance is costless because of secular stagnation is not a product of sober analysis but rather an expression of wishful thinking.
There are exceptions to this trend. Argentina and Venezuela, for example, have rejected the IMF’s macroeconomic policy guidelines. While this earned them much praise from American and European progressives, the results have been predictably catastrophic. Argentina is a growth laggard grappling with runaway inflation, which exceeds 100%. Venezuela, after two decades of corrupt autocratic rule, has experienced the most profound peacetime output collapse in modern history. Evidently, the “Buenos Aires consensus” was dead on arrival.
To be sure, not every country that spurned macroeconomic conservatism has collapsed. The Turkish president, Recep Tayyip Erdoğan, has kept a lid on interest rates despite soaring inflation, firing every central bank head who advocated rate increases. Even with inflation approaching 100% and widespread predictions of an imminent financial crisis, Turkey’s growth has remained robust. While this shows that there is an exception to every rule, such anomalies are unlikely to last indefinitely.
Will emerging markets remain resilient if, as one suspects, the period of high global interest rates persists into the distant future, thanks to rising defence spending, the green transition, populism, high debt levels, and deglobalisation? Perhaps not, and there is huge uncertainty, but their performance so far has been nothing short of remarkable.
Kenneth Rogoff is professor of economics and public policy at Harvard University. He was the IMF’s chief economist from 2001-03.
© Project Syndicate