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.
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.
Unilever, the consumer goods giant whose business depends on discretionary spending in developed and emerging countries, has said it can fight off difficult economic conditions to produce robust growth this year.
The maker of Dove personal care products and Ben & Jerry’s ice cream said in the outlook statement accompanying its third quarter results that:
We are confident that we will achieve another year of profitable volume growth ahead of our markets, steady and sustainable core operating margin improvement and strong cash flow.
Its third quarter sales rose 2.1 per cent on a like-for-like basis, compared to the same time last year.
Its strongest trading was in the US, where sales advanced by 6.8 per cent. Europe was weak, however, with sales falling by 4.3 per cent.
Investors had been fearing a more pessimistic update from Unilever ever since finance director Jean-Marc Huët said at an event last month that global market growth had slowed and emerging markets had worsened.
Just over a year ago, Unilever became the first consumer goods maker to warn on emerging markets sales growth.
The world economy is threatened by a “new mediocre” of low growth for a long time, warned Christine Lagarde as she signalled cuts to the global outlook for 2015.
Ms Lagarde, the managing director of the International Monetary Fund, said in a speech on Thursday that the global economic recovery is “brittle, uneven and beset by risks,”
Her remarks highlight a steady weakening of the global outlook in recent months as emerging economies, in particular, suffer a slowdown that threatens to dampen already sluggish growth in advanced countries as well.
“Overall, the global economy is weaker than we had envisaged even six months ago,” Ms Lagarde told an audience at Georgetown University. “Only a modest pickup is foreseen for 2015, as the outlook for potential growth has been pared down.”>> Read More
Emerging markets are heading for their ninth straight day of losses, the longest streak of declines since September 2001, as nervousness over the possibility of US rate hikes and slower Chinese growth mount.
The FTSE Emerging Index of developing market bourses has suffered steeper slides – most notably in the “taper tantrum” jitters of January and last summer, and at the depths of the eurozone and global financial crises – but the uninterrupted nature of this month’s slump is almost unprecedented.
Today FTSE’s flagship EM index fell another 0.6 per cent, led by bourses in Asia. Latin American exchanges have yet to open.
The gauge has only slid for 10 consecutive days once in its two-decade history – in August 1998, when a profound crisis across the developing world led to the default of Russia and a host of Asian countries.
Emerging stock markets have still enjoyed reasonable returns this year, with the FTSE index up 6.7 per cent, and the recent slide is partly a natural correction after the gauge hit a two-year high earlier this summer.>> Read More
The world is facing a global jobs crisis that is hurting the chances of reigniting economic growth and there is no magic bullet to solve the problem, the World Bank warned on Tuesday.
In a study released at a G20 Labour and Employment Ministerial Meeting in Australia, the Bank said an extra 600 million jobs needed to be created worldwide by 2030 just to cope with the expanding population.
“There’s little doubt there is a global jobs crisis,” said the World Bank’s senior director for jobs, Nigel Twose.
“As this report makes clear, there is a shortage of jobs — and quality jobs.>> Read More
The emerging market slowdown is affecting some countries worse than others, with comparatively resilient growth in African and the Middle East now attracting serious attention from the financial salesmen whose job it is to keep the investment dollars flowing.
Brazil and Russia’s growth has been especially sluggish since emerging markets boomed in 2004-2008, according to data supplied by London research consultancy Capital Economics.
And while emerging Asia remains the fastest growing developing region, “growth has held up best in in the Middle East and Africa,” Capital Economics economist Daniel Martin finds.
That will be music to the ears of those bankers and consultants who are currently fishing out old China research notes from 2006, substituting the word “Africa” throughout.
Africa is the next frontier for emerging market investors, according to some analysts, because the development of the middle class is expected to lift off.
On one level, this seems like a rather odd time to be asking such a question, especially when the BRICS political leaders have just agreed to set up a joint development bank to be headquartered in Shanghai. So the BRICS name is certainly here to stay, and in terms of global governance, their influence is likely to rise as a group because of this development. Previously, the BRICS political leaders meetings had failed to agree anything specific and even once the creation of such a bank was first mooted, for the past two years, they appeared to have difficulties in agreeing where it might be located and how it should be capitalised. At this Fontaleza meeting in Brazil, they have confounded sceptics by agreeing not only both these key things, but also to have the first head of the Bank to be an Indian. What the Bank will prioritise in terms of lending and projects, we will have to wait and see, but one can think of many good ideas including shared road and rail infrastructure challenges, especially those with some common borders, projects for energy efficiency, alternative energies, clean and safe water, and of great importance to themselves, to focus on the growing resistance to antibiotics, a challenge that if a solution cannot be found will be very harmful for their futures. But if the BRICS leaders hadn’t made this breakthrough, I am sure the siren rising about the end of the BRIC economic phenomena would be even louder and it is important to try and objectively deal with this, separately from this announcement, important as that is.>> Read More
The PBOC has just signed a deal with the BRICS nations on a $100bn Contingent Reserve Arrangement. After finalising the deal they said it was in the best interests of China and the world to help other emerging economies. They also said that it’s is hard for China to be the exception if there is huge volatility in global financial markets.
China’s reach now goes further with this deal. It’s effectively an emergency swap agreement program like the Fed, BOJ, BOE and ECB have agreed for their respective currencies.
The breakdown is as follows;
China – USD 41 billion
Brazil – USD 18 billion
Russia – USD 18 billion
India – USD 18 billion
South Africa – USD 5 billion
It will be interesting to hear if Russia ever needs to access the swap lines if sanctions bite deeply.