As economies continue to struggle with global financial turmoil, a question which has gained heap among investors is “will current crisis halt the growth of emerging markets”?
Decoupling has been one of the most common and optimistic words used since the onset of the current recession. But before going into further discussions, lets look on to what exactly decoupling theory means;

Decoupling holds that European and Asian economies, especially emerging ones, have broadened and deepened to the point that they no longer depend on the United States for growth, leaving them insulated from a severe slowdown there, even a fully fledged recession

This however does not conclude that global economic slowdown will have no impact on developing economies. Emerging markets have become more integrated with world economy (their exports have increased from just over 25% of their GDP in 1990 to almost 50% today). However the effect of American downturn on GDP Growth of emerging markets will be less in comparison to previous downturns.
Decoupling has been one of the hottest issues of debate among economists. If we look at the growth rates of India and China over the last year gives us enough reason to believe that Asian economies will decouple from world economy. Impressive improvement in its macro foundations of growth – especially in saving, infrastructure, and foreign direct investment. Chinese industrial output growth reaccelerated to an 18.5% over the Jan-Feb period – up from 15% in final period of 2006. India, not as brisk as China, has a 10% y-o-y pace in early 2007 which was well above 7.25% in late 2005 and early 2006 when there was no recession in US. There is a 5.5% of annualized increase in Japanese economy.

Decoupling is also evident from fact that though exports to America have lurched, but to other emerging economies have surged. For instance China’s growth in exports to America slowed to only 5% (in dollar terms) in 2007. However this slowdown was offset by increase in exports to countries like India, Brazil & Russia by 60% and to oil exporters by 45%.Likewise, South Korea's exports to the United States tumbled by 20% in the year to February, but its total exports rose by 20%, thanks to trade with other developing nations.
Reasons for Decoupling

A study by IMF shows that decoupling and globalization can go hand in hand. According to IMF methodology they divide 106 countries into 3 groups – developed, emerging and low income developing countries. And then measure how the correlation between economies has changed over time as cross border flows have expanded.

Outcome of their study shows that growth has become contemporize in both developed and emerging economies. But economic activity in emerging economies has surprisingly decoupled from that of developed economies in past two decades, since technology bubble burst. Exports of consumer goods to United States declined to 6% of total Asian exports in 2006 from 8% in 2001. Emerging economies have now started trading with each other, which accounts for half of their total exports.

Another reason that can be attributed for decoupling and globalization going together is that opening up of economies have not only boosted poor countries trade, but also has stimulated their productivity growth and in turn boosted domestic income and spending. In 2007 emerging economies' real domestic demand grew by an average of 8%, almost four times as fast as in the developed world.

U-Turn of Decoupling
In the year of 2008, India and China have shown the signs of overheating due to current global meltdown. Many economist are of view that boom in emerging economies was largely driven by exports to American consumers, easy access to cheap capital and high commodity prices. All these tools have now dried up. In particular, as America’s housing bust causes households to save more, they will import less over the coming years. This could reduce emerging economies’ future growth rates. However dependence on exports to American markets is always exaggerated. No doubt that emerging economies won’t be able to record higher growth rates of 2007. But at the same time it is wrong to presume that emerging markets will not recover until America rebounds.
There are enough reasons to believe that emerging markets share of world growth will continue to surge.

