Emerging markets
Stumble or fall?
Jan 8th 2009| HONG KONG
>From The Economist print edition
>http://www.economist.com/finance/displayStory.cfm?story_id=12896793&source=hptextfeature
>
Will the global
financial crisis halt the rise of emerging economies?
NOBODY talks about “decoupling” any more.
Instead, emerging economies are sinking alongside developed ones. In 2008
emerging stockmarkets fell by more than those in the rich world, and financial
woes forced countries such as Hungary, Latviaand Pakistanto go cap in hand to
the IMF. Taiwan’s exports have plunged by 42% over the past
year, and South Korea’s
by 17%; even China’s have shrunk. Singapore’s GDP fell by an annualised 12.5%
in the
fourth quarter of 2008, its biggest drop on record. Is this the end of the
emerging-market boom?
Over the five years to 2007, emerging
economies grew by an annual average of more than 7%. But in the past three
months their total output may have fallen slightly, according to JPMorgan, as
the fall in exports was exacerbated by a sudden drying up in trade finance. For
2008 as a whole, average growth in emerging economies was still above 6%, but
recent private-sector forecasts suggest that this could slip to less than 4%
this year. That is grim compared with the recent past, though still robust set
against an expected 2% decline in the GDP of the G7 countries.
Short-term pain is only to be expected. But
some economists argue that emerging markets’ longer-term prospects have been
badly hurt by the global financial crisis. From Brazilto China, they claim, the
boom was driven largely by
exports to American consumers, easy access to cheap capital and high commodity
prices. All three props have now collapsed. In particular, as America’s housing
bust causes households to save
more, they will import less over the coming years. This could reduce emerging
economies’ future growth rates.
Yet emerging economies’ reliance on Americais often exaggerated. The surge in
their
total exports as a share of GDP since 2000 might, on the face of it, suggest
that their boom was powered by rich-world demand. But their dependence on
exports to developed countries has barely budged, at just under 20% of GDP (see
chart 1). Most of the growth in exports has been within the developing world.
For sure, emerging economies will not return
to their exceptional growth rates in 2007 (no bad thing either, since many of
them were overheating). But it is equally wrong to assume that they cannot
recover until Americarebounds. There are good reasons to believe
that emerging markets’ share of world growth will continue to climb (see chart
2).
Gerard Lyons, chief economist at Standard
Chartered, argues that most emerging economies are not plagued by America’s
deep structural problems, such as an
overhang of debt, which could cramp growth for several years. Although 2009
will be a painful year for poorer countries, those with high savings and modest
debt could
recover fairly quickly. On many measures, such as government and external
balances, emerging economies look much sounder than the big rich ones.
Unfortunately,
aggregate numbers conceal many horrors, most notably in eastern Europe.
Countries such as Hungary, Estonia, Latviaand Turkeyhave huge current-account
deficits and
foreign debts. Between 2000 and 2008, the ratio of foreign debt to GDP dropped
from 37% to 20% in Latin Americaand from
28% to 17% in emerging Asia, but jumped from 45% to 51% in central and
eastern Europe.
As foreign capital dried up, GDP fell by
4.6% in Latviaand by 3.5% in Estoniain the year to the third quarter of 2008.
Capital Economics, a research consultancy, expects another 5% drop this year.
Hungary’s economy is expected to contract in 2009. Turkeymay also be heading
for trouble. Its
debt-service payments due in 2009 amount to 80% of its foreign reserves, the
highest ratio of any big emerging economy.
Russiahas run current-account surpluses for many
years, yet it has also been badly hit by an outflow of capital and a credit
freeze. Banks and companies are finding it hard to roll over their foreign
debt. Official reserves have fallen by $160 billion, or 25%, since August. As a
result of lower oil prices, Russiais likely to run its first current-account
and budget deficits in a decade, and its economy may well contract in 2009.
Asia’s export-led economies have been hurt by
the collapse in global demand. Output is already falling in Singapore, Hong
Kongand Taiwan. However, current-account surpluses and
modest domestic debts mean that most of the region is much less exposed to the
credit crunch than eastern Europe is. Asiahas two other advantages. First, as a
large net importer of raw materials it
will benefit from the plunge in commodity prices, unlike Latin America. And
second, with the exception of India, Asian countries have low
public-debt-to-GDP ratios, giving them more room for fiscal stimulus than other
emerging economies. Such policies take time to work, but after a nasty 2009,
Asiais well placed to be the first region in
the world to recover.
Chinais crucial to Asia’s fortunes. Many economists expect GDP
growth to slow to around 7% in 2009, down from almost 12% in 2007 and its
slowest rate for almost two decades. Thousands of factories have closed in
southern China, triggering concerns that rising
unemployment will cause social unrest. This prompted the government to unveil a
large fiscal stimulus in late 2008, which should help to boost growth in the
second half of this year. With debts of only 18% of GDP, the government has
plenty more room to boost spending. And if Chinahas to rely more on domestic
demand, this
will help to steer it onto a more sustainable path.
