The Stunning Resilience of Emerging Markets

CAMBRIDGE – As finance ministers and central bankers convened in Marrakesh for the International Monetary Fund and World Bank annual meetings on October 9-15, 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 – appears to be in debt distress, according to both 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 United States, fiscal policy is still extremely loose. The US is poised to run a $1.7 trillion deficit in 2023, compared to roughly $1.4 trillion 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 $2 trillion.

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