Stretched budgets and sluggish growth are putting emerging-market governments on a collision course with rising pressures from recently empowered middle classes for more spending and better services.

From Jakarta to Brasilia, policy makers face the end to an era of abundant global liquidity that helped fuel the fastest expansion in three decades. In the eight weeks through July 17, investors pulled $40.3 billion from emerging-market bond and equity funds amid signs the Federal Reserve may begin reducing stimulus later this year. In 2012, $111 billion poured into these asset classes, according to EPFR Global in Cambridge, Massachusetts, which tracks money flows.

The Fed’s plans didn’t trigger the slump -- after a decade of prosperity, the BRIC economies of Brazil, Russia, India and China have been slowing since 2010. Developing nations are punished more during downturns than their European counterparts because they depend on growth to mitigate social tensions, said Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development.

“The needs are much more elementary and brutal,” said Gurria, a former Mexican finance secretary, in a July 19 interview in Moscow. Families live with “vermin because they don’t have cement on the floor, and when there’s a big wind it blows off the roof. This isn’t the problem the middle class in the Netherlands face.”

Corruption Frustration

Nomura International Plc, citing the “surprise” outbreak recently of protests in Brazil and Turkey, said 11 other countries -- including China, India and Russia as well as commodity exporters Argentina and Venezuela -- face the risk of market-moving civil unrest in the short to medium term. Frustration with corruption by a middle class that swelled during the past decade is partly fueling the angst, according to its June 27 report.

“If you lift your people out of extreme poverty, it’s not like they’re going to say ‘Great, now we’re all set, we don’t want anything else,’” said Jim Yong Kim, president of the World Bank, in a June 30 interview in Lima, Peru. “This is not going to go away. This is the most natural thing in the world.”

Investors can ride out the volatility by betting on governments that resist populist pressures for more spending and instead shore up long-term financial stability, said Ruchir Sharma, who helps manage $25 billion in emerging-market stocks at Morgan Stanley Investment Management in New York. He says his group is underweight China, Brazil and Russia and overweight Mexico and the Philippines.

Tax Overhaul

Mexico is benefiting from a stronger U.S. economy, and first-year President Enrique Pena Nieto is trying to open up the state-run oil industry. The Philippines is forecast to grow 6.2 percent this year, according to a Bloomberg survey of economists, on the back of a recent tax overhaul.

First « 1 2 3 4 5 » Next