Emerging markets in danger of overheating

June saw the International Monetary Fund (IMF) highlighting the increasing risks that face the global economy, including the continuing debt crisis in Greece, a lack of consensus in the US Congress with regard to tackling the country’s budget deficit and the danger some emerging economies – particularly in Asia – might overheat.

The IMF also cautioned against inflationary pressures that are building in developing economies, warning: “Too much capital may be moving too quickly to emerging markets.” Meanwhile, according to the most recent statistics from the Investment Management Association, funds within the Global Emerging Markets sector were among the most popular in the equity arena during May.

The Reserve Bank of India increased interest rates yet again in its struggle against mounting inflationary pressures, raising them to 7.5% during the month. Boosted by soaring commodity prices, India’s wholesale price index ran at a rate of 9.06% during May, compared with a rate of 8.66% during April. The central bank warned domestic inflation remains a significant problem, despite evidence commodity prices are easing and economic growth is showing signs of slowing down.

US Treasury Secretary Timothy Geithner provided evidence of the US’s increasingly close links with India during the month, reaffirming the country’s support for the latter’s rise as an economic power, while commenting: “India’s growth is good for us, just as our growth is good for India.” At present, US companies face high barriers to entry in certain sectors of the Indian economy, but the US has called for these barriers to be lowered and for India to become one of its top-10 trading partners.
In a similar vein, June also saw China and Germany sign new bilateral trade deals and voice the intention to increase trade between the two countries to €200bn (£179bn) over the next five years. Meanwhile, China’s annualised rate of inflation hit 5.5% during the month, fuelled by soaring costs for food.

Nevertheless, in an article written for the Financial Times, China’s premier Wen Jiabao asserted the country will be able to “rein in inflation and sustain its rapid development”, adding “the overall price level is within a controllable range and is expected to drop steadily.”

China’s central bank raised the reserve requirement for the nation’s banks once again during June while ratings agency Standard & Poor’s downgraded its outlook for China’s property market from “stable” to “negative”, citing the country’s increasingly restrictive credit environment.


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