Panic in the markets last week test the energetic efforts of politicians from emerging markets to reduce the vulnerability of their economies. There are loads of attempts countries of the developing world can be grouped into different categories, susceptible to various shocks, but the history of previous episodes of market turmoil, especially at the end of last year and early this year showed that all developing economies can be involved in the maelstrom, writes Financial Times.

Obviously it is too early to draw definitive conclusions about how assets will suffer in the developing economies of the recent turmoil in share prices – not least because the Chinese central bank intervened on Tuesday and helped the conversion of part of the declines. History of previous market turmoil, and some suggestive signs in recent months and days, however, suggests that developing countries that have done their basic political work can be rewarded.

The difference with the Asian crisis

During the crisis in Asia and Russia in 1997-1998 investors speculating against currencies in developing countries (such as loans short positions), without considering the differences in the balances on their current accounts and debt positions. This created lasting resentment in South Korea, for example, where initial investors, and later the IMF when negotiating its bailout package for the country’s currency mismatch treated as if it was a genuine solvency crisis. Before the crisis, South Korea forecasts a budget surplus, low internal and external debt as a share of GDP, shrinking current account deficit and fairly valued or undervalued exchange rate. The pressure on its currency caused by external funding of local banks, however, threw the country into the hands of the IMF, recalls FT.

During the global financial crisis of 2008-2009, however, developing countries as a whole were much better prepared and investors seemed more willing to treat them differently. Even traditionally crisis-prone countries such as Brazil went through a period relatively well, as they were in moderately good economic shape and had accumulated huge foreign exchange reserves. Unlike the Asian crisis, when a number of currencies tied to boards could be attacked, this time there was no obvious way in which all emerging markets are vulnerable. And since in essence it was a crisis of the rich world, investors were able to make a difference between developing countries with much direct exposure and those who were not as directly exposed to shocks. Baltic countries tied their currencies to the euro and with his strong banking links with the euro area countries were subject to much greater pressure than even in neighboring Poland with its independent currency and lower its ratio of debt to GDP.