Posts Tagged: emerging markets

 

Just like footballers before the World Cup final, central bankers in emerging markets are readying themselves for the biggest test of their careers: the first rate increase in nearly a decade by the US Federal Reserve.

The timing of this momentous event is uncertain, and disappointing data since the start of the year has made US monetary policy makers more cautious than they were just a few months ago. However, Janet Yellen, Fed chairwoman, remains confident the economy will strengthen and rates are likely to go up this year.

When the Fed eventually moves, economists believe a rate rise is bound to provoke large capital outflows away from Latin America and Asia. This will test the defensive strategies local policy makers have built throughout the long era of ultra-low rates.

“I don’t think emerging market central bankers can ever be properly prepared,” says Simon Quijano-Evans, emerging markets analyst at Commerzbank. “They have accepted that if it does happen, they will just have to deal with it.”

Their first line of defence includes interest rates, which central bankers can increase to persuade investors to stay put rather than moving their money to the US. >> Read More

 

India has slipped six places to rank 89th on a global Networked Readiness Index, showing a “widespread” weakness in its potential to leverage information and communications technologies for social and economic gains.

While Singapore has replaced Finland on the top of the 143-nation list, prepared by World Economic Forum (WEF), it has called for improvement in India’s business and innovation environment, infrastructure and skills availability.

However, India has been ranked on the top globally on a sub-index for competition and affordability.

Overall, India was ranked 83rd last year, and even better at 68th position in 2013.

WEF said India’s weakness is widespread, falling in the bottom half of seven of the 10 pillars of the index.

“Major areas that need improvement, according to our analysis, are the country’s business and innovation environment (115th out of 143), infrastructure (115th) and skill availability (102nd).

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Faced with recession, decade- high inflation, a fiscal crisis and water rationing, more than 1m Brazilians took to the streets last month to protest against corruption and mismanagement in their government. In China, growth is slowing as property prices fall, propelling more than 1,000 iron ore mines toward financial collapse. The patriotic citizens of Russia, meanwhile, are deserting their nation’s banks, switching savings into US dollars.

Such snapshots of growing distress in the world’s largest emerging markets are echoed among many of their smaller counterparts. Several countries in Sub-Saharan Africa are beset by dwindling revenues and rising debts. Even the turbo-powered petroeconomies of the Gulf, hit by a halving in the price of oil over the past six months to $55 a barrel, are moving into a slower lane.

Though these expressions of distress derive from disparate sources, one big and insidious trend is working to forge a common destiny for almost all emerging markets .

The gush of global capital that flowed into their economies in the six years since the 2008-09 financial crisis is in most countries now either slowing to a trickle or reversing course to find a safer home back in developed economies.

Highest outflows since 2009

On an aggregate basis, the 15 largest emerging economies experienced their biggest absolute capital outflow since the crisis in the second half of last year, as a strong US dollar drove emerging market currencies into a swoon and investors grew nervous over the prospect of a tightening in US monetary policy, according to data compiled by ING. At the same time, low commodity prices slammed GDP growth rates across the developing world.

These trends, analysts say, signal a “great unravelling” of an emerging markets debt binge that has swollen to unprecedented dimensions. Importantly, the pain inflicted by this capital flight is being felt beyond financial markets in the real economies of vulnerable countries and in a surging number of emerging market corporations that are forecast to default on their debts.

“Certain parts of the world are looking really vulnerable,” says Maarten-Jan Bakkum, senior emerging market strategist at ING Investment Management. “Places like Brazil, Russia, Colombia and Malaysia, that rely heavily on commodity exports, are going to get hit even harder, while those countries that have borrowed most excessively like Thailand, China and Turkey also look risky.” >> Read More

Reserves in emerging markets shrink

01 April 2015 - 6:35 am
 

Foreign currency reserves in emerging markets fell last year for the first time in two decades, as developing economies found themselves beset by waning competitiveness, capital outflows and concerns over US monetary policy.

Nine out of 10 emerging market economists polled by the Financial Times said emerging markets had passed a period of “peak reserves” and might continue to see their stashes of foreign currency shrink for months.

That decline could hamper emerging economies’ ability to carry on buying US and European debt, a trend that has been an engine of growth in the west over the past decade.

“We are past the peak forex reserves in emerging markets,” said Maarten-Jan Bakkum, senior emerging market strategist at ING Investment Management. “The peak was in June last year. Since then we have seen declines in all major EM countries apart from Mexico, India and Indonesia.”

The International Monetary Fund said on Tuesday that total foreign currency reserves in emerging and developing economies fell $114.5bn year on year in 2014 to $7.74tn — the first annual decline since the IMF data series began in 1995. At their peak, emerging market reserves reached $8.06tn at the end of the second quarter last year. >> Read More

 

International Monetary Fund chief Christine Lagarde has sounded another strong warning of the turmoil likely to strike the developing world when the US Federal Reserve begins to raise interest rates this year.

Speaking at a conference in India today, Ms Lagarde pointed out that emerging markets received about $4.5tn of gross capital inflows between 2009 and 2012 – much of it a result of US quantitative easing – which pumped up currencies, stocks and bonds across the developing world.

Emerging markets first received a taste of the turmoil that could follow US rate increases when the Fed in 2013 signalled it would begin to unwind QE, starting what analysts called a “taper tantrum”.

Ms Lagarde warned that this could be a harbinger of more ructions to come.

The risk of financial market and capital flow volatility, along with sudden increases in interest rate spreads, remains a real possibility as U.S. interest rates begin to rise.

The danger is that vulnerabilities that build up during a period of very accommodative monetary policy can unwind suddenly when such policy is reversed, creating substantial market volatility…. I am afraid [the temper tantrum] may not be a one-off episode. This is so, because the timing of interest rate lift-off and the pace of subsequent rate increases can still surprise markets.

