Fifteen years ago—March 2008—new stresses in the global financial system were uncovered. Here we are in March 2023, and new challenges to the global banking system have revealed themselves. New exogenous shocks mean we need to assess vulnerabilities in our sectors, which in this case, are the emerging markets. According to our framework, on balance, vulnerabilities within the emerging markets have lessened since the 2008 Global Financial Crisis. Reduced imbalances can support emerging market currencies should another global banking crisis indeed materialize. While depreciation of emerging market currencies would likely still be significant, improved fundamentals can result in more contained selloffs.
To be clear, we are not forecasting nor implying a repeat of the Global Financial Crisis is imminent. We believe policymakers and regulators will move quickly, and banking sector stresses will be contained and will not result in systemic risks to the global financial system. Under this assumption, we believe emerging currency volatility may stay elevated in the short term; however, we maintain our constructive medium- to long-term outlook for developing currencies, and continue to believe currencies across the emerging markets spectrum can outperform in 2023.