This is important to make room for a recovery. The currency depreciation of, on average, 40% against the dollar will be particularly supportive. First, a sharply falling currency puts pressure on sluggish policymakers to reform. If there is pressure, unpopular measures can be taken that will strengthen the economic structure and lay the foundation for future growth. Secondly, a weaker currency reduces current account deficits and ensures that credit growth drops back to healthier levels because of higher interest rates. This way, imbalances in the economy will be reduced and there will be room for new investment and consumption growth.

It is also important that there is more realism about the growth opportunities in the emerging world. This reduces the risk of further negative surprises and the related disruptive market turmoil. Market economists now forecast an EM growth rate of 4.5% for 2016. This is still a rather high number, but it is unlikely that this forecast will prove to be more than half a percentage point too high. How different it was last year, when the prospects for 2015 were more than one percentage point too high. The growth slowdown in China and elsewhere in the emerging world could easily create a strong market correction and even cause panic in August. The chances of this happening again next year have been reduced.

As a result of the correction in currency and equity markets and lower expectations, risks in emerging markets are more balanced than they have been in years. In addition to downside risks – a sharp Chinese slowdown, a systemic crisis in China, a debt crisis in Brazil, a capitulation in emerging currency markets – there are now risks to the upside as well. If the Chinese authorities succeed in their attempts to stabilise the economy and there are no major defaults in other countries with excessive credit growth, such as Malaysia, Thailand, Turkey and Brazil, markets could slowly begin to anticipate a recovery in growth. Prices rising from low levels could lead to an improved market sentiment, with appreciating currencies, falling interest rates and a feeling that a growth recovery is getting closer. Let’s hope that the inevitable process of deleveraging in the emerging world will continue without any major mishaps.


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