Emerging markets face growth headwinds

Emerging economies have witnessed lower growth and even financial turbulence in the first half of this year amid the dual impact of structural problem and capital outflows. BRICS, the grouping of five major emerging economies, has seen a considerable drop in growth figures in four of its members during the period, while China, the second largest economy in the world and a leading player in the BRICS bloc, also saw tempered domestic growth. Among the five members, Brazil posted the steepest decline in economic growth, from 7.5 percent in 2010 to 2.7 percent in 2011 and a mere 0.9 percent in 2012. The figure further retreated to 0.6 percent in the first quarter this year. India also saw a new low in annual growth for the past 10 years, with the figure standing at 5 percent for fiscal year 2012-2013, which ended in March. South Africa registered a growth rate of 0.9 percent in the first quarter this year, the lowest since the onset of the global financial crisis in 2008. And in Russia, the government recently downgraded its growth forecast by one third to 2.4 percent, the lowest since 1999. Leading financial institutions, including Citibank and the HSBC, also recently cut overall growth forecasts for emerging economies in 2013, with Citibank lowering its projection from 5.3 percent to 4.8 percent and the HSBC from 5.4 percent to 4.6 percent. While growth rates are heading down in emerging economies, financial turbulence is on the rise. In the first half of 2013, stock markets in Brazil, Russia and China were among the most bearish across the globe, retreating 22.14 percent, 16.47 percent and 12.07 percent, respectively. The falls sent MSCI's benchmark emerging equity index down more than 10 percent in the first six months this year, in stark contrast to the 20 percent increase in MSCI's developed market index during the same period. With foreign exchange, the currencies of Brazil, India, South Africa and Turkey all experienced accelerated depreciation in the first half of this year as a result of capital outflows. Sluggish growth rates, combined with worsening inflation and capital outflows, triggered social disturbances in some emerging economies, which has further weighed on their efforts to lure foreign investment. Observers note the capital outflows that came amid prospects of the U.S. Fed's withdrawal of quantitive easing raises borrowing costs for emerging markets and potentially undermines their growth outlook. However, they believe such external impacts should not be a problem. Barclays CEO Antony Jenkins told Xinhua in a recent interview the turbulence in emerging markets in recent months was mainly due to short-term capital flow in the chase of higher returns. "Such short-term capital flow will not deal a fatal blow to emerging markets," he said. Internal problems such as lagging structural reforms and the unsustainability of existing development modes are the real reason for concern for emerging economies, experts say. Taking Brazil as an example, the various internal challenges for growth include a too-low investment/GDP ratio, heavy dependence on external finance, backward infrastructure and excessive trade barriers. With the external environment rapidly reshaping, emerging economies were facing an urgent task to remold their growth patterns, said Guillermo Mondino, director of Citigroup emerging markets and strategic research.