September 2015 – GLOBAL ECONOMY – Brazil, which saw its credit rating downgraded to junk last week, is only the latest BRICs economy to crumble in the face of a strong dollar, a global trade slowdown and the prospect of higher US interest rates. Russia is already in recession; many economists believe China is heading towards a “hard landing”; and South Africa, which managed to append itself to the emerging-markets club in 2010, is on the brink of recession. Of the group once identified as the shining economic beacons of the future, only India has so far remained relatively insulated from what World Bank chief economist Kaushik Basu described last week as the “troubled” state of the global economy. It wasn’t supposed to be like this. In 2009, as the rich western countries were surveying the chaos wrought by the financial-market crisis, China was cranking up an immense fiscal stimulus program to boost demand and kick-start growth. Beijing’s ability to muster financial firepower in the face of the crisis seemed to underline the shift of power towards the nimble emerging nations, with their rapidly growing middle classes, and away from the sclerotic Old World.
“Decoupling” became fashionable. Instead of being tethered to the fortunes of the mighty US (“When America sneezes, the world catches a cold,” went the old saw), emerging economies would break free, nurturing trade links across the developing world and fostering homegrown demand. But seven years on from the collapse of Lehman Brothers, the chaos wrought across financial markets in emerging countries by the prospect of a rise in US interest rates – which could come as soon as the Federal Reserve’s meeting this week – is a reminder of how closely tied the BRICs economies remain to the world’s biggest economy, and vice versa. The term BRICs was coined by former Goldman Sachs economist Jim (now Lord) O’Neill – George Osborne’s freshly ennobled Treasury minister. He never saw their rise as inevitable, but the acronym captured a widespread sense of optimism, and indeed China, India and Brazil in particular have made extraordinary strides in lifting their populations out of poverty.
Yet today, the twin threats of a strong dollar – driven by the prospect of central bankers lifting interest rates in the relatively strong US economy and a sharp slowdown in Chinese growth – have sent emerging-market currencies plunging. The fallout goes well beyond Brazil, which has pegged its fortunes closely to serving Chinese demand, and Russia, which has been hit by the oil price crash. It is being felt in a swath of other countries, from South Africa to Turkey. Warning lights are flashing right across the world, from slumping trade volumes and volatile stock markets to declining inflation and rock-bottom commodity prices. Copper, iron ore and aluminum have tumbled this year. And the old impression of bottomless pockets in Beijing, giving policymakers unfettered power to direct the mighty Chinese economy at will, has given way to the sense that its politicians are just as baffled as their western counterparts were by the sub-prime crisis. –Guardian
Emerging markets implode – debt rises, civil war and mass immigrant exodus follows
The dollar is strong, stronger indeed than it has been for years. Fears that the world’s leading currency could implode are now over. Good news, right? Not quite. Paradoxically, it is precisely this overly strong dollar that could threaten the world financial system: A growing number of experts worry that a severe debt crisis in the emerging economies may be brewing. If the value of the dollar continues to rise, it could lead to a wave of bankruptcies in Russia, Brazil and other emerging economies, which would have a serious impact on Germany and other countries that rely on exports.
Where and why did this potential threat arise? Countries, corporate entities and private households have, globally, become indebted to the tune of $10tn. A growing share of the debt has been incurred within emerging markets. This debt could also become an existential risk. Most of these liabilities are not in native currencies like the Brazilian real or Russian ruble, but in dollars. In times of relatively stable exchange rates and a strong world economy with robust commodities quotations, this would not be such a serious problem: Dollar revenues on the world markets make it possible for dynamic economies to meet the costs of interest and repayment.
Within emerging economies, borrowing in dollars amounts to $2.6tn. Add to that $3tn in international bank loans, and that makes for a significant sum – approximately equivalent to Japan’s economic power. The Basel-based Bank for International Settlements (BIS), a kind of central bank to the central banks, warned in its December 2014 Quarterly Review, that the appreciation of the dollar against the backdrop of divergent monetary policies could “have a profound impact on the global economy.” Hans Redeker, chief currency strategist at Morgan Stanley, notes that money borrowed by emerging economies is often used for domestic investments, so the balance sheets of many companies could be negatively impacted.
Redeker fears that the crisis symptoms could play off each other, posing the danger of a chain reaction: “The BIS warnings confirm what we’ve been saying for a long time: Hell could soon break loose in the emerging markets.” Already now, the appreciation of the dollar is one of the strongest rises in past decades. The Dollar Index, which measures the greenback against the world’s major currencies, has been at its highest since Spring 2006. But it’s not the absolute state of the index that is noteworthy: it is the speed of the appreciation. Since the beginning of July last year, the dollar has gained 13% on the major trade currencies, which for the currency market is huge. Against the currencies of individual emerging markets the greenback’s rally has been even more dramatic. Since the summer last year, appreciation against the ruble is over one-third. It’s 15% against the Ukrainian hryvnia and Brazilian real and 7% against the Turkish lira.
For companies whose debt in is dollars that means that in their own currency their burden of debt keeps rising. And there’s another troubling accounting problem: many emerging economies overwhelmingly take in the dollars they need through the sale of commodities, which are traditionally billed in dollars. –Gulf News