It remains to be seen whether policymakers are able or willing to take ample action. But like in every crisis, and as is now clear, measures are ultimately inevitable if the pressure is high enough. For countries with the strongest growth slowdown and the biggest currency drops, doing nothing is no longer an option.

In Indonesia, the central bank had been very wary since the summer of 2013. Interest rates were maintained at high levels, partly to put pressure on the government to speed up the reduction of fuel subsidies. These subsidies were the main cause of the rapid increase in the budget and current account deficits. In November and December of last year, the new government of President Jokowi quickly came into action. In two steps, subsidies were reduced and detached from the oil price. This has significantly reduced the risk of a large budget deficit in the future and has created ample room for investments in infrastructure.

In South Africa, Turkey and Brazil, governments have committed to a smaller budget deficit, while the central banks keep their interest rates relatively high. South Africa and Turkey still lack solid reforms that could reduce the structurally high current account deficit. Yet in Brazil, where the economy has stalled and the exchange rate has depreciated by around 20% since September, the second Dilma government has recently started reducing energy subsidies and subsidized loans.

Recent policy action in the vulnerable countries is encouraging for growth prospects in the longer term, and perhaps also for the equity markets in the short term. After four years of declining growth in the emerging world, the average growth is to plunge below 4% in the coming months. This means the bottom is near. Carefully assuming a banking crisis in China can be avoided, it is not unreasonable to expect that 2015 will be the year of the beginning of the recovery of growth in emerging markets. This may mark a new period of outperformance for emerging equity markets, after more than four years of underperformance relative to developed markets. This is only getting more likely now that policymakers in the countries with the biggest structural problems have finally woken up to face reality.


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