Investors may find it tempting to pursue a broad risk-off approach to the entire emerging world, especially in the context of rising global trade tensions. But it would be a mistake to ignore the very favorable conditions that exist in some emerging economies.
PARIS – Once again, the world’s emerging economies are facing a bout of uncertainty. Argentina, South Africa, and Turkey are among those generating the most concern, owing to a combination of questionable monetary policies and currency depreciation vis-à-vis the US dollar that threatens to undermine these countries’ ability to service their debts. But not all emerging economies are created equal.
To be sure, as in the past, there is a distinct risk of contagion. The emerging economies that are most vulnerable each must address its own challenges to avoid falling victim. And the approaches countries take to the challenges they face will have knock-on effects of their own.
Given this, investors may find it tempting to pursue a broad risk-off approach to the entire emerging world, especially in the context of rising global trade tensions. But it would be a mistake to ignore the very favorable conditions that exist in some emerging economies. For example, many have made significant progress in managing their debt levels, raising productivity, improving infrastructure, and implementing needed reforms.
All of this has contributed to strengthening these economies’ resilience to external shocks. Indeed, despite enduring uncertainties over the degree to which they have absorbed the lessons of the past, not to mention inconsistencies across countries, many emerging economies have developed much sounder fundamentals over an extended period.
The disparity between perceived and actual risk and the tendency to paint all emerging economies with the same brush is a longstanding problem. But investors should eschew a wholesale retreat from emerging economies in response to high-profile problems in a few. Instead, they should adopt a more nuanced approach, one focused on improving the risk-return profile by investing in selected regions and markets, while working with the right institutions.
In particular, now is not the time to ignore Latin America and the Caribbean, which have a wide range of investment needs – touched upon during the recent G20 meetings in Argentina – and also offer a broad range of growth opportunities. Countries in this region have pursued substantial reforms that have boosted economic growth and laid the foundations for strong financial returns in the longer term.
More broadly, stakeholders should strengthen their commitment to using the “billions to trillions” approach to resolving the world’s most vexing problems. That approach uses a combination of measures related to finance, skills, capacity, and risk allocation to leverage relatively scarce public-sector capital to mobilize more robust private-sector resources.
The multilateral development banks have a critical role to play here, and many have made great strides in responding to market needs. Moreover, the world has agreed, under the auspices of the United Nations, on complementary road maps for addressing global challenges: the Paris Climate Agreement and the Sustainable Development Goals. By establishing the right mechanisms to take advantage of related investment opportunities, we can use billions of public dollars to make trillions of dollars’ worth of progress.
Many of us in the investment community are working to boost the effectiveness of our work by ensuring that the right financial and risk-management instruments are in place to connect the public and private sectors. Already, mechanisms are in place to facilitate capital flows into emerging economies, particularly those in Latin America and the Caribbean, where opportunities for attractive risk-adjusted returns are now available.
In this context, even a very modest allocation by large institutional investors will have a major impact on the pursuit of sustainable outcomes, while also providing attractive, competitive financial returns. This dynamic – a fundamental component of the billions-to-trillions approach – can become embedded, creating the basis for a broader system in which there is no trade-off between making money and doing good.
The current turmoil in some emerging economies must not be allowed to derail past progress. On the contrary, it should spur stakeholders to redouble their collective efforts to establish a broadly beneficial system. This means, first and foremost, taking a nuanced approach to risk assessment that recognizes the attractive long-term growth opportunities that many emerging-market economies offer.