Economist com Page 3 of 3 equities(based on forecast profits for the next 12 months)is only eight the lowest on record and 40% below the ten-year average. The equivalent ratio for American shares is 17. Of course, shares in emerging markets should be cheaper because their prices are more volatile. However more stable economic fundamentals have made these stockmarkets less bumpy than they were There's always a but Despite all this, there are lots of risks that might trip up emerging economies. a slump in demand in America or China and a consequent fall in commodity prices is one possibility. a further rise in oil prices is another. a sharp rise in global interest rates is a third. However some of the risks offset one another. For example, weaker demand in america would mean lower interest rates Or suppose China's investment boom turns to bust: then global oil prices should fall. so although countries would see their exports to China falter, they would pay less for fuel imports Higher oil prices are clearly squeezing oil importers, but Jonathan Anderson, the chief Asia economist at UBS, argues that their effect tends to be exaggerated It is commonly argued that higher prices hurt emerging economies more than developed economies because poorer countries exchange rates. However, this version of GDP understates the true size of emerging economes c are more oil-intensive. Indeed their oil consumption is higher relative to gDP measured at marke elative to rich ones because non-traded goods and services are much cheaper in poorer countries. Once this is taken into account, says Mr Anderson, Asia's oil intensity is roughly the same as Americas In any case, sounder policies and current-account surpluses mean that many emerging economies are better placed than in the past to withstand an oil-price shock. Some are in better shape than thers though Latin American and central and eastern European economies still look more vulnerable than Asia. Brazil, for instance, despite its first current-account surplus in a decade still has a huge foreign debt and its exchange rate looks overvalued. any fall in the real against the dollar would inflate the cost of servicing its floating-rate, dollar-denominated debt Emerging European economies have the least healthy external position. Hungary's frighteningly large current-account deficit, of 9% of GDP, and its reliance on short-term capital inflows are ringing alarm bells. The Czech Republic and Turkey also have big current-account deficits. In contrast, the surge in oil and commodity prices has brought Russia a current-account surplus of 8% of gDP There are almost certain to be more troubles in emerging markets over the coming years. But from the promising buds, fine flowers may blossom Copyright o 2004 The Economist Newspaper and The Economist Group. All rights reserved m/Printer Friendly. cfm? Story ID=3292842equities (based on forecast profits for the next 12 months) is only eight, the lowest on record and 40% below the ten-year average. The equivalent ratio for American shares is 17. Of course, shares in emerging markets should be cheaper because their prices are more volatile. However, more stable economic fundamentals have made these stockmarkets less bumpy than they were. There's always a but Despite all this, there are lots of risks that might trip up emerging economies. A slump in demand in America or China and a consequent fall in commodity prices is one possibility. A further rise in oil prices is another. A sharp rise in global interest rates is a third. However, some of the risks offset one another. For example, weaker demand in America would mean lower interest rates. Or suppose China's investment boom turns to bust: then global oil prices should fall. So although countries would see their exports to China falter, they would pay less for fuel imports. Higher oil prices are clearly squeezing oil importers, but Jonathan Anderson, the chief Asia economist at UBS, argues that their effect tends to be exaggerated. It is commonly argued that higher prices hurt emerging economies more than developed economies because poorer countries are more oil-intensive. Indeed, their oil consumption is higher relative to GDP measured at market exchange rates. However, this version of GDP understates the true size of emerging economies relative to rich ones, because non-traded goods and services are much cheaper in poorer countries. Once this is taken into account, says Mr Anderson, Asia's oil intensity is roughly the same as America's. In any case, sounder policies and current-account surpluses mean that many emerging economies are better placed than in the past to withstand an oil-price shock. Some are in better shape than others, though. Latin American and central and eastern European economies still look more vulnerable than Asia. Brazil, for instance, despite its first current-account surplus in a decade, still has a huge foreign debt, and its exchange rate looks overvalued. Any fall in the real against the dollar would inflate the cost of servicing its floating-rate, dollar-denominated debt. Emerging European economies have the least healthy external position. Hungary's frighteningly large current-account deficit, of 9% of GDP, and its reliance on short-term capital inflows are ringing alarm bells. The Czech Republic and Turkey also have big current-account deficits. In contrast, the surge in oil and commodity prices has brought Russia a current-account surplus of 8% of GDP. There are almost certain to be more troubles in emerging markets over the coming years. But from the promising buds, fine flowers may blossom. Copyright © 2004 The Economist Newspaper and The Economist Group. All rights reserved. Economist.com Page 3 of 3 http://www.economist.com/PrinterFriendly.cfm?Story_ID=3292842 10/22/2004