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The writer is chair of Rockefeller International
Emerging world powerhouses such as India and Indonesia weathered the turbulence of recent years in solid shape and are widely recognised for their success. Now many of the emerging world’s most troubled economies are reforming their way towards recovery as well, and markets are starting to reward them for it.
They include most prominently Turkey, Argentina, Egypt, Nigeria and Kenya, and they carry some weight. All five of these reforming countries are in the 40 largest emerging economies, so their turn for the better is reinforcing the global economic recovery as well.
Battered by high inflation, debt and deficits, their foreign exchange coffers were emptying when global interest rates rose sharply in 2022. As higher borrowing costs drove their debts deeper into distress, they had no choice but to change. Their leaders — who in Argentina, Kenya and Nigeria were newly elected with a mandate for reform — don’t quite say so out loud, but their plans came straight from the pages of the old and much-maligned Washington consensus. Budget discipline and heeding market forces are the only policy choices that work when a nation runs out of money.
The five reforming nations are still widely under-appreciated. Just a year ago, they were running deficits above 5 per cent of gross domestic product. Their inflation rates were in the high double digits on average, and more than 200 per cent in Argentina. Investors either demanded a huge premium to hold their sovereign bonds, pushing yields to 15 percentage points above US bonds, or shunned them. If emerging market monikers were still in fashion, these economies would have been labelled the “fragile five” of this decade.
As capital fled, their foreign exchange reserves hit new lows, registering maximum declines of a third on average. At first, the governments resisted these pressures, trying to stabilise the currencies through controls. That only pushed investors into black markets, where the five currencies traded on average 45 per cent below the official exchange rate.
Then came the turn. The beleaguered countries started bowing to market realities, most recently in Egypt under Abdel Fattah al-Sisi. After being in power for a decade, he announced his latest reforms last month. His regime took steps to lower the deficit by cutting spending on new mega projects. It moved to stabilise the pound, raising interest rates to beat inflation and allowing its value to float freely, leaving black marketeers no reason for being.
If this sounds like Washington consensus orthodoxy, it is. Egypt is reforming in part to meet conditions for relief from champions of the consensus, including the IMF and World Bank. So are Kenya and Argentina, which by many measures had sunk deeper than the other four: Buenos Aires had to pay the highest premium on its bonds, and faced the biggest black-market discount for its currency.
In response, Argentina became the most aggressive reformer. Last November, a new president was elected — Javier Milei, a populist who vowed to take a “chainsaw” to his country’s dysfunction. He has devalued the peso by more than half, cut government departments in half to nine, downsized the public payroll and moved to eliminate private jets and other official perks while selling hundreds of state companies. In January, the budget turned to surplus in a country that has run deficits for all but 10 of the years since 1900.
Even the cases that did not seek international relief — Turkey and Nigeria — were compelled to rethink. Turkey under Recep Tayyip Erdoğan, once a candidate most unlikely to reform, has hired serious technocrats who raised interest rates by more than 35 percentage points, and are curbing excessive credit growth.
Now capital is starting to return to the five reformers. For them, foreign direct investment, weakening worldwide, is unusually resilient. Bond premiums have fallen at least 40 per cent from their peaks. Argentine stocks rose sharply in anticipation of Milei’s presidency, and are up another 60 per cent in dollar terms since he took office. The black-market currency discount has disappeared in Nigeria, and all but disappeared in Egypt. Financial life is starting to look more normal.
That doesn’t seal a bright future. Nations often reform in crises and then revert to old ways when the storms pass. Escaping this cycle requires leadership that recognises the need to avoid relapses and commits to ongoing reform. It’s too early to say any of the recovering countries are on that path. But they are on the mend for now, and that makes the global economy feel less fragile.