Satyajit Das: Trophy projects and debt hindering Brazil and other emerging markets

 

Slowing growth and the withdrawal of foreign capital is now exposing deep-seated problems in emerging markets.

Debt levels in emerging markets have risen significantly, with total credit growth since 2008 in the range of 10 to 30 per cent depending on country. Credit growth has been especially strong in Asia. Total debt to gross domestic product (GDP) above 150 to 200 per cent of GDP is now common. Credit intensity has also increased sharply. New credit needed to generate each extra dollar of GDP has doubled to about $4-8 for each dollar of GDP growth.

Bank credit has increased rapidly and is above the levels of 1997 (as percentage of GDP) in most countries.  There has also been rapid growth in debt securities issued by emerging market borrowers, in both local and foreign currencies.

Borrowing varies between sectors, depending on country. Consumer credit has grown strongly in many Asian countries and also in Brazil. Many corporations in China, South Korea, India and Brazil are highly leveraged. Combined gross debts at India’s biggest 10 industrial conglomerates having risen 15 per cent in the past year to $102bn (363bn). Many borrowers are over-extended with inadequate cash flow to meet interest and principal payments, especially in a weak economic environment.

With notable exceptions like China and India, government debt levels are not high. However, state involvement in banks and industry mean that effective level of government obligations is higher than stated.

Sustainable levels of public debt are lower for emerging market countries, given lower per capita income and wealth.

Banks and investors with exposure to emerging markets are at significant risk. Borrowing has been used, worryingly, to finance consumption, investment in infrastructure projects with uncertain rates of return or speculation.

In many emerging countries, quasi-government bank officials have financed projects sponsored by politically connected businesses and elites. Lending practices have been weak, helping finance expensive property and grand vanity projects with dubious economics.

Many borrowers will struggle to repay the debt. The current account surplus of emerging market countries has fallen to 1 per cent of combined GDP, from about 5 per cent in 2006. The deterioration is greater, as large trade surpluses of China and energy exporters distort the overall result. The falls reflect slow growth in export markets, lower commodity prices, higher food and energy import costs and domestic consumption driven by excessive credit growth.

India, Brazil, South Africa and Turkey have large current account deficits, which must be financed overseas. India has a current account deficit of about 6 to 7 per cent and a budget deficit (Federal and State government) approaching 10 per cent which requires funding. Countries dependent on commodity exports are also vulnerable, given the fall in prices and anaemic global economic growth.

Emerging countries require about $1.5 trillion per annum in external funding to meet financing needs, including maturing debt. A deteriorating financing environment combined with falling currency reserves, reduced cover for imports and short-term borrowings, declining currencies and diminished economic prospects have increased their vulnerability.

The difficult external environment has highlighted long-standing structural weaknesses.

Investors fear that many emerging markets may be caught in a middle-class income trap, where countries experience a sharp slowdown in economic growth when GDP per capita reaches about $15,000.

Emerging economics remain highly linked to developed economies, through trade, need for development capital and the investment of foreign exchange reserves. Weak growth in developed markets and decreasing credit quality of developed country sovereign bonds may adversely affect emerging markets. Emerging countries have also lost competitiveness, as a result of rising costs, especially labour.

Investors are concerned about mal and mis investment. Trophy projects, such as the 2008 Beijing Olympics (costing $40bn), Russia’s 2014 Sochi Winter Olympics ($51bn) and Brazil’s 2014 football World Cup, have absorbed scarce resources at the expense of essential infrastructure.

Income inequality, corruption, hostile and difficult business environments, excessive concentration of economic power in heavily subsidized state corporations and political rigidities increasingly compound the problems of debt and capital outflows. Political instability exacerbates economic problems, for example in Brazil, Turkey, South Africa and India.

These concerns have resulted in a new acronym for the more vulnerable emerging markets – Biits (Brazil, India, Indonesia, Turkey, South Africa). It seems the Brics are now breaking into Biits.

Satyajit Das is a former banker and author of ‘Extreme Money’ and ‘Traders, Guns & Money’

Sport
Aaron Ramsey celebrates after opening the scoring in Arsenal's win over Hull `
sport
News
peopleActress speaks out against historic sexual assault claims, saying things have 'gone quite far now'

Arts & Entertainment
A stranger calls: Martin Freeman in ‘Fargo’
tvReview: New 10-part series brims with characters and stories