Economists argue that most emerging economies are not victims of America’s obscure structural problem, such as of swelling debt, which could pinch growth for several years. Though 2009 will be a painful year for poor countries, but those with high savings and modest debt could recover quickly. On account of measures such as government and external balances emerging economies are sounder than developed ones.
Let’s have a brief overview of these emerging economies:
· Russia: has been badly hit by current crisis, by outflow of capital and credit squeeze, despite of running current account surpluses for many years. It has become excessively difficult for banks and companies to pay off their foreign debts; due to this it has lost its shareholders trust. Official reserves have fallen by $160 billion or 25% since August. As a result of lower oil prices, Russia is likely to run its current -account and budget deficits in a decade and its economy may well contract in 2009.
· China: 2009 will prove out to be more severe to China than 2008, with GDP growth rate slowing down to 7%. According to many economists China will follow a “007 pattern”; 0% world financial growth; 0% interest rate world wide and 7% growth in China. In China property and export sectors are ones which are in enormous trouble, the government might introduce another round of interest rate cuts on a large scale in the first half of 2009. In the summer, the one-year deposit interest rate might drop to as low as 1 percent from its current 2.25 percent. Apart from this China has the fiscal room to expand spending and cut taxes, which should be an effective stimulus. It may take a few months for the package to have a big effect, and that is why the first part of 2009 looks particularly difficult. But the infrastructure projects in the package will stimulate demand for steel, cement and construction. That in turn should have a positive spillover effect on the rest of the economy.
· India: is not an export driven economy, therefore it is not as susceptible to global meltdown as China is. World Bank forecasts India’s growth rate at 5.6% in 2009, followed by a bounce back of 7.7% in 2010. The reasons for such a slow growth can be accounted to the fact that main drivers behind explicit growth had been overseas borrowings and new equity issuance. Both of which have dried up now. Therefore picture for 2009 is gloomy. India will need capital for growth while global capital will remain in short supply. Corporate India, which has led the investment boom from the front in the last four years, will also be shy of putting more capacities into place due to falling demand. Even those who want to precede with their capex plans may find it difficult to raise money even from the domestic markets.
· Latin America: Global financial turmoil is ending a half-decade of more than 5 percent growth in Latin America, as prices for its commodity exports sink and foreign investors sell off assets to cover losses at home. The global downturn has slashed demand for oil, copper, iron ore, grains and other regional exports, narrowing trade surpluses, while credit for farmers and small businessmen has tightened amid the global crunch, boosting unemployment and poverty. Economic growth could slow to 2 percent across the region in 2009, its lowest level in years. Latin America's two largest economies, Brazil and Mexico, have seen growth forecasts more than halved, while analysts worry that Argentina, one of the world's top-five exporters of wheat, corn, soy and beef won't be able to service payments on $20 billion in debt next year as income from export taxes stalls.
In past five years emerging economies have boomed, but not completely busted. In order to safeguard themselves from this ongoing recession these economies need to be high savers and able to stimulate their own economies. These economies are likely to face major headwinds in 2009 and negative earnings revisions for emerging market companies are likely to increase in the next six months.
However if we analyze MSCI EM index (An index created by Morgan Stanley Capital International that is designed to measure equity market performance in global emerging markets.The Emerging Markets Index is a float-adjusted market capitalization index. As of May 2005, it consisted of indices in 26 emerging economies: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela) , which have fallen by 57% in the first 11 months of 2008 , have outperformed the MSCI World IndexSM (A market-capitalization-weighted index maintained by Morgan Stanley Capital International (MSCI) and designed to provide a broad measure of stock performance throughout the world, with the exception of U.S.-based companies. The MSCI All Country World Index Ex-U.S. includes both developed and emerging markets)by 10.3% per annum for the seven years ending 30/11/2008. In fact, over very long time periods, the performance of emerging market equities has tended to confirm the widely-held view that high rates of economic growth in emerging markets offer the potential for returns superior to developed markets. Thus, for the 18 years ending 9/30/2008, the MSCI EM Index has outperformed the S&P 500® by more than 76 basis points per annum.

But many uncertainties still exists in emerging markets these include the magnitude and severity of the global recession, bank regulation and/or recapitalization (with many commentators suggesting that several US banks will be nationalized), credit availability, and the ability of China to avoid a "hard landing." And the recent tragic terrorist attacks in Mumbai remind investors that specific political risks in some emerging markets remain high. And now icing on the cake would be recent Sataym fraud which have raised issue on corporate governance practices, will also affect investor’s sentiments in time to come.
In summing up, long term prospects for emerging markets remain good, thanks to structural reforms and better macroeconomic policies over the past decade. In December the World Bank forecast that GDP per head in poorer countries would rise at an annual pace of 4.6% during 2010–15, similar to that during the past decade, and more than twice as fast as in the 1990s. Though investors have lost their sense of perspective on these markets but economic fundamentals of these economies are stronger and will be able to survive the global financial meltdown. Therefore there might be some recoup ling will be there in short term, but in longer term decoupling will bounce back.