December 28, 2014 12:17 pm
Emerging states must make their own mark
Alan Beattie
A boom based on borrowing cheaply is easier than to take on vested interests, writes Alan Beattie
©Matt Kenyon
Nothing irritates specialist investors in emerging markets more than seeing all middle-income countries lumped into a single category: a special hatred is reserved for the “Brics” label slapped across the five wildly contrasting economies of Brazil, Russia, India, China and South Africa.
Yet despite manifest differences in economic structure and quality of policy making, emerging markets have suffered together this year from fears about rising interest rates and sliding commodity prices.
Given the disparate paths and policies among middle-income economies, it is implausible that the emerging market boom dating back to the early 2000s reflected only cheap borrowing and expensive commodities. But with a supportive external environment dissipating, even stable economies may find growth harder to achieve in the future.
In January fears of the US Federal Reserve tapering off its quantitative easing programme caused a general sell-off of emerging markets currencies and assets. In the past two months falling global oil prices and turmoil in Russia have triggered another widespread correction.
A fall in commodity prices always hurts raw materials exporters. But some have compounded bad luck with seriously poor policies, overextending government spending and borrowing on the back of expected revenue. Zambia, a copper producer, and Ghana, a newly minted oil exporter, called in the International Monetary Fund after shortfalls in export earnings exposed underlying fiscal and current account deficits.
Others have compounded economic mistakes with geopolitical follies. Russia was in theory better placed than some other oil exporters to ride out a fall in crude prices and even a slide in its currency. With substantial foreign exchange reserves and little dollar-denominated public debt, the impact of a fall in the rouble should have been to protect the value of the government’s rouble-denominated tax revenue. Instead, it sparked all-round panic and surging outflows of capital, requiring an emergency rise in interest rates.
Though comparisons between the current emerging market volatility and the Asian and Russian financial crises of 1997-98 can be overdone, one parallel is the similarity of capital flight from Indonesia in 1997 and Russia this year, which turned a currency slide into a rout.
In 1997 Indonesia’s Chinese business community, fearing economic chaos and ethnic violence, reacted to market volatility by taking their money and themselves out of the country, causing the rupiah to go into freefall. Similarly, wealthy Russians have been sending their money abroad in the past few months, driving the rouble far lower than is justified by the falling price of oil.
As the costs of Vladimir Putin’s Ukraine misadventure become more obvious, Russia’s future seems dimmer — and the risk of erratic and possibly confiscatory behaviour on the part of the government increases. The Russian economic crisis underlines the uncertainty intrinsic to a one-man, one-commodity country where the former is almost as unpredictable as the latter.
The growth in Turkey’s economy over the past decade has been real and substantial, but the country has become far too reliant on cheap borrowing. Last year it ran a current account deficit of about 8 per cent, and despite a lower oil import bill is likely to record a gap of almost 6 per cent this year.
With the government publicly bullying the central bank into keeping monetary policy loose, short-term interest rates have been kept too low, inflation has risen out of control and long-term borrowing costs are high. The Turkish lira has lost more than a quarter of its value against the dollar since the start of 2013.
More surprising is that better-performing countries such as India have also been caught up in the general malaise. India has done much more than Turkey to shrink its current account deficit and the Reserve Bank of India, under its governor Raghuram Rajan, moved quickly to head off inflationary pressure. Nonetheless, though faring better than the Turkish lira, the rupee is also sharply lower than last year.
There is not much policy makers can do about this but focus on the fundamentals of their economies and wait for calm to return. Unfortunately, far too few have been doing that over the past decade.
With one or two exceptions, productivity-enhancing structural reform has been notably absent from emerging markets. It turns out to be far easier and more rewarding to ride a boom based on cheap external borrowing and commodity export revenue than to take on vested interests to increase long-run growth.
Infuriating though it may be to many involved, investors’ discrimination between emerging markets is still a work in progress. That makes it ever more important, now that the supporting pillars of the commodity boom and cheap lending are being kicked away, that countries build their own reputations rather than relying on the brand of the emerging market bloc. The days of easy living for emerging markets are ending and hard work lies ahead.
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