Emerging Markets

It is more evident today than ever before that what happens in emerging markets directly effects the global economy. Emerging markets now account for about half of the world's economy.

China has seen an 8% decrease in exports in July. This was the determinator that pushed Chinese officials to devalue the Yuan.

All this time, the world's Emerging Markets has been growing by supplying China with the raw materials it needs to facilitate exports. Raw materials from Emerging Markets (iron, copper, oil..etc) saw less demand. As a result, Emerging Markets currency value fell. A prime example is the Kazakhstanian currency "Tenge" falling by 23%.

History lesson: We have seen a similar situation in Eastern Asia during 1997. Thailand's currency "Baht" collapsed due to the lack of foreign currency to support it's fixed exchange rate pegged to the U.S dollar. At the same time, Thailand acquired too much foreign debt which led the country into bankruptcy. As the crisis spread, Japan and most of Southeast Asia saw slumping stock markets, devalued currencies and increases in private debt. Foreign debt to GDP ratios rose from 100% to 180%. The Thai stock market fell 75% and the Baht lost more than half of it value. Other countries in Asia such as Indonesia had to widen it's currency trading band. Indonesia lost about 13.5% of it's GDP in 1998.

Learning from history: Now, with the devaluations of Emerging Market currencies, countries with large foreign borrowings (mainly in dollars) will suffer. In addition, problems with overcapacity and falling commodity prices may hit countries like Russia and Brazil. European stocks may take a hit also due to diminished export prospects to Asia and Emerging Market economies.

Regarding the U.S economy, exports are only about 14% of our GDP. But multinational companies such as General Motors who rely on foreign profit will take a hit.