The IMF managing director therefore urged policymakers in the developing world to prepare for rockier conditions, pointing out that countries that kept their fiscal and economic house in order in the years of plenty did better when the tantrum struck. >> Read More

 

Sitting on the desks of central bank governors and regulators across the world is a scholarly report that spells out the vertiginous scale of global debt in US dollars, and gently hints at the horrors in store as the US Federal Reserve turns off the liquidity spigot.

This dry paper is the talk of the hedge fund village in Mayfair, and the stuff of nightmares for those in Singapore or Hong Kong already caught on the wrong side of the biggest currency margin call in financial history. “Everybody is reading it,” said one ex-veteran from the New York Fed.

The report – “Global dollar credit: links to US monetary policy and leverage” – was first published by the Bank for International Settlements in January, but its biting relevance is growing by the day.

It shows how the Fed’s zero rates and quantitative easing flooded the emerging world with dollar liquidity in the boom years, overwhelming all defences.

This abundance enticed Asian and Latin American companies to borrow like never before in dollars – at real rates near 1pc – storing up a reckoning for the day when the US monetary cycle should turn, as it is now doing with a vengeance.

>> Read More

BRICS to Create Own Parliamentary Assembly

26 February 2015 - 18:51 pm
 

BRICS leaders

A parliamentary assembly of the BRICS countries, namely Brazil, Russia, India, China and South Africa, could be established in the near future on Russia’s initiative, the Izvestia newspaper reported Thursday, citing a source familiar with the situation.

 The issue will reportedly be discussed during the upcoming trip to India by Russian State Duma Speaker Sergei Naryshkin and Foreign Affairs Committee Chairman Alexei Pushkov.

“We will begin cooperation to establish a parliamentary assembly of the BRICS countries. This will be one of the issues that will be discussed there,” the source told Izvestia.

Naryshkin and Pushkov will be joined by Russia’s Deputy Finance Minister Sergei Storchak, who oversees the creation of a new bank within the BRICS framework, on their visit to New Delhi, according to the source.

 Pushkov declined from passing detailed comment on the source’s statements, but confirmed to Izvestia that Russia is set to “strengthen and give new impetus to inter-parliamentary cooperation within the BRICS format.”

The BRICS group of prominent emerging economies was established in 2010, when South Africa joined Brazil, Russia, India and China in what was previously known as BRIC.

10 worst performing stock markets in 2014

24 December 2014 - 13:58 pm
 

10. Malaysia – Bursa Malaysia stock exchange

Loss in 2014: -10pc

How to access this market: The best route to this stock market is via the iShares MSCI Malaysia ETF, which tracks the up and down movements of shares listed in Malaysia. 

9. Mexico – Bolsa Mexicana de Valores SAB de CV stock exchange

Loss in 2014: -12pc

How to access this market: One option is to buy a fund that has a significant chunk of its money in Mexican shares, such as the Blackrock Latin American Investment trust, which has around 30pc of its money in the country. Alternatively there is SPDR MSCI Mexico Quality Mix ETF and the iShares MSCI Mexico Capped ETF. 

8. Brazil – Bovespa stock exchange >> Read More

 

The US Federal Reserve has pulled the trigger. Emerging markets must now brace for their ordeal by fire.

They have collectively borrowed $5.7 trillion in US dollars, a currency they cannot print and do not control. This hard-currency debt has tripled in a decade, split between $3.1 trillion in bank loans and $2.6 trillion in bonds. It is comparable in scale and ratio-terms to any of the biggest cross-border lending sprees of the past two centuries.

Much of the debt was taken out at real interest rates of 1pc on the implicit assumption that the Fed would continue to flood the world with liquidity for years to come. The borrowers are “short dollars”, in trading parlance. They now face the margin call from Hell as the global monetary hegemon pivots.

The Fed dashed all lingering hopes for leniency on Wednesday. The pledge to keep uber-stimulus for a “considerable time” has gone, and so has the market’s security blanket, or the Fed Put as it is called. Such tweaks of language have multiplied potency in a world of zero rates.

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The US Federal Reserve has started to wean the US economyoff phantom money, euphemistically called “quantitative easing” (QE). Reserve Bank of India (RBI) GovernorRaghuram Rajan has been apprehensive about its potential impact on emerging economies like India. He made a vocal plea for a globally co-ordinated monetary policy action, ostensibly after due consideration of the impact of global capital flows on emerging economies. The then fellow at Peterson Institute Arvind Subramanian together with Princeton University economist Dani Rodrik, through an article in this paper (“Emerging Markets’ Victimhood Narrative,” February 1, 2014) pointed to the disingenuity of such claims of victimhood. They argued how emerging markets “consciously and enthusiastically embraced financial globalisation” to soak up foreign capital flows during times of easy money and contended that emerging markets are “simply reaping what they have sown”.

Over the next few weeks and months, as the tide of US capital flows run out, naked swimmers in emerging economies could be exposed, (the tangible impact of Bank of Japan’s renewed benevolence in flooding the market with liquidity is still unclear). Amid such bay watching, this is yet another opportunity for policymakers in emerging economies to assess reliance and susceptibility of various sectors in their economy to foreign flows. In this context, the badge of honour for dependence on foreign capital flows in the Indian economy can be bestowed on our equity markets. Analysis of all factors such as gross domestic product (GDP) growth, interest rates, domestic institutional investor (DII) flows, foreign institutional investor flows (FII), corporate earnings and so on that typically move stock markets, reveals that FII flows alone explain movement in the BSE Sensex since 2000.

>> Read More

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Technically Yours,
Team ASR,
Baroda, India.