Tag Archives: emerging markets

The Weekly Mishmash: November 29

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1. A story of Brics without mortar
Philip Stephens, FT

Does it make sense to lump the BRICs together? Not really, says Stephens.

He points out that Brazil, Russia, India and China have little in common other than impressive rates of economic growth. They are not united politically, and he doesn’t see them reliably allying together. Rather, he sees a more multi-polar world where “rising states want to do some things together and some things with the west.”

EM Muser: I completely agree with Stephens that it’s a mistake to view the BRICs as a united political bloc. As the economic power of many emerging markets grows, their political clout will grow as well. However, it should not automatically be assumed they will work together.

We’ve seen a number of recent examples that highlight the lack of coordination among the BRICs. This spring, many EMs would have loved to place one of their own at the helm of the IMF, but they disagreed on who. Overall, it looks like we’re headed toward a more multi-polar geopolitical arrangement – characterized by shifting alliances and no clear dominant power – which likely means a less stable world.

2. South African lawmakers approve ‘secrecy bill’ to protect state
David Smith, Guardian

South Africa’s lower house of parliament passed a controversial ‘Protection of Information’ bill on November 22. The media – as well as human rights organisations, unions and renowned national heroes like Desmond Tutu and Nelson Mandela – see the bill as a major setback for freedom of expression and the fight against corruption.

Daniel Bekele, Africa director of Human Rights Watch: “The manner in which the government pushed this bill through parliament instead of proceeding with consultations as promised, as well as the secrecy embedded in this legislation, send very worrying signs about the government’s commitment to transparency.”

EM Muser: This so-called ‘secrecy’ bill is yet another sign that political risk in South Africa is on the upswing, which is negative for the investment climate. In late October, President Zuma sacked two cabinet ministers for misuse of public funds. Corruption is an ongoing problem, and this bill will make it harder to stamp it out.

The ANC continues to dominate South African politics, winning 66% of the vote in 2009. However, what was once a dynamic party is looking increasingly sclerotic, between allegations of corruption to growing dissension within the party ranks (see The Weekly Mishmash: November 13). Just because the governing party has a large majority in no way ensures a predictable policy environment. Look at Hungary.

3. Not amused: China’s theme park industry should be making easy money
China Economic Review

Over-investment in China is not limited to ghost towns and highways to nowhere. Apparently it also extends to theme parks. Many are boondoggles, and regulators are cracking down. “[T]heme parks larger than 20 hectares or requiring more than US$78 million in investment must obtain national-level approval or halt construction immediately.”

EM Muser: There has been lots of talk about fizzy conditions in China as well as corruption among government officials. The theme park bubble is just the latest example. 

4. Fitch Revises Turkey’s Outlook to Stable; Affirms at ‘BB+’
Fitch Ratings

Fitch held Turkey at one notch below investment grade, but cut the ratings outlook to stable from positive last week. This contrasts with S&P, which upgraded the country’s local currency rating to investment grade in September.

Despite strong government finances and a healthy banking sector, “Turkey’s large external financing requirement leaves it vulnerable to the deterioration in the global outlook,” according to Fitch.

EM Muser: While I am upbeat about Turkey’s medium-to-long term economic prospects, I agree with Fitch that the economy looks vulnerable in the short-term.

As I noted in a recent post, Turkey’s high current account deficit (which Fitch expects to reach almost 10% of GDP in 2011) combined with limited foreign reserves and high amounts of short-term external debt leaves the economy very exposed to a dry-up in external financing. (See Which Emerging Markets Appear Vulnerable? A Look at Early Warning Indicators)

The Weekly Mishmash: November 22

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1. BRICs’ rapid growth tips the global balance
Jim O’Neill, Goldman Sachs

Jim O’Neill is best known for coining the term BRICs a decade ago, when he predicted Brazil, Russia, India and China would be the world’s future growth drivers. He highlights the critical importance of population dynamics in making his call: “Simply applying the most credible estimates of long-term demographic trends, especially for the working population, is the intellectual cornerstone of the argument for the BRICs’ potential.”

