See improvement in emerging market competitiveness: David Lubin

In an interview with ET Now, David Lubin of Citi HD-EM Economics, shares his views on the emerging markets and currencies. Excerpts:


ET Now: In the last few months, concerns over global growth have taken centre stage, but many would argue that if you look at it from the start of the year, equities in the US and Europe may have taken sharper cuts but emerging markets were not all that bad. Would you agree with us that EMs perhaps are better placed to weather this volatility storm?

David Lubin: EM equity markets have held up somewhat better than global equity markets because the particular location of the concern in the last few weeks has been in developed countries, particularly in euro zone where growth prospects have been downgraded yet again.

This week the United States had a very nasty shock in the form of retail sales data, which has helped to postpone the market’s expectation of any monetary tightening in the US. So, for the time being emerging markets are something of peripheral sideshow and that has helped them weather this particular bit of storm.

ET Now: Last year when the US Federal announced that it would be going ahead and probably pulling the plug on QE, EMs were hammered badly in shape, especially those with large current account deficit like India. A year on, do you think emerging markets are better prepared now?

David Lubin: Generally speaking, there is evidence of some kind of adjustment process taking place in emerging markets across the board. Real exchange rates are not as expensive as they were in April 2013 before the taper tantrum.

So, there has been an improvement in emerging market competitiveness and at the same time you could say at least for some countries, current account deficits are smaller than they were. It is particularly true for countries like India and Turkey, i.e., countries whose exports are built on a manufacturing base and there is a very marked difference between countries like that.

For instance, India and Turkey have manufacturing export basis and on the other hand countries like South Africa, Brazil and Indonesia have commodities export basis and that divide between commodity exporting developing countries and manufacture exporting developing countries has become one of the most important dividing lines within emerging markets.

Last year with the taper tantrum the most important dividing line within EM was between countries with current account deficits and countries with current account surpluses. Portfolio managers made money by selling assets in countries with deficits and buying assets in countries with current account surpluses. In a way that distinction between commodity exporting EM and manufacture exporting EM is super imposing itself on that distinction.

ET Now: Our central bank governor believes that there will be some volatility in Indian markets as and when the US rolls back its easy money policy. But India, he believes, is much better prepared today to deal with the aftershocks. Would you agree?

David Lubin: India is one of the countries that has demonstrated the most visible shrinking of its current account deficit. Now, in India’s case, that was partly because of a very strong contribution made by reduction in gold imports. It was also because India had been able to grow its exports since the second quarter of 2013 and that is very unusual.

It is largely because India has a dynamic private sector and it has benefitted from being a manufacture exporter. It was also quite careful in some cases where it made use of the ability to change the direction of its trade. So, Middle Eastern countries have become more important destination for Indian exporters.