Satyajit Das: Tide is turning and emerging economies risk falling like a Bric

Economics View

Multiple Latin debt crises and the Asian emerging markets crisis of 1997-98 have been forgotten. To paraphrase Robert Louis Stevenson, financial markets have “a grand memory for forgetting”.

Now, the risk of an emerging markets crisis is very real.

Investors have been romancing emerging markets, exemplified by the dalliance with the Bric economies (Brazil, Russia, India and China), a term coined by Goldman Sachs’ Jim O’Neill in 2001.

Slowing growth in developed economies following the 2007-08 global financial crisis resulted in a sharp slowdown in emerging economies. To restore growth, emerging markets switched to development models more reliant on credit. Double-digit annual credit growth drove economic activity in China, Brazil, India, Turkey and many economies in Asia, Latin America and Eastern Europe.

Loose monetary policies in developing countries – low or zero interest rates, quantitative easing and currency devaluation – encouraged capital inflows into emerging markets in search of higher returns and currency appreciation. Banks, awash with liquidity, sought lending opportunities in emerging markets. International investors such as pension funds, investment managers, central banks and sovereign wealth funds increased allocations to emerging markets.

Foreign ownership of emerging market debt increased sharply. In Asia, up to 50 per cent of Indonesian rupiah government bonds are held by foreigners, up from less than 20 per cent at the end of 2008. About 40 per cent of government debt in Malaysia and the Philippines is held by foreigners.

Capital inflows drove sharp falls in emerging market borrowing costs. Brazil’s dollar-denominated bond yields fell from above 25 per cent in 2002 to a record low 2.5 per cent in 2012. After averaging about 7 per cent for the period 2003-2011, Turkish dollar-denominated bond yields sank to a record low 3.17 per cent in November 2012. Indonesian dollar bond yields fell to a record low 2.84 per cent. Local currency interest rates also fell.

The increased availability of funds and low rates encouraged rapid increases in borrowing and speculative investment. Asset prices, particularly real estate, increased sharply.

The effect of capital inflows was exacerbated by the relative size of the investment and local financial markets. A 1 per cent increase in portfolio allocations by US pension funds and insurers equates to about $500bn (£312bn), much larger than the capacity of emerging markets to absorb easily.

In the past 12 months, investor concern about developments in emerging markets has increased, reflecting slowing growth and a potential reversal of capital inflows.

China’s growth has fallen below 7 per cent. India’s growth is below 5 per cent. Brazil has slowed to near zero. Russian forecasts have been downgraded repeatedly to below 2 per cent. The slowdown reflects economic stagnation in the US, Europe and Japan. In addition, slowing Chinese growth has affected commodity demand and prices, with a knock-on effect on producers such as Brazil. The slowdown has flowed through the supply chain, affecting suppliers to Chinese manufacturers.

The growth slowdown is now attenuated by capital outflows, driven by fundamental concerns about emerging market economies but also changing US policy dynamics.

Improvements in American economic conditions have encouraged discussion about “tapering” the US Federal Reserve’s liquidity support, currently $85bn a month. US Treasury bond interest rates have risen in anticipation of stronger growth, inflation and higher official rates. Rates in other developed countries such as Germany have also increased sharply.

As investors shift their asset allocations back in favour of developed economies, especially the US, there have been significant capital outflows from emerging markets, resulting in sharp falls in currency values and rises in borrowing rates.

Brazilian dollar-denominated bond yields have risen to about 5 per cent, well above the lows of 2.5 per cent last year. Turkish dollar-denominated bonds have risen to nearly 6 per cent from a low of 3.17 per cent.

Like an outgoing tide that reveals the treacherous rocks hidden by high water, slowing growth and the withdrawal of overseas capital is now exposing deep-seated problems, especially high debt levels, financial system problems, current and trade account deficits, and structural deficiencies.

Satyajit Das is a former banker and the author of “Extreme Money” and “Traders Guns & Money”

News
Jennifer Lawrence was among the stars allegedly hacked
peopleActress and 100 others on 'master list' after massive hack
Sport
Radamel Falcao
footballManchester United agree loan deal for Monaco striker Falcao
Sport
Louis van Gaal, Radamel Falcao, Arturo Vidal, Mats Hummels and Javier Hernandez
footballFalcao, Hernandez, Welbeck and every deal live as it happens
Sport
footballFeaturing Bart Simpson
PROMOTED VIDEO
News
people'It can last and it's terrifying'
Voices
A man shoots at targets depicting a portrait of Russian President Vladimir Putin, in a shooting range in the center of the western Ukrainian city of Lviv
voicesIt's cowardice to pretend this is anything other than an invasion
News
i100
Arts and Entertainment
Alex Kapranos of Franz Ferdinand performs live
music Pro-independence show to take place four days before vote
Arts and Entertainment
booksNovelist takes aim at Orwell's rules for writing plain English
Arts and Entertainment
The eyes have it: Kate Bush
music
News
ebooksAn unforgettable anthology of contemporary reportage
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

Senior Asset Manager

£70000 - £75000 Per Annum: The Green Recruitment Company: Katie Robinson +44 (...

Application Support Analyst / Junior SQL Server DBA

£40000 - £45000 per annum: Ashdown Group: An established professional services...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Business Development Manager / Media Sales Exec

£28 - 32k + Uncapped Commission: Guru Careers: A Business Development Manager ...

Day In a Page

Alexander Fury: The designer names to look for at fashion week this season

The big names to look for this fashion week

This week, designers begin to show their spring 2015 collections in New York
Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

'I like Orwell's writing as much as the next talented mediocrity'

Will Self takes aim at Orwell's rules for writing plain English
Meet Afghanistan's middle-class paint-ballers

Meet Afghanistan's middle-class paint-ballers

Toy guns proving a popular diversion in a country flooded with the real thing
Al Pacino wows Venice

Al Pacino wows Venice

Ham among the brilliance as actor premieres two films at festival
Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

Neil Lawson Baker interview

‘I’ve gained so much from art. It’s only right to give something back’.
The other Mugabe who is lining up for the Zimbabwean presidency

The other Mugabe who is lining up for the Zimbabwean presidency

Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

The model for a gadget launch

Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
Alice Roberts: She's done pretty well, for a boffin without a beard

She's done pretty well, for a boffin without a beard

Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
Get well soon, Joan Rivers - an inspiration, whether she likes it or not

Get well soon, Joan Rivers

She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

A fresh take on an old foe

Doctor Who Into the Dalek more than compensated for last week's nonsensical offering
Fashion walks away from the celebrity runway show

Fashion walks away from the celebrity runway show

As the collections start, fashion editor Alexander Fury finds video and the internet are proving more attractive
Meet the stars of TV's Wolf Hall... and it's not the cast of the Tudor trilogy

Meet the stars of TV's Wolf Hall...

... and it's not the cast of the Tudor trilogy
Weekend at the Asylum: Europe's biggest steampunk convention heads to Lincoln

Europe's biggest steampunk convention

Jake Wallis Simons discovers how Victorian ray guns and the martial art of biscuit dunking are precisely what the 21st century needs
Don't swallow the tripe – a user's guide to weasel words

Don't swallow the tripe – a user's guide to weasel words

Lying is dangerous and unnecessary. A new book explains the strategies needed to avoid it. John Rentoul on the art of 'uncommunication'
Daddy, who was Richard Attenborough? Was the beloved thespian the last of the cross-generation stars?

Daddy, who was Richard Attenborough?

The atomisation of culture means that few of those we regard as stars are universally loved any more, says DJ Taylor