A comparison of Chinawith Indiain any case shows that exports are not the
main thing that determines how vulnerable economies are to the global crisis.
India’s exports as a share of GDP are much
smaller than China’s, so one might expect it to be holding up
better. But a big chunk of Indian investment—the main driver of recent
growth—has been financed by overseas borrowing or new equity issuance. Both
have dried up. The government’s huge budget deficit also limits its room for
fiscal easing. On January 2nd Indiaannounced its second monetary and fiscal
stimulus package within a month, but the extra spending is tiny. Standard
Chartered thinks that GDP growth will dip to 5% in 2009, well below its recent
9% pace.
Latin America’s prospects lie somewhere between those of Asiaand emerging
Europe. Weak commodity prices could push the
region into running a large current-account deficit, just as private-capital
inflows decline sharply. Latin Americaalso has
less scope for fiscal stimulus than Asia,
because many governments (including Argentinaand Brazil) used the windfall from
higher commodity
prices to boost spending rather than cut debt. Goldman Sachs forecasts that
Brazilwill grow by only 1.5% in 2009, whereas Mexico’s GDP could fall by 0.5%
because of its
stronger trade links with America. The bank reckons that both should recover
fairly quickly. Argentinais another matter. Credit-default-swap
spreads on its government debt have surged to horrifying levels, signalling
that investors see a high risk of default.
During the past five years virtually all
emerging economies boomed. Now their fortunes will diverge much more. The most
important factor determining how they cope with the recession in the rich world
will be whether they are high savers, able to stimulate their own economies, or
big borrowers. If international investors continue to shun risk and rich-world
governments swamp markets with their own borrowing, it will be hard for
emerging-market governments to issue bonds and for banks and firms to roll over
debts. Some developing countries will therefore remain sluggish for longer than
others.
Overall, however, their long-term prospects
remain good, thanks to structural reforms and better macroeconomic policies
over the past decade. In December the World Bank forecast that GDP per head in
poorer countries would rise at an annual pace of 4.6% during 2010–15, similar
to that during the past decade, and more than twice as fast as in the 1990s.
That word “decoupling” may yet get dusted off again.
Indonesia's economy and the election
So far so good
Jan 8th 2009| JAKARTA
>From The Economist print edition
>http://www.economist.com/research/articlesbysubject/displaystory.cfm?subjectid=348879&story_id=12896757
>
The president
has quite a good crisis
WITH only three months until parliamentary
elections, Indonesia’s six-month-old campaign has moved up a
gear. For once, thanks to the global economic slump, it as much about substance
as about style and personalities. And, unlikely as it seemed six months ago,
President Susilo Bambang Yudhoyono’s government can hold its head pretty high.
The data suggest the fourth-quarter slowdown
in Indonesiawas much less pronounced than elsewhere in South-East Asia.
Economic growth for 2008 as a whole is
likely to exceed 6%. Many other indicators are also robust. The 2008 budget
deficit was 0.1% of GDP and the government has earmarked $3.5 billion to spend
on tax breaks and infrastructure projects.
In late 2008 the currency, the rupiah, lost
a fifth of its value against the dollar, but the slide has halted. The cost of
insuring Indonesian government bonds against default has come down sharply.
Inflation, still running at an annual rate of 11%, is falling, enabling the
central bank this week to cut its benchmark interest rate by one-half of a
percentage point, to 8.75%.
Most banks are healthy, thanks to radical
reform after the Asian crisis of a decade ago. And in 2008 the country achieved
rice self-sufficiency for the first time in 24 years. Manufacturing is starting
to feel the heat but only 25,000 workers have been laid off since November.
And, according to research by the Asia Foundation, an American NGO, the huge
informal sector has yet to feel much of an impact of the crisis.
President Yudhoyono can certainly take some
credit for all this. He courted unpopularity by raising the prices of
government-subsidised fuel when oil was soaring last year, and has now been
able to cut them twice. Measures have been taken to support the financial
sector and the poorest in society, and his stimulus package will both offer tax
incentives and finance additional infrastructure projects. Moody’s, a
credit-rating agency, gave Indonesiaa “stable” outlook in its annual report
this week, expecting the authorities to manage the impact of the crisis
competently.
Factors that have nothing to do with the
president’s policies are also helping. Domestic demand accounts for two-thirds
of GDP, so though Indonesiaremains vulnerable to sharp falls in the
prices of commodities such as coal and palm oil, collapsing exports will not
hit it as hard as its neighbours. The lack of infrastructure development in
recent years means a few billion dollars will have a much greater impact than
it might otherwise have done.