Life & Style
Guests enjoy food and cocktail parings by Chefs Jimmy Bannos, Jimmy Bannos Jr, Daniel Rose and Mindy Segal with mixologists Josh King and Alex Gara at Bounty & Barrel: A Jack Daniel's Single Barrel Dinner Series at Heaven on Seven on April 9, 2014 in Chicago, Illinois.
food + drinkSprinkle Palcohol 'on almost any dish' for 'an extra kick' firm says...
VIDEO
Arts & Entertainment
Shaun Evans as Endeavour interviews a prisoner as he tries to get to the bottom of a police cover up
tvReview: Second series comes to close with startling tale of police corruption and child abuse
Arts & Entertainment
Schwarzenegger winning Mr. Universe 1969
arts + entsCan you guess the celebrity from these British Pathe News clips?
News
politicsLabour launches the 'completely hollow' Easter Clegg
Sport
Luis Suarez celebrates after scoring in Liverpool's 3-2 win over Norwich
sport Another hurdle is out of the way for Brendan Rodgers' side
News
Portrait of Queen Elizabeth-II by David Bailey which has been released to mark her 88th birthday
peoplePortrait released to mark monarch's 88th birthday
Arts & Entertainment
The star of the sitcom ‘Miranda’ is hugely popular with mainstream audiences
TVMiranda Hart lined up for ‘Generation Game’ revival
Life & Style
The writer, Gerda Saunders, with her mother, who also suffered with dementia before her death
healthGerda Saunders on the most formidable effect of her dementia
Arts & Entertainment
Last, but by no means least, is Tommy Cooper and the fez. This style of hat became a permanent trademark of his act.
comedyNot Like That, Like This centres on alleged domestic abuse
Arts & Entertainment
Oxegen in Ireland has been axed as promoters decide it is 'no longer viable'
arts + ents Promoters have axed the event as it is 'no longer viable in current form'
News
The troubled star is set to give fans the biggest insight into her life away from the headlines
people Star made the announcement during the final episode of the programme, entitled Lindsay
Life & Style
YouTube clocks up more than a billion users a month
mediaEuropean rival Dailymotion certainly thinks so
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Database Team Lead ( Leadership, Sybase, Computer Science)

Negotiable: Harrington Starr: Database Team Lead ( Leadership, Sybase, Compute...

C#.NET Delphi SQL Developer (C#,DELPHI,SQL)

£40000 - £50000 per annum + Bonus+Benefits+Package: Harrington Starr: C#.NET D...

VB.NET SQL Junior-Mid Level Developer (VB.NET,SQL,Excellent com

£25000 - £35000 per annum + Bonus+Benefits+Package: Harrington Starr: VB.NET S...

Trade Support, Application Support, Operations Analyst, CRM MS

£45000 - £55000 per annum + Bonus and Benefits: Harrington Starr: Trade Suppor...

Day In a Page

Rubin ‘Hurricane’ Carter: The man who could have been champion of the world - and the Bob Dylan song that immortalised him

The man who could have been champion of the world

Rubin ‘Hurricane’ Carter and the Bob Dylan song that immortalised him
Didn’t she do well?

Didn’t she do well?

Miranda Hart lined up for ‘Generation Game’ revival
The Middle East we must confront in the future will be a Mafiastan ruled by money

The Middle East we must confront in the future will be a Mafiastan ruled by money

In Iraq, mafiosi already run almost the entire oil output of the south of the country
Before they were famous

Before they were famous

Can you guess the celebrity from these British Pathe News clips?
Martin Freeman’s casting in Fargo is genius

Martin Freeman’s casting in Fargo is a stroke of genius

Series is brimming with characters and stories all its own
How I brokered a peace deal with Robert Mugabe: Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC

How I brokered a peace deal with Robert Mugabe

Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC
Video of British Muslims dancing to Pharrell Williams's hit Happy attacked as 'sinful'

British Muslims's Happy video attacked as 'sinful'

The four-minute clip by Honesty Policy has had more than 300,000 hits on YouTube
Church of England-raised Michael Williams describes the unexpected joys in learning about his family's Jewish faith

Michael Williams: Do as I do, not as I pray

Church of England-raised Williams describes the unexpected joys in learning about his family's Jewish faith
A History of the First World War in 100 moments: A visit to the Front Line by the Prime Minister's wife

A History of the First World War in 100 moments

A visit to the Front Line by the Prime Minister's wife
Comedian Jenny Collier: 'Sexism I experienced on stand-up circuit should be extinct'

Jenny Collier: 'Sexism on stand-up circuit should be extinct'

The comedian's appearance at a show on the eve of International Women's Day was cancelled because they had "too many women" on the bill
Cannes Film Festival: Ken Loach and Mike Leigh to fight it out for the Palme d'Or

Cannes Film Festival

Ken Loach and Mike Leigh to fight it out for the Palme d'Or
The concept album makes surprise top ten return with neolithic opus from Jethro Tull's Ian Anderson

The concept album makes surprise top ten return

Neolithic opus from Jethro Tull's Ian Anderson is unexpected success
Lichen is the surprise new ingredient on fine-dining menus, thanks to our love of Scandinavian and Indian cuisines

Lichen is surprise new ingredient on fine-dining menus

Emily Jupp discovers how it can give a unique, smoky flavour to our cooking
10 best baking books

10 best baking books

Planning a spot of baking this bank holiday weekend? From old favourites to new releases, here’s ten cookbooks for you
Jury still out on Manchester City boss Manuel Pellegrini

Jury still out on Pellegrini

Draw with Sunderland raises questions over Manchester City manager's ability to motivate and unify his players