Perfect storm hits emerging markets as G7 meets

By Walter Brandimarte and Vivianne Rodrigues

WASHINGTON (Reuters) - Emerging-market economies face their biggest challenge in a decade as G7 finance ministers gather this weekend to discuss ways to prevent the financial crisis from snowballing into developing countries.

Leaders from Brazil, Russia, India and China, among others will pressure the world's richest nations during the International Monetary Fund and World Bank's Fall meeting in Washington to act vigorously in order to maintain liquidity in global credit markets. A parallel summit of the G20 emerging market and industrialized nations will also take place on Saturday.

At stake for the emerging market economies is a decade worth of fiscal discipline, tame inflation, and sustainable economic growth. Many of those economies, helped by a boom in commodity prices and a decline in the U.S. dollar, accumulated unprecedented levels of foreign exchange reserves that are now being used to help prevent their own currencies and markets from melting down amid a global slump in asset values.

"Decoupling is dead. The talk in emerging markets until recently was that many of those economies would survive the liquidity meltdown in the U.S. and Europe reasonably well," said Win Thin, a senior currency strategist at Brown Brothers Harriman in New York. "But that's gone. No country is isolated."

The Russian central bank has spent about $25.6 billion in foreign reserves in September to support the ruble as their stocks plunged to multiyear lows. In Brazil, stock trading has been halted almost daily in the past week as equity prices sank to their lowest in two years and its currency touched its weakest level since 1999.

While government agencies and banks in most developing countries are not exposed to the same sort of mortgage-related assets that have been poisoning U.S. and European markets, the rapid appreciation of the U.S. dollar, combined with a drop in commodity prices, along with capital outflows, are all forming a "perfect storm," economists said.

Current account surpluses are quickly turning into deficit and now the World Bank and the IMF see overall economic growth slowing in 2009 in Latin America, Eastern Europe and part of Asia.

"We obviously see a very significant deterioration of the external environment," said Augusto de la Torre, chief economist for Latin America at the World Bank in Washington. "The shocks have become global, they have become integrated."