 "Emerging markets could triumph from crisis")
The retreat of capital inflows from emerging markets, the fall of asset prices, and the tumbling of currency values were fairly predictable. They also brought a reality check to investing in emerging countries. As investors are looking deeper into the underlying fundamentals, they have come to the realisation that two things had driven growth. One driver was the positive demographics, population growth, productivity gains, and growth policies, which in turn attracted investment capital, about $1 trillion each year. But, growth also came with growth in debt and excess liquidity created by central banks.
Fundamentals of emerging markets
Emerging countries have different economic fundamentals. India, Turkey and Indonesia, which are in a much greater danger of collapse, were generally put together with Malaysia, The Philippines and Thailand, more resilient. Brazil, India, Turkey, South Africa and Indonesia have been hit particularly hard in the present climate. Their currencies have fallen on average by 14% since May. The hype about the BRIC countries and overconfidence in the good years led some leaders to assume that their countries’ gains were inevitable. They are not, as it turned out.
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The threat of liquidity withdrawal by the Chairman of the US Federal Reserve has exposed the fragile structure of economies with twin deficits. It has also put them in a situation where markets will now force structural reforms by denying these countries access to capital. A large part of the losses have been recovered, but the correction should be a wake up call for investors and governments. In general, economists argue that developing countries are unlikely to repeat the crises of the 1980s and 1990s, their flexible exchange rates, foreign exchange reserves and reliance on foreign direct investment limit the risk.
Need for structural changes
However, some have argued that the global economy is much larger than in 1997, the level of debt is at many multiples, and cross border flows are much bigger. Consider India, for example. India will run out of reserves quickly if the market forces their hand. The Reserve Bank of India (RBI) has done the sensible thing of letting the rupee depreciate rather than taking on the market. Other countries also need to be watched. Turkey, for example, has a much larger current-account deficit than India and the investment grade rating has attracted a large amount of hot money inflows into the country. It may lose its investment grade rating. Indonesia and India may face a similar fate.
Central banks in emerging markets now have a problem of currency weakness and imported inflation to deal with, while governments have to contend with higher interest rate and slower growth. An escalation of the current situation into a full-blown crisis could present dollar based investors with an opportunity to invest in some of these economies at a much more attractive valuation due to weaker currencies and lower stock and bond markets. A crisis would force some level of reform that would enable these economies to address structural weaknesses facilitating a rise in the long-term growth trajectory.
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Developing countries still face big challenges. They need to develop their human capital, health, education and skills, and draw on the talents of all their people, including women, with flexible labour markets. Many countries need to invest in solutions to overcome transport, energy, telecommunications and water bottlenecks. There are too many obstacles to starting new businesses, and too many public services are inefficient.
Core sectors offer huge potential
The current emerging markets bust is an opportunity to be embraced by both investors and governments by accepting short-term pain for long-term gain. The era of cheap money will not last forever and emerging markets need to capitalise on the moment before it is gone.
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The author is an Independent Consultant based in Chapel Hill, NC, USA, and was recently Vice President - Technology at Asian Paints Ltd, Mumbai, India. He is a member of the American Chemical Society and Product Development Management Association. Email: mmoukwa@aol.com
Fundamentals of emerging markets
Emerging countries have different economic fundamentals. India, Turkey and Indonesia, which are in a much greater danger of collapse, were generally put together with Malaysia, The Philippines and Thailand, more resilient. Brazil, India, Turkey, South Africa and Indonesia have been hit particularly hard in the present climate. Their currencies have fallen on average by 14% since May. The hype about the BRIC countries and overconfidence in the good years led some leaders to assume that their countries’ gains were inevitable. They are not, as it turned out.
ALSO READ: Can the chemical end-user industries get back on track?
The threat of liquidity withdrawal by the Chairman of the US Federal Reserve has exposed the fragile structure of economies with twin deficits. It has also put them in a situation where markets will now force structural reforms by denying these countries access to capital. A large part of the losses have been recovered, but the correction should be a wake up call for investors and governments. In general, economists argue that developing countries are unlikely to repeat the crises of the 1980s and 1990s, their flexible exchange rates, foreign exchange reserves and reliance on foreign direct investment limit the risk.
Need for structural changes
However, some have argued that the global economy is much larger than in 1997, the level of debt is at many multiples, and cross border flows are much bigger. Consider India, for example. India will run out of reserves quickly if the market forces their hand. The Reserve Bank of India (RBI) has done the sensible thing of letting the rupee depreciate rather than taking on the market. Other countries also need to be watched. Turkey, for example, has a much larger current-account deficit than India and the investment grade rating has attracted a large amount of hot money inflows into the country. It may lose its investment grade rating. Indonesia and India may face a similar fate.
Central banks in emerging markets now have a problem of currency weakness and imported inflation to deal with, while governments have to contend with higher interest rate and slower growth. An escalation of the current situation into a full-blown crisis could present dollar based investors with an opportunity to invest in some of these economies at a much more attractive valuation due to weaker currencies and lower stock and bond markets. A crisis would force some level of reform that would enable these economies to address structural weaknesses facilitating a rise in the long-term growth trajectory.
ALSO READ: M&A deals in Indian chemical industry down with economic slowdown
Developing countries still face big challenges. They need to develop their human capital, health, education and skills, and draw on the talents of all their people, including women, with flexible labour markets. Many countries need to invest in solutions to overcome transport, energy, telecommunications and water bottlenecks. There are too many obstacles to starting new businesses, and too many public services are inefficient.
Core sectors offer huge potential
Dr Mosongo Moukwa
The current emerging markets bust is an opportunity to be embraced by both investors and governments by accepting short-term pain for long-term gain. The era of cheap money will not last forever and emerging markets need to capitalise on the moment before it is gone.
_______________________________________________________________________________________________
The author is an Independent Consultant based in Chapel Hill, NC, USA, and was recently Vice President - Technology at Asian Paints Ltd, Mumbai, India. He is a member of the American Chemical Society and Product Development Management Association. Email: mmoukwa@aol.com