Category Archive: Emerging Markets
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The Latin American Boom is Over
Although not necessarily spectacular by East Asian standards, Latin America experienced rapid growth rates from 2003 to 2007. These rates were below the previous record set in the period 1967 – 1974 (5.5% vs. 6.6% per year), due to the relatively slow growth of the two largest economies, Brazil and Mexico. But if we estimate simple averages, the rate of growth is actually the highest in the post-war period (6.0% in 2003-07 vs. 5.7% in 1967-74). This indicates that the average performance of the small and medium-sized economies of the region was excellent.
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There is no global lender of last resort to help Mexico and Brazil withstand the global financial crisis
Yesterday’s events on the multilateral fire-fighting front of the global crisis are revealing: there is no global lending of last resort arrangement in place to help prequalified, well-behaved emerging markets such as Mexico and Brazil to withstand the first truly global financial crisis. The FED and the IMF have revealed what their balance sheet and governance constraints allow them to put on the table: an approximate, combined US$60 billion for each. This is not going to be sufficient, if one of these economies ends up in serious trouble, as the scale of government interventions in advanced economies shows.
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Bankruptcies and Plant Closings Rising in China
We featured reports earlier this year on plant closings in China, and the suffering in manufacturing areas is becoming more acute as the global downturn cuts into Chinese exports.Reader Michael sent us this report on China’s toymakers, but it also stresses that China may be more vulnerable to a global financial shock than advanced economies. Part of the problem is that many manufacturers were also speculating in currencies or commodities. We also feature a second report from the Guardian, which says that growth in China may fall below 8% due to the drop in manufacturing. While that sounds like a high-class problem, in fact it would be difficult for China, which requires 8% expansion to maintain employment levels. Chinas’ fragile social contract requires more growth to maintain stability. Protests are taking place now, and the worst has yet to arrive.
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Argentina: Good News, Bad News
First the good news, the Fernandez de Kirchner Administration is keen on servicing its external obligations. After the debacle of 2002, the Kirchners took great pride in restoring economic, financial and political stability. In return for their stewardship, the two rulers expect the loyalty, adoration and support of the population. However, failure to ensure the continuation of this stability would break the social contract between leader and subjects—at least that is what they think. Therefore, the Kirchners will do everything they can to service their debt obligations, even if it means nationalizing the private pension fund system (AFJP). Unfortunately, they never appreciated the damage such a decision would have on the real economy or the reaction it would trigger in the marketplace. However, how could they?–if they ruled Argentina like their own personal domain. Unfortunately, this is a characteristic of populist leaders—be it on the left or on the right of the political spectrum. Colombian President Alvaro Uribe, another populist, never consulted the country’s many prominent economists before introducing capital controls. Why should he? By definition, a populist rules for the masses, eschewing all of the corporatist organizations and political parties that typify institutional regimes. Therefore, the fact that the Kirchners hatched up such an ill-conceived scheme late one night, without consulting anyone else, as a means to bolster market confidence should come as no surprise. Nevertheless, there is some good news in Argentina. The country’s macroeconomic indicators are impressive. GDP growth should top 6% y/y in 2008. International reserves are north of $47 billion. The primary surplus is 3.5% of GDP, and the current account surplus is 2% of GDP. Exports soared 45% y/y in September, while imports rose 34% y/y; thus bringing the trade surplus for the first nine months of the year to $10.2 billion. Last of all, there is virtually no leverage within the Argentine consumer sector. However, there is also bad news.
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The Unwinding of the Carry Trade Has Finally Hit Currencies
Why has the yen strengthened so much the week, even though the Japanese stock market has plummeted? The financial media have largely got this one right: the answer is unwinding of the carry trade, and the associated flight to quality, which means flight to yen and dollar (cash and treasury bills).
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Fed Chairmen and Presidents: Roundtable with Roger Kubarych and Richard Whalen
In this issue of The IRA, we turn to two veteran observers of the Fed and the US political process to get some perspective on the financial crisis and the policy makers who have arguably caused much of the present economic difficulty.
Roger M. Kubarych is Chief US Economist of UniCredit Global Research, part of UniCredit Markets and Investment Banking. He joined HVB Americas Inc., now part of UniCredit Group, in July 2001 with responsibility for advising management and clients on economic, financial market, and policy developments with significant implications for banking and investment decisions. He is also the Henry Kaufman Adjunct Senior Fellow for International Economics and Finance at the Council on Foreign Relations. He has published two books: Stress Testing the System: Simulating the Global Consequences of the Next Financial Crisis (2001) and Foreign Exchange Markets in the United States (1980).
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GDP: Negative 0.3%
GDP was negative in Q3 — worst quarter since Q3 2001 — and the headline number doesn’t even do the extent of the contraction justice:
“Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 0.3 percent in the third quarter of 2008, (that is, from the second quarter to the third quarter), according to advance estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.8 percent.
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Peru Unscathed
In mid October, at the Annual Meetings of the World Bank and IMF, the Minister of Finance of Peru, Luis Valdivieso, announced his intention to float a US$600 million, 30 -year bond . Will currently dysfunctional capital markets welcome a new bond from a developing country issuer? The short answer is no , but Peru may be one of the exceptions .The paradox is that Peru could succeed to tap capital markets precisely because it does not need the money .It has been running budget surpluses for many years and its public debt is small .In fact , Peru is one of the few countries where central bank’s international reserves ( at US$35 billion or 26% of GDP ) exceed the total domestic and external public debt ( at US$ 30 billion ) . In other words , Peru’s public sector is a net creditor .Since the proceeds of the bond are not needed to pay for expenditures , the authorities intend to use the money to buy back Peru’s short-end maturity bonds from investors .The operation will extend the average maturity of the external debt , now at eleven years .
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As Ukraine And Hungary Accept IMF Loans, Will Poland Be Next?
Yesterday, the Ukraine received a USD16.5bn loan from the IMF and the IMF at the same time said that it would agree with the Hungarian government on a rescue package in the coming days. Under normally circumstances this would be good news for CEE assets. However, it seems like the markets are totally giving up on CEE. This morning the Hungarian stock markets have dropped more than 10% despite the promise of an IMF package.
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Artificial Boom
Discussion about the current financial crisis has largely devolved into a debate about regulation. What’s more, the general public has been led to believe that economic theory has little to say about the current crisis. In reality, the multitude of work on bubbles, crises, business cycles, and credit crises is far too vast to summarize in a book, let alone one thousand words. What should be clear, however, is that an understanding of the current crisis must begin with a description and explanation of the preceding boom. Along these lines, insight can be obtained from the writings of two prominent economists of the early twentieth century, F.A. Hayek and John Maynard Keynes.