EM Muser: Demographics is an oft-ignored area of economics so it’s interesting to hear O’Neill cite it as a ‘cornerstone’ of his BRIC thesis. I think it’s paramount for long-term investors to look at a country’s population dynamics.

The demographic profiles of EMs vary greatly. Many countries in Eastern Europe have profiles similar to those of advanced economies. This will make it hard for them to avoid the public finance strain, productivity loss and slowing economic growth typically associated with aging populations. However, other EMs are still enjoying a demographic divided given their young and growing populations (eg. Brazil, Indonesia, Turkey).  (See my related post: The Double Whammy: Debt and Demographics)

2.  IMF Is No Cure-All for Hungary
Gergo Racz, WSJ Emerging Europe

Hungary surprised markets when it expressed interest in a new IMF agreement. The announcement marks a sharp U-turn from last year when the government abruptly broke off talks with the lender. Even if an agreement is reached, the post notes that the country’s fundamentals remain poor and its sovereign credit rating still teeters on the edge of ‘junk’.

EM Muser: This appears to be a ploy by the government to delay a sovereign credit rating downgrade. The fact that the government publicly expressed interest in an IMF deal before notifying its own central bank – or even the IMF itself – lends support to this idea.

Hungary wants an deal with no strings attached – that is, with no austerity measures. However, I find it hard to believe the IMF will go along without demanding some sort of structural reforms, which the country badly needs. In the meanwhile, the ploy may work, at least temporarily, as the mere prospect of a deal should help prevent borrowing costs from spiking dramatically. (See my recent posts on the country: Hungary’s Latest Debt Relief Plan: From Bad to Worse and Hungary’s Vicious Circle: Anemic Lending and Weak Growth).

3. Argentina: Balance of Payments Crunch?
Daniel Volberg, Morgan Stanley

Volberg describes the significant fall in Argentina’s international reserves, which have declined by more than $5bn since July. While he does not foresee a full-blown currency crisis, he does note several areas for concern, including the country’s deteriorating balance of payments and an acceleration in investors pulling money out of the country following the tightening of capital controls in late October.

Mr. Volberg believes the government’s currency policy could go one of two ways. The good scenario would involve a rise in interest rates to compensate investors for a weakening of the peso in an effort to keep capital from fleeing, while a bad scenario would feature a more severe tightening in capital controls along with a multiple exchange rate regime.

EM Muser: Argentina poses something of a conundrum. I discussed analysts’ widely varying perspectives on the country’s economic success last week. (See The Weekly Mishmash: November 13). On the positive side, the economy expanded by 7.7% in the year through September. However, this fast growth does not appear sustainable.

It’s increasingly clear that the administration’s policies are draining investor confidence and prompting capital to flee the country. President Cristina Fernandez Kirchner is due to announce her new cabinet in early December, which should give more insight into the government’s future policy direction.

4.  Brazil: ‘Pacification’ of Favelas Not Just a Media Circus
Fabiana Frayssinet, Inter Press Service

Last week, roughly 3000 heavily-armed soldiers and police took over Rio de Janeiro’s largest slum, Rocinha. Officials hailed it as a “recovery of territory” by the state.

The occupation is “part of a new security strategy that provides for a permanent community policing presence as well as services and projects for social improvement and infrastructure in favelas, replacing the traditional policy of head-on warfare on the drug gangs.” According to the article, Rio has some 750 favelas with 1.5 million people, about one-third of the city’s total population. The goal is to occupy 40 of them by 2014.

EM Muser: This is huge positive step forward for Brazil that hasn’t received much international attention. I lived in the country about a decade ago and still remember the power of the drug gangs. These are no common thugs. They have anti-aircraft missiles and were powerful enough to shut down Rio on a number of occasions – a pretty mean feat considering it’s a city of roughly 6 million people. In more recent years, they have managed to shoot down police helicopters.

Drug gangs effectively control large swathes of the city, and it’s encouraging to see authorities finally stepping in. In some ways, their hand has been forced. Brazil is hosting the World Cup in 2014 and the Olympics in 2016. These events represent a coming-out part of sorts for the country, and authorities can’t afford to let Brazil’s image be tainted by public security problems.

5.  Putin is booed at martial arts fight
Charles Clover, FT

The crowd unexpectedly heckled Russian President Vladimir Putin at a live televised fighting event. “Mr Putin was seeking to boost the popularity of the hegemonic United Russia party in forthcoming parliamentary elections on Dec 4, but the spectacle showed that the gulf between the regime and the people appears to be widening.”

EM Muser: This is not the first time one of Putin’s publicity stunts has gone awry. Last month, his spokesman admitted that Putin’s discovery of ancient Greek ceramic pieces on a dive in August had been staged (see here). Despite these stumbles, Putin still enjoys a 61% approval rating according to a recent poll and is expected to return to the presidency in 2012.

The Weekly Mishmash: November 6

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1. Permanent Jobs Disappear from South Korea

Steven Borowiec, Asia Sentinel

Non-regular workers – including temporary and part-time employees – now make up one-third of South Korea’s workforce. These workers lack job security and get paid roughly half that of regular employees. As Borowiec notes, the increase in non-regular workers has a host of negative implications, including rising income inequality.  “Permanent jobs were the norm until the tumult of the late 1990s (invariably referred to as “the IMF crisis” by South Koreans) set in motion changes in the nature of employment that are now jeopardizing the country’s middle class and social cohesion.”

EM Muser:  South Korea’s economy has recovered strongly from the global recession in 2008-09, with GDP growing by more than 6% last year. However, growth is not evenly distributed. Non-regular workers are struggling to maintain middle-class lifestyles through debt-fuelled consumption, and household debt now surpasses 150% of disposable income.

As I noted in an earlier post, GDP measures the size of the economy, but gives no indication of how that pie is divided. An economy may be growing, but if that growth is debt-fuelled, then its sustainability is in question. (See: Unhealthy Obsession with GDP)

2. Brazil: Well Positioned Against Higher Global Financial Volatility

Erich Arispe and Shelly Shetty, Fitch Ratings

The title of this Fitch report sums it up pretty well. No emerging market is completely immune to a spike in global risk aversion, but Brazil is relatively well-placed to deal with the fallout. Fitch cites the following factors to justify its upbeat assessment: strong international reserves, moderate external financing needs, credibility of the policy framework, banking system strength and stable government debt.

EM Muser: The Fitch report’s findings coincide with my own views (See: Brazil: Bubble, Bubble, Toil and Trouble? and Which Emerging Markets Are Vulnerable? A Look at Early Warning Indicators). Like Fitch, I see growth moderating in Brazil in line with the global slowdown, but no financial crisis. Economies that are domestic demand-oriented with healthy banking systems and strong international reserves – like Brazil, Colombia and Indonesia – are relatively better prepared to weather the global downturn. 

3. Supply chain disruption: sunken ambitions

Ben Bland and Robin Kwong, FT

Global supply chains are once again in disarray. Floods in Thailand are the latest culprit, but they also suffered from the heartbreaking tsunami/earthquake in Japan earlier this year. “[A]mid growing fears that climate change will lead to more frequent, more unpredictable natural disasters, multinationals are coming under increasing pressure to rethink the way they produce and distribute.”

EM Muser: First and foremost, my thoughts and prayers are with the flood victims in Thailand.

As for the global supply chain, multinationals have clustered their production to reduce costs and take advantage of economies of scale and now we’re seeing the consequences. It’s amazing how much multinationals have put their eggs in one basket and concentrated production of a component in one location, leaving global supply chains extremely vulnerable. It will be interesting to see if this trend starts to reverse or if they just accept such disruption as a rising cost of doing business. Either scenario is likely to result in inflation down the line.

4. Nowhere to hide: EM decelerating alongside US and Euro area

Joseph Lupton, David Hensley and Luis Oganes, J.P. Morgan

J.P. Morgan provides an in-depth analysis that details why EMs will once again fail to decouple from the slowdown in advanced economies.

“[W]e still project that real GDP growth in the EM economies will track its historical relationship with the US/EMU dating back to the late 1990s. Over this period, the EM have maintained a unit-beta to the DM economies. That is, a 1%-point move in DM growth typically has been matched by a 1%-point move in EM growth. This relationship held remarkably well during the global financial crisis of 2008-09 and during the subsequent recovery, with slight differences across each EM region. In the current environment, both the trade and financial channels are already operating, with EM export growth softening and global markets selling off. One way in which the EM might “decouple” is through an early, aggressive easing of policy; however, officials in most countries are moving cautiously…”

EM Muser: Before the global financial crisis, analysts talked about decoupling. No one seems to be touting that idea this time around. As I noted in an earlier post, EMs account for an increasing share of global GDP, but many are still heavily dependent on export-led growth.  Trade between these countries is increasing, but advanced economies continue to be their main export destinations. (See: Can Emerging Markets Replace the US as the World’s Consumer of Last Resort?)

While no EMs will decouple from global turbulence, some should prove more resilient and recover faster than others. (See: Which Emerging Markets are Vulnerable? A Look at Early Warning Indicators)



Why Emerging Markets Are Not in the Running for Top IMF Job

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Emerging markets’s economic clout is growing, but their influence in international financial institutions (IFIs) has not kept pace.  These economies accounted for almost half of global GDP (on a purchasing power parity basis) in 2010, a sharp increase from their 37% share a decade earlier. Nevertheless, they have only achieved modest reform of IFIs, and no emerging market candidate has ever headed the IMF or World Bank. The recent arrest of Dominique Strauss-Kahn and his subsequent resignation as IMF head has brought this issue to the fore.

Will an emerging market candidate replace DSK? The short answer is no. French finance minister Christine Lagarde looks almost certain to fill the coveted post.  The most obvious reason for this is that emerging markets’ voting power at the IMF does not match the new global economic reality. However, tradition and a lack of unity among emerging markets themselves are also important factors. Ultimately, the institutions created after World War II, including the IMF and World Bank, will reform or become irrelevant.

Lopsided Voting Power

The US and Europe continue to dominate the IMF through their superior voting power as seen in the graphs below.

*Australia, Canada, Czech Republic, Denmark, Hong Kong, Iceland, Israel, Japan, Korea, New Zealand, Norway, Singapore, Sweden, Switzerland, Taiwan, UK (based on IMF definition of advanced economies outside the US and Euro area)

The IMF trumpeted 2010 as “the year of reform,” even though there was not much change. The IMF claims that 6% of the voting power will be transferred to emerging markets in coming years. However, critics have noted that some of this transfer results from reduced voting shares for other developing economies, meaning advanced economies will still control a sizeable majority – around 55% – of total votes. Moreover, the US will retain its veto over key IMF decisions.  Details on the current formula for allocating votes is available here.

Tradition

The IMF and World Bank can trace their origins back to the 1946 Bretton Woods Conference following World War II. Since that time, a European has always stood at the helm of the IMF, while the US has appointed the World Bank head.

There is a raging debate right now about whether a European should remain in the top spot. See Wolfgang  Munchau for the arguments in favour of a European candidate and Martin Wolf who takes the opposing view. The main gist of Munchau’s argument is that a European is better positioned to lead the institution right now given the turmoil in the euro zone periphery and given that most of the IMF’s outstanding loans are to European countries. Like Wolf, I find this argument to ring hollow. There are plenty of economists and policymakers in other parts of the world who are capable of leading the institution and who would have the advantage of being able to deal with the euro zone problems in a more objective manner than a European. Where were the voices calling for an Asian IMF head during the Asian financial crisis in the late 1990s?

Emerging markets do not speak with one voice

It’s easy to pin blame on the US and Europe for not devolving more power to emerging markets, but lack of unity among these countries is a key reason why IMF reform has limped forward at such a slow pace. Statements from various emerging market leaders highlight the collective action problem.

Mexico’s Agustín Carstens put himself forward as a candidate to replace DSK, but Brazil and Peru balked. So there was not even regional solidarity, much less emerging market solidarity. Asia fared somewhat better, with Thailand and the Phillipines appearing to unite behind Singapore’s finance minister, Tharman Shanmugaratnam.

Simon Johnson hits on the issue in a recent Bloomberg column: Who will provide the diplomatic initiative to organise emerging markets behind a single candidate? So far no one is stepping up.  Until that happens, emerging markets will continue to face a collective action problem that results in them punching below their weight in the world’s international financial institutions.