The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site.

All material subject to strictly enforced copyright laws. © 2021 Euromoney, a part of the Euromoney Institutional Investor PLC.

A question of balance

Currency crises in emerging markets are the result of too much foreign capital, not too little. An early warning barometer is a country's "fundamental balance" - current account plus foreign direct investment. But even then, if small economies can't absorb the inflow they should form regional currency blocs. Roll on the Singapore yen, the Polish euro and the Mexican dollar, writes Michael Howell.

Too much money is as bad as too little. Foreign capital inflows can be of poor quality. And emerging financial systems are often unable to absorb the shock of such an influx. They can act as a trampoline, bouncing the cash straight into a domestic spending boom.

One barometer of domestic economic excess - and of the sustainability of growth - is the fundamental balance. Paying attention to this barometer reading could warn when an investment bonanza is heading for trouble.

The fundamental balance is defined as the sum of a country's current account position plus its total net receipts of foreign direct investment (FDI), less any scheduled foreign debt repayments. It represents the long-term demand for a currency.

Because currency values are determined by the interaction of supply and demand, countries that run fundamental surpluses (ie, strong demand) and impose relatively tight monetary policies (ie, limited supply) - such as Japan and Germany in the 1980s - enjoy long-term currency strength. Those that follow the opposite path - such as the UK and the US in the 1970s - suffer currency weakness.

The domestic counterpart of the fundamental balance is the gap between domestic savings and investment by indigenous firms.

You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.

SUBSCRIBE ONLINE TODAY

Unlimited access to Euromoney.com and Asiamoney.com

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually

FREE 7 DAY TRIAL

Unlimited access to Euromoney.com and Asiamoney.com, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors

LOGIN NOW

Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree