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’

PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
tech

Board creates magnetic field to achieve lift

News
There have been various incidents of social media users inadvertently flouting the law
news

Life and Style
Stack ‘em high?: quantity doesn’t always trump quality, as Friends of the Earth can testify
techThe proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
News
Bourgogne wine maker Laboure-Roi vice president Thibault Garin (L) offers the company's 2013 Beaujolais Nouveau wine to the guest in the wine spa at the Hakone Yunessun spa resort facilities in Hakone town, Kanagawa prefecture, some 100-kilometre west of Tokyo
i100
Sport
CSKA Moscow celebrate after equalising with a late penalty
footballCSKA Moscow 2 Manchester City 2: Premier League champions let two goal lead slip in Russia
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Helpdesk Analyst

£23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...

Senior Helpdesk Analyst / Service Desk Co-ordinator

£27000 per annum + pension, 22 days holiday: Ashdown Group: An established ind...

Senior Pensions Administrator

£23000 - £26000 Per Annum: Clearwater People Solutions Ltd: Our client is curr...

Corporate Actions Administrator / Operations Administrator

£25 - 30k: Guru Careers: A Corporate Actions Administrator / Operations Admini...

Day In a Page

Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
Ed Sheeran hits back after being labelled too boring to headline festivals

'You need me, I don’t need you'

Ed Sheeran hits back after being labelled too boring to headline festivals
How to Get Away with Murder: Shonda Rhimes reinvents the legal drama

How to Get Away with Murder

Shonda Rhimes reinvents the legal drama
A cup of tea is every worker's right

Hard to swallow

Three hospitals in Leicester have banned their staff from drinking tea and coffee in public areas. Christopher Hirst explains why he thinks that a cuppa is every worker's right
Which animals are nearly extinct?

Which animals are nearly extinct?

Conservationists in Kenya are in mourning after the death of a white northern rhino, which has left the species with a single male. These are the other species on the brink
12 best children's shoes

Perfect for leaf-kicking: 12 best children's shoes

Find footwear perfect to keep kids' feet protected this autumn
Anderlecht vs Arsenal: Gunners' ray of light Aaron Ramsey shines again

Arsenal’s ray of light ready to shine again

Aaron Ramsey’s injury record has prompted a club investigation. For now, the midfielder is just happy to be fit to face Anderlecht in the Champions League
Comment: David Moyes' show of sensitivity thrown back in his face by former Manchester United manager Sir Alex Ferguson

Moyes’ show of sensitivity thrown back in his face... by Ferguson

Manchester United legend tramples on successor who resisted criticising his inheritance
Two super-sized ships have cruised into British waters, but how big can these behemoths get?

Super-sized ships: How big can they get?

Two of the largest vessels in the world cruised into UK waters last week
British doctors on brink of 'cure' for paralysis with spinal cord treatment

British doctors on brink of cure for paralysis

Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
Ranked seventh in world’s best tourist cities - not London, or Edinburgh, but Salisbury

Lonely Planet’s Best in Travel 2015

UK city beats Vienna, Paris and New York to be ranked seventh in world’s best tourist destinations - but it's not London