Economist com Page 2 of 3 boosted global trade and triggered a surge in commod rices:The Economists metals index is at a ten-year From budding to blooming high. This has been a fillip to raw-materials producers GDP growth, annual average such as Brazil, South Africa and Russia. Low global %2001-04 interest rates have also reduced debt service costs and the fall in the dollar has improved the competitiveness of Emerging economies those currencies, notably in Asia, that follow the CIST and Mongolia greenback Thanks in large part to higher commodity prices, even Middle East Africa's prospects are better than for many years. The Amca continent is also benefiting from a recovery in agricultur after severe droughts in 2003 and from greater polit/ o Latin America stability. The IMF forecasts growth of 5.8% in sub- Advanced economies Saharan Africa in 2005, which would be the highest rate in three decades. The fund admits however that its Emerging economies net borrowing from abroad forecasts have consistently overestimated African growth% of GDP because of political turmoil and natural disasters Emerging economies' improved health is not only due to favourable external factors. their basic financial health has also improved Structural reforms and sounder macroeconomic policies have made them more able to sustain strong growth and to withstand adverse external shocks ⊥⊥⊥⊥ ⊥⊥⊥⊥⊥⊥⊥ Thus inflation has been tamed and budget deficits have 1980 85 90 95 2000 03 been trimmed: emerging economies are, on average running much smaller deficits than rich countries .2004 forecast commonwealth of Independent States Sources: IMF: UB According to a recent study by UBS, a bank, emerging economies are less dependent on foreign capital than ever before. Collectively they have run a current-account surplus for six consecutive years, having been in deficit for most of the previous 20. Unlike previous debt-financed booms, which were often followed by financial crises, the current expansion has been financed largely by domestic saving allowing them to repay foreign debt. Emerging economies ratio of total foreign debt to exports of goods and services has dropped from 172% in 1998 to 93% this year; the ratio of debt-service costs to exports has fallen from 26% to 15%o. Foreign-exchange reserves have swollen to eight months import cover, compared with only five months worth just before the Asian crisis in 1997. Moreover, most emerging economies no longer have the unsustainable, fixed exchange rates that have contributed to past financial crises Officially, floating rates are now the norm. Many Asian countries do use foreign-exchange intervention to maintain informal pegs against the dollar but as a result their currencies are, if anything undervalued. In 1997, they were grossly overvalued If emerging economies are doing so splendidly why arent their stockmarkets racing? Morgan tanley Capital Internationals emerging-market index has risen by a modest 7% this year in 1994 peak. Many investors who got their fingers burnt in the Mexican, Asian, Russian ano w the dollar terms. Latin American shares have enjoyed strong gains, but several Asian markets, notabl China and India, have actually fallen Today share prices remain, on average, 20% belor Argentine crises remain understandably wary Yet many of those markets currently look like a bargain. The Bank Credit Analyst, a Canadian investment-research firm, calculates that the average price-earnings ratio for emerging-market m/Printer Friendly. cfm? Story ID=3292842boosted global trade and triggered a surge in commodity prices: The Economist's metals index is at a ten-year high. This has been a fillip to raw-materials producers, such as Brazil, South Africa and Russia. Low global interest rates have also reduced debt-service costs, and the fall in the dollar has improved the competitiveness of those currencies, notably in Asia, that follow the greenback. Thanks in large part to higher commodity prices, even Africa's prospects are better than for many years. The continent is also benefiting from a recovery in agriculture after severe droughts in 2003 and from greater political stability. The IMF forecasts growth of 5.8% in sub￾Saharan Africa in 2005, which would be the highest rate in three decades. The Fund admits, however, that its forecasts have consistently overestimated African growth because of political turmoil and natural disasters. Emerging economies' improved health is not only due to favourable external factors. Their basic financial health has also improved. Structural reforms and sounder macroeconomic policies have made them more able to sustain strong growth and to withstand adverse external shocks. Thus inflation has been tamed and budget deficits have been trimmed: emerging economies are, on average, running much smaller deficits than rich countries. According to a recent study by UBS, a bank, emerging economies are less dependent on foreign capital than ever before. Collectively, they have run a current-account surplus for six consecutive years, having been in deficit for most of the previous 20. Unlike previous debt-financed booms, which were often followed by financial crises, the current expansion has been financed largely by domestic saving, allowing them to repay foreign debt. Emerging economies' ratio of total foreign debt to exports of goods and services has dropped from 172% in 1998 to 93% this year; the ratio of debt-service costs to exports has fallen from 26% to 15%. Foreign-exchange reserves have swollen to eight months' import cover, compared with only five months' worth just before the Asian crisis in 1997. Moreover, most emerging economies no longer have the unsustainable, fixed exchange rates that have contributed to past financial crises. Officially, floating rates are now the norm. Many Asian countries do use foreign-exchange intervention to maintain informal pegs against the dollar, but as a result their currencies are, if anything, undervalued. In 1997, they were grossly overvalued. If emerging economies are doing so splendidly, why aren't their stockmarkets racing? Morgan Stanley Capital International's emerging-market index has risen by a modest 7% this year in dollar terms. Latin American shares have enjoyed strong gains, but several Asian markets, notably in China and India, have actually fallen. Today share prices remain, on average, 20% below their 1994 peak. Many investors who got their fingers burnt in the Mexican, Asian, Russian and Argentine crises remain understandably wary. Yet many of those markets currently look like a bargain. The Bank Credit Analyst, a Canadian investment-research firm, calculates that the average price-earnings ratio for emerging-market Economist.com Page 2 of 3 http://www.economist.com/PrinterFriendly.cfm?Story_ID=3292842 10/22/2004