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Solving the Asset–Shortage Problem of Emerging Markets

March 3, 2012 • GLOBAL ECONOMY, FINANCE & BANKING, EMERGING TRENDS, Frontier Markets, Asia - Pacific, China, Global Capital Markets, India, Middle East & Africa

By Patrick Imam

The growing appetite for emerging market financial assets (such as equity or bonds) by local and foreign investors has not been met by a commensurate increase in the supply of these assets. This is because an economy’s ability to produce output is only imperfectly linked to its ability to generate financial assets.

With the start of the new millennium, a “golden decade” of macroeconomic stability and economic growth has put emerging markets back on the map for investors. Following the 1980s debt crisis in Latin America and Asian crisis of the 1990s, most emerging markets undertook bold reforms, encompassing orthodox fiscal policies, a predictable monetary stance, and other measures that led to strengthened balance sheets in both the public and private sectors. These economies-with the exception of those in Eastern Europe-managed to maintain this newfound economic stability through the 2008 global credit crisis.  

Paradoxically, however, the growing appetite for emerging market financial assets (such as equity or bonds) by local and foreign investors has not been met by a commensurate increase in the supply of these assets. This is because an economy’s ability to produce output is only imperfectly linked to its ability to generate financial assets.1

 
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