3 Economic Challenges Facing Emerging Markets in 2018

Emerging Markets in crisis?

The year 2017 was not expected to be a calm one for the world economy.

Anti-Brexit protesters demonstrate outside the Houses of Parliament in London, Britain, December 13, 2017. REUTERS/Simon Dawson

With the election of Donald Trump as the new US President and the Brexit vote wreaking havoc in Europe, all indications were that 2017 would be volatile.

And yet it has been one of the best years for the global markets since the dramatic 2008 recession.
Commodities such as oil and copper are back in the game, after plunging in late 2015 and then experiencing a highly volatile 2016.

By late November, the VIX index showed that volatility was at a record low, while positive credit ratings for developed countries kept debt yields low.

And as for the stock market, things could not have been better. The S&P500 has soared around 16% this year, and indexes from emerging markets have followed that upward trend. The Mexican stock exchange has increased so far by approximately 6%, while that of Nigeria crept up over 30% so far in 2017.

Things look good and the world economy is not showing evidence of slowdown. But three factors could change all of this.

1. An uncertain geopolitical scenario

Even though the economy has performed well, the potential for destabilizing geopolitical events could change everything.

The North Korean missile program has developed at a steady peace. As a result, the US has strongly criticized the Kim Jong-un regime for threatening world peace.

However, unconventional diplomacy on the part of the Trump administration has led to a verbal escalation with Kim Jong Jong-un that continues to disrupt the region.

Although a war still looks unlikely, there were moments in 2017 where both leaders seemed to be eyeing up the red button.

Western Europe is also in a state of flux as populist politicians win elections across the board.

Anti-EU leaders such as Geert Wilders in the Netherlands and Marine Le Pen in France had real chances to win their general elections, although neither did.

Additionally, the Catalan nationalist movement has gained ground in Northeast Spain, with a sizeable proportion of the populace demanding the creation of a new independent state. This development could inspire additional separatist movements such as that of Flanders in Belgium.

Should this new nationalist wave continue to evolve in the Old Continent, it would be a major threat to the structural integrity of the European Union as a supranational organization. And European officials are already from the headache of handling the Brexit negotiations.

2. An abrupt change in monetary policy

Janet Yellen is leaving the FED. She has been the Chair of the Federal Reserve since 2014, and heralded the gradual withdrawal of quantitative easing.

It was in late 2015 when Yellen approved the first interest rate hike in nearly a decade, since the cost of money remained close to zero after the 2008 recession.

Additional increases followed in 2016 and 2017 after the US labor market improved and inflation began to rise.
Next step for the FED is the unwinding of its stimulus program in the coming months. That will reduce the size of the balance sheet, which expanded from USD1 trillion in 2007 to nearly USD4.5 trillion a decade later.
President Trump has nominated Jerome H. Powell to be the new FED Chair.

His monetary policy is viewed as centrist, and it has been reported that he shares Yellen’s view of prioritizing job growth over inflation. This means that Powell will link future rate increases to possible continuous improvement of the employment situation, and will generally maintain a cautious approach to withdrawing stimulus.

Nevertheless, every change brings some degree of uncertainty with it.

His first months as Chain of the Federal Reserve will be key to understanding his road map for the coming years.

Any abrupt change in monetary policy would generate instability in global markets.

3. The rules of trade are changing

Protectionism versus globalization. Battles for and against free trade are taking place in every continent.

The UK is in negotiations with the European Union to reach a deal to leave the free trade bloc.

The EU-Canada Comprehensive Economic and Trade Agreement, known as CETA, is erasing 98% of tariffs between the EU and Canada and was signed in 2016.

European parliaments are going through ratification processes to greenlight the agreement, but this free trade deal is encountering marked opposition in many of the EU member countries.

Crossing the Atlantic, the “three amigos” (Canada, US, and Mexico) are tangled in a complex and difficult negotiation to come up with a new version of the North American Free Trade Agreement (NAFTA), which has boosted commerce substantially among members.

The negotiations were to end in 2017, but they have been extended until March 2018.

It is widely believed that a new deadline will be announced given the different goals that each party has set.

The US wants to impose a higher “rules of origin” threshold for the automotive industry, a proposal that both Canada and Mexico have rejected.

After several rounds, talks have reached a deadlock on some of the most controversial subjects such as dairy, vehicle manufacturing, and the idea of terminating the treaty in its entirety.

Free trade developed considerably over the late 20th Century, and continued to expand in the 2000s.

If this anti-free trade trend continues to evolve, it will create yet more unpredictability for the future of global commerce.

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