“There are positive stories as well,” said Sharma in a telephone interview from New Delhi. “The selloff has been indiscriminate, but once the dust settles, the attention will turn back.”
The MSCI Emerging Markets Index has fallen about 9 percent since May 21, the day before Fed Chairman Ben S. Bernanke said the central bank could scale back its $85 billion in monthly bond purchases if the U.S. job market keeps improving. In Brazil, stocks have slid 14 percent since then, while the real has fallen to a four-year low. Stocks in Turkey and China also have posted double-digit declines. In contrast, the MSCI World Index of advanced nations is little changed.
Social Tensions
Officials still have the ability to defuse underlying social tensions, having strengthened their finances since the last spate of emerging-markets crises toppled governments from Indonesia to Argentina starting in the late 1990s, said Alastair Newton, the London-based Nomura political analyst who wrote the bank’s report. Only now they’ll need to balance the mood in the streets with the discipline demanded by markets in the context of slowing expansions and tighter budgets.
The International Monetary Fund cut its global growth forecast on July 9 for the fifth consecutive time, saying a leveling off in China and the risk of capital outflows present new challenges to nations that have propelled the world economy. Developing countries will expand 5 percent this year, down from a 5.3 percent forecast in April and an annual average of 6.6 percent during the past decade, according to the IMF.
Finance Minister Lou Jiwei has signaled China’s economy may expand less than the government’s target of 7.5 percent. At a July 11 press briefing in Washington, he said he’s confident 7 percent can be achieved this year and growth as low as 6.5 percent may be tolerable in the future.
Stabilize Debt
One country already feeling the squeeze is Indonesia, where President Susilo Bambang Yudhoyono last month stared down demonstrations and ordered cuts to fuel subsidies. The move, which raised gasoline prices by 44 percent, recalled austerity pledges that fueled protests and led to the collapse in 1998 of Suharto’s three-decade regime. Fifteen years later, under democratic rule and with an economy still forecast to grow about 6 percent this year, reaction has been more muted even as investors have pushed the rupiah down near a four-year low.
“This is a very good example of how you don’t need to spend more money to reallocate resources better,” said Gurria in the interview on the sidelines of a Group of 20 finance- ministers meeting.
Like Indonesia, the world’s largest producer of palm oil, Brazil is another commodity exporter that stands to lose from China’s slowdown. Both countries -- along with Egypt, where Mohamed Mursi was ousted from the presidency this month amid the worst economic slump in two decades -- are raising interest rates to fight inflation, which could damp growth even further.