By Jamie Robertson Presenter, BBC World News

Ugly – not at all – just a mixture of good and bad

Emerging markets have been getting it in the neck this last week. But many argue not all deserve such treatment.

Globally, investors are most anxious about Brazil, Indonesia, India, South Africa and Turkey. They’ve been dubbed the Fragile Five by investment bank Morgan Stanley.

The common denominators are the usual suspects: Large deficits, slowing growth and vulnerable currencies.

On top of that there is the slowing Chinese economy that doesn’t require the massive diet of commodities that it was consuming two years ago, and the “tapering” off of the Federal Reserve’s massive support for the US economy – investors are abandoning emerging economies, good and bad alike, in search of richer pickings in the US.

Panic

So emerging economies are getting a bad name. Let us take a closer look though – South America is a good case study, where there’s a fair old mix of the good, the bad – and the ugly too.

Kirchner’s handling of the economy has spooked the markets

Argentina is, without doubt, “bad” and generally credited with starting the general panic.

It’s been playing fast and loose with its deficit, letting inflation take hold. Government attempts to control the economy on a micro-level have been a failure, to say the least.

The Index of Economic Freedom compiled by the Wall Street Journal and the Heritage Foundation reports: “The state’s interference… has grown substantially since 2003, accelerating the erosion of economic freedom… The judicial system has become more vulnerable to political interference, and corruption is prevalent.”

Oddly, Argentina doesn’t actually qualify as a Fragile Five, but as Elizabeth Johnson, Director of Brazil Research at Trusted Sources, says, its fall from grace is hardly news: “Argentina has been a pariah for quite a while, so it never enjoyed the over-hyping that we saw in other markets.”

Pinched

Venezuela is being put in the same category as Argentina for much the same reason. Both have been economically mismanaged and with raw materials as the bedrock of their economies, both are suffering as the great Chinese commodity cycle takes a downward path.

Even Venezuela’s oil exports are being pinched: its exports to its traditional US markets have hit a 28 year low, and its attempts to offset the fall by selling to China is not making up for the losses.

If Venezuela and Argentina are the bad, Brazil may just qualify for being “ugly” – a bit of good and bad combined which, to an outsider could come across as, if not ugly, definitely unattractive.

Elizabeth Johnson says: “There has been a fair amount of government intervention, and there’s been inflation, which, while it is no where near as high as Argentina, is still very high at 6%.

Brazil’s Ipanema beach shows the sunny side of a cloudy economy

“But on the positive side the Central Bank has taken tough action and put up interest rates. Then, on the negative side, this is an election year so fiscal adjustment is going to be difficult. Putting up taxes will not be easy politically. ”

Muscle

But she points out that even with the commodity cycle on a downswing, Brazil’s exports are too big to ignore, particularly when it comes to agriculture.

It is the world’s biggest exporter of sugar, coffee, and beef and close to being the biggest in soya, chicken and corn (maize). With this kind of muscle in the commodity markets a fall in the currency is only good news for exporters.

It may be inflationary, but the fall so far has been just 2% since the beginning of the year and appears manageable.

Elizabeth Johnson, who is based in San Paolo, says strategic foreign investors have not been disturbed by the last week’s panic. “Foreign direct investment has held up reasonably well. Investors in oil and gas, the agricultural sector, in tractor and car manufacturing, wind power – there seems to be no sign of concern.

“The state’s interference… has grown substantially since 2003, accelerating the erosion of economic freedom…. The judicial system has become more vulnerable to political interference, and corruption is prevalent”  – The Index of Economic Freedom Government control in Argentina

“The portfolio investors, though, in the equity markets, need a lot more reassurance, and they are worried about government interference, the falling currency, and are not at all happy.”

Discipline

As for the “good” emerging economies, Peter West, senior economist at Poalim Asset Management. lists Mexico, Peru, Colombia and Chile.

Mexico is definitely at the top of the list, he says: “It has been implementing reforms and because of NAFTA (the North American Free Trade Agreement) some 80% of its exports go to the US and it will be able to share in the recovery north of the border.”

The other three have all benefitted from the commodity boom and are now being equally punished by the collapse – particularly in the copper price.

The Chilean peso has fallen over 5% since the beginning of the year. The Colombian peso is down 4.6%. But Mr West is optimistic about their future, and believes they have “done their homework, with inflation under control and some degree of fiscal discipline”.

But, asked when they might start to separate themselves from the Fragile Five, he says “when the dust settles, but when that will be, I don’t know”.

For more on this story go to:

http://www.bbc.com/news/25988823