EM: Structural reforms are last stand – Deutsche Bank

Research Team at Deutsche Bank, find many EM economies displaying an unsurprising and yet disappointing slippage in structural strength and particularly in the current cycle, which is characterized by pervasive demand weakness.

Key Quotes

“With limited fiscal and monetary policy room available, and the efficacy of demand supportive policies suspect, EM economies have little other than the pursuit of structural reforms as the way to counter the ongoing growth malaise. Looking at the overall scores, Asian stalwarts Hong Kong, Singapore, South Korea, and Taiwan take up the top of the table of the structural performance scorecard.

At the other end of the spectrum, Argentina, Ukraine, and Venezuela remain the bottom ranked countries. These economies are characterized by very poor quality of institutions, weak financial and goods markets, and high level of state intervention in the economy.

There have been some striking changes to structural rankings between 2007 and 2014. India has seen marked deterioration in its scores, ranging from education to financial and goods markets. This contrasts with its relatively high economic growth performance during that period, but is consistent with the view that the impetus for high quality growth had slipped considerably in recent years. We will watch with interest if matters improve under the aegis of the new government, which came to power in mid-2014.

While there is considerable worry about China's slowing growth momentum and debt problems, we take heart from its steady improvement in structural strength. While much more needs to be done, there has been encouraging improvement in its institutional quality, infrastructure, financial market, as well as goods and labor markets. Some slippage in economic openness however is a source of concern.

In terms of regions, Asia remains the most advanced on structural quality scores and Latin America the least advanced. EMEA is in the middle of the pack but there is divergence within EMEA: Czech Republic, Israel, and Poland rank much higher than Russia, Romania and South Africa.”