Financial turbulence returned to emerging economies in early 2014 after the previous year's market reaction to the US Federal Reserve's discussion of reducing quantitative easing. Immediate pressure came from several directions, including Argentina's currency difficulties, weaker Chinese data and political uncertainty in Turkey, Ukraine and Thailand.
Investors' reduced appetite for risk carried some of the volatility into advanced-economy equity markets. Yet the proximate events were only part of the explanation. Several emerging economies also faced persistent domestic and external weaknesses.
A varied group of vulnerabilities
At the time, India, Indonesia, Brazil, Turkey and South Africa were commonly grouped as the “Fragile Five.” The label reflected combinations of fiscal and current-account deficits, slower growth, inflation pressure and election-related uncertainty. Argentina, Venezuela, Ukraine, Hungary and Thailand presented different mixtures of political, fiscal and external risk.
The popular BRICS grouping also concealed substantial differences. Contemporary forecasts suggested slower growth in Brazil, Russia and South Africa, while China and India were losing momentum. Demographic trends raised longer-term questions for China and Russia, although the timing and scale of those effects remained uncertain.
China drew particular attention because rapid credit growth had financed investment by local authorities, state enterprises and property businesses. This created concerns about bank and non-bank balance sheets. A difficult transition from investment-led expansion towards greater household consumption was widely viewed as necessary, but institutional interests could slow the process.
Global liquidity and commodity prices
The underlying pressures visible in 2013 had not disappeared. A pronounced Chinese slowdown could have affected emerging Asia, commodity exporters and advanced economies through trade, finance and confidence channels.
The Federal Reserve had begun reducing long-term asset purchases. Contemporary expectations of tighter financial conditions encouraged some capital to leave economies that had benefited from abundant global liquidity and low yields. The original policy announcement remains available in the Federal Reserve's January 2014 release.
Commodity markets created another source of strain. Slower Chinese demand was only one factor: earlier high prices had encouraged investment and additional supply. Some commodity exporters had not used the preceding windfall to strengthen institutions or diversify their economies, leaving them more exposed when prices softened.
The near-term outlook therefore depended on difficult choices. Faster fiscal or monetary tightening could weaken growth, while delayed action risked further currency depreciation, inflation and more expensive financing for fiscal and external deficits.
Why a systemic crisis was not inevitable
Despite these vulnerabilities, a broad currency, sovereign-debt and banking crisis was not considered the most likely outcome. Flexible exchange rates and substantial reserve holdings offered some protection. Foreign-currency mismatches were generally less severe than in earlier emerging-market crises, and many banking systems and public balance sheets were in a stronger position.
The longer-run case for emerging economies also remained more constructive than the immediate market mood suggested. Urbanisation, industrialisation, convergence from lower income levels, expanding consumer markets and potential productivity gains could support development where credible reforms followed. This made country-level differentiation essential rather than treating every emerging market as one uniform category.
Nevertheless, the short-run policy trade-offs were severe. External financial risks, domestic imbalances and structural constraints suggested an uneven adjustment before greater stability could emerge.
What this archive piece highlights
- Emerging markets differed substantially in their exposure to currency, fiscal and political risks.
- Changes in US monetary policy could influence capital flows and borrowing conditions far beyond the United States.
- China's credit cycle and commodity demand mattered for exporters and regional trading partners.
- Exchange-rate flexibility, reserves and healthier balance sheets reduced—but did not remove—crisis risk.
- Long-term development potential did not eliminate difficult near-term policy choices.
Further archive reading: The return of the emerging-market crisis and Emerging-markets rout: blip, correction or a repeat of earlier turmoil?
This archive edition paraphrases the original argument in calm, factual language and preserves its historical setting. It is educational editorial material, not personalised financial advice.