The government, however, needs to get the
funds flowing fast and it is bad at disbursing money quickly. It also needs
consumers to keep spending. Here the signs are ambiguous. Many Indonesians are
not savers by nature. Yet carmakers, for example, are predicting a 25%
contraction in sales. Food producers are less gloomy.
However, Indonesia, which suffered worse than any of its
neighbours in the crisis of the late 1990s, has not yet weathered this one. It
is handicapped by the weakness of the rule of law, the poor investment climate
(see article below), labour militancy and creeping protectionism.
The elections pose another hazard: the
extent to which government ministers are ready to put the country’s interests
ahead of their parties’ electoral prospects is in doubt. And then there are the
global unknowns that could wreak havoc. But Mr Yudhoyono is probably sleeping
better these days than most of his regional counterparts; and better than he
himself could have hoped just a few months back.
Business in Indonesia
Bakrie's
bounceback
Jan 8th 2009| JAKARTA
>From The Economist print edition
>http://www.economist.com/displaystory.cfm?story_id=12906389&CFID=37717224&CFTOKEN=45130775
A well-connected
conglomerate avoids collapse—but exactly how is unclear
GIVEN its size and political connections,
the recent turmoil surrounding Indonesia’s Bakrie group has provided a test
case for
whether the country can escape its crony-capitalist past and become a safer
place to do business. Three months ago a debt crisis at the sprawling
conglomerate, owned by the family of Aburizal Bakrie (pictured), a senior
government minister, triggered a meltdown on the Jakartastockmarket, forcing
its closure for three
days. There was talk of a government bail-out, fiercely opposed by Sri Mulyani
Indrawati, the finance minister and a leading cabinet reformist. In the end
private investors came to the rescue and the taxpayer was spared. But lingering
doubts over the somewhat mysterious deals behind Bakrie’s salvation mean the
episode cannot yet be declared a clear sign of progress.
In mid-2008, with commodities riding high,
the group’s holding company, Bakrie & Brothers (B&B), took out $1.4
billion in loans, using as collateral most of its 35% stake in Bumi Resources,
one of the world’s biggest coal-mining firms. Then came the credit crunch, the
collapse in commodities and the flight of Western capital from emerging
markets. By November the Bakrie empire was valued at one-tenth of the $8.2
billion it had been worth in June and could not guarantee the loans, even with
cash and share top-ups. The end seemed nigh as defaults began.
Two months later, however, the group looks
in pretty good shape. B&B says it has cleared more than $1.1 billion of
debt from its books while retaining ownership of 15% of Bumi, indirect control
of another 6.4% and voting rights over a further 4.2%. Much of the rest of the
Bakrie empire, which includes mobile telecoms, plantations, energy and
property, remains intact.
So how did the Bakries pull it off? Nobody
outside the family’s inner circle knows for sure. The negotiations have been
characterised by a lack of openness—the business equivalent of Javanese shadow
puppetry. What is known is that Bumi controls two world-class mines that have
caught the attention of suitors, especially Indians and Chinese looking to feed
coal-fired power stations. (Tata Power of Indiapaid $1.1 billion in 2007 for
30% of the
two mines.) This may explain why Northstar Pacific, a local private-equity
fund, endured months of talks with B&B. Northstar first tried to build a
consortium to buy the debt in exchange for the pledged shares. When this failed
it formed a joint venture with B&B that will own 21.4% of Bumi. Northstar
is taking on $575m of Bakrie debt in return for 30% of the joint venture but
neither party has explained the details of the deal, unveiled on December 25th.
Other deals forming part of the rescue are
equally opaque. In early December B&B said it had paid off $200m, thanks to
gains from hedging some of its dollar loans. No details were given. Then it
said it had surrendered a 6.7% stake in Bumi to Brentwood Ventures, an
Australian hedge fund that took over $150m of Bumi’s debt—ostensibly a far
better deal than Northstar got. Again, no details were given. Nor was there an
adequate explanation for why trading in Bumi and B&B shares remained
suspended for almost a month after the stockmarket reopened.
A further worry is the overlap between the
senior management of Bumi and B&B. Bumi’s announcements since October,
including plans for a rights issue and the acquisition of three coal-miners for
$570m, have further perplexed analysts. It also borrowed hundreds of millions
of dollars in the third quarter. Some $230m has been invested with Recapital
Securities, a Bakrie-linked firm, with little explanation.
The Bakries made their fortune under the
authoritarian Suharto regime, lost it in the 1997-98 Asian financial crisis
that toppled the regime, then restored their riches under the wobbly democratic
governments that followed. They seem to have sorted things out without
taxpayers’
help, which is more than can be said of some big Western firms. But they remain
a powerful family in a country with weak capital-market regulation. Given the
lack of disclosure about the deals, minority shareholders in both B&B and
Bumi do not yet know if they should be cursing the Bakries—or cheering their
brilliant deal-making.
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