Macquarie: Emerging Markets Are Not Facing a 1997-Style Crisis—They’re Facing Something Worse – Bloomberg Business 09-16-15

Salient to Investors:

Viktor Shvets and Chetan Seth at Macquarie said:

  • Emerging markets and economies are in a worse situation than in the 1997 Asian financial crisis because they now face far longer, more painful and insidious disease with limited or no cures or exits, punctuated by occasional significant flare-ups.
  • The effect of the 1997 crisis were mitigated by excessively loose monetary policies and China’s integration into global trade, which helped all markets recover quickly. However, this is not the environment facing economies in the next 5 to 10 years: long-term structural shifts, driven by the deflationary progress of the Third Industrial Revolution, is aggravated by overleveraging and overcapacity.
  • Turkey, South Africa, and Malaysia are at most risk, while China, the Philippines, and South Korea are at least risk. Brazil and Russia are at lessor risk but their low exposure to external debt could be undermined by slumping commodities and slowing trade.

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China Lures Less Investment Than Southeast Asia, BofA Reports – Bloomberg 03-04-14

Salient to Investors:

Chua Hak Bin at Bank of America Merrill Lynch said:


  • Total foreign direct investment into Singapore, Malaysia, Indonesia, the Philippines and Thailand was $128.4 billion in 2103 versus $117.6 billion for China.
  • Rising foreign direct investment into Asean will remain a favorable structural trend over the next few years, given favorable demographics, competitive wages and geopolitical competition between the superpowers which remain the major investors.
  • China’s ability to attract investment may be hampered by higher manufacturing wages and an appreciating currency.
  • Indonesia’s large domestic market, low relative wages despite minimum wage increases and a weak rupiah make it attractive for lure foreign investment.


A Japan Bank for International Cooperation survey showed Indonesia has overtaken China and India as the most promising country for Japanese companies for business development.

A drop in China’s working-age population is robbing China of an engine of three decades of growth, whereas Southeast Asia’s developing nations show rising numbers of youth search for employment, luring companies seeking a cheap labor force and new domestic markets.

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Irrational Exuberance Overtakes Asia – Bloomberg 12-12-13

Salient to Investors:

William Pesek is  writes:

The “Greenspan put” that flooded markets with cash whenever things got dicey has become the default position in Washington, while in Asia there is an even more dangerous escalation of this policy in papering over cracks in economies that desperately need tougher, structural reforms.

Indian stocks have hit record highs, everyone is talking about India turning the corner, despite nothing really changing from 3 months ago when the rupee was plunging to record lows, politicians fumbled at every turn, talk abounded it would become the first BRIC to have its credit rating cut to junk. India’s current-account deficit is still a danger, just temporarily disguised by a charismatic new central banker. India remains politically corrupt, and the odds are that the BJP is no more a force for change than it was in 2004.

In Japan, the Nikkei 225 Stock Average is up 47 percent despite not one of Abe’s restructuring pledges being fulfilled. Japan is just as heavily regulated, uncompetitive and devoid of innovation as it was the day before Abe came to office. All that is new is a stronger punch recipe. Japan has an overpriced, unproductive and shrinking workforce, not to mention an economic structure geared for success in the 1970s.

PBC Governor Zhou Xiaochuan is deluded in believing China that can grow close to 8 percent a year, no matter what Communist Party leaders do or don’t do. President Xi Jinping’s vague pledges to let markets play a bigger role in the economy has made him seem like a Chinese Margaret Thatcher. Yet as China ends a crackdown on fraud and clears the way for over 700 companies to sell shares, the coming boom in IPOs will benefit from a kind of reform halo effect.

The policies of central bankers in China, India and Japan is no replacement for real reforms, like curbing corruption, lowering trade barriers, creating jobs, encouraging entrepreneurship, building social safety nets, promoting sustainable development and reducing their own role in the economy. Monetary policy can cushion the process of fixing flaws in economies, but it is no substitute.

America’s Greenspanization unfolded at a time in the 1990s of relative stability in a very mature economy. Asia’s Greenspanization is happening far too early in the development cycle, and much too broadly. Evidence of governments letting central bankers do their jobs can be found in Indonesia, Malaysia, the Philippines, South Korea, Thailand and Vietnam.

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Don’t Blame the Fed for Asia’s Problems – Bloomberg 08-26-13

Salient to Investors:

William Pesek writes:

Another 1997-like Asian crisis is highly unlikely because exchange rates are now more flexible, foreign-currency debt is lower, banks are healthier, countries are sitting on trillions of dollars of reserves, and economies are far more transparent.

The same can’t be said of 1994, when the Fed last reminded the world that its monetary policy is decided in Washington, not Asia. Then, Greenspan doubled benchmark interest rates over 12 months, causing hundreds of billions of dollars in bond-market losses and helping set the Asian financial crisis in motion. The dollar’s post-1994 rally made currency pegs impossible to maintain, leading to devastating devaluations across the region.

Asia’s real problem then was hubris, but now it suffers from a different kind of smugness. After the 2008 global crash, regional governments started believing their own press. They were convinced they had decoupled from the West. Bankers were abandoning New York and London for Hong Kong and Singapore. Asian debt had become a safe haven from turmoil in Europe. And, as China’s 1.3 billion people grew richer, the good times would keep rolling on.

Asia has come a long way since 1997 but rapid growth and unquestioned success in surviving the global meltdown has revived hubris. Currencies in Indonesia, Thailand and elsewhere suddenly seem toxic to investors, while India is in chaos at a time when China’s growth trajectory is more uncertain than it has been in 15 years.

Asia may be able to live without American and European consumers for 4 or 5 years, but thriving beyond that requires more buoyant and self-supporting domestic economies.

Complacency is too easy to find in Indonesia, Thailand, Philippines, and Malaysia.

Simon Grose-Hodge at LGT Group said the US has been given a free pass on the twin deficit issue, but emerging-market countries will not be so lucky.

In India, reforms have stalled and unaffordable government handouts have proliferated. With an election due in nine months, no one expects the hard decisions needed to get the economy back on track will be taken.

Unlike in 1997, Japan Inc. is healthier, the government is shoring up the economy, and the central bank stands ready to add new liquidity as the Fed’s tapering process begins. China will pull out all the stops to keep growth above 7 percent.

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Pesek’s View From Asia – Bloomberg 08-02-13

Salient to Investors:

William Pesek writes:

Former George Soros advisor Takeshi Fujimaki  said Abe delaying increasing Japan’s sales tax would worsen Japan’s debt profile, while Fed tapering would cause a fresh credit crunch that would slam Japan’s bond market.

When Li Ka-Shing, Asia’s richest man, is turning to Europe as Hong Kong property slumps you know things are bad in the greater China region.

Philippine bonds are rallying on speculation Moody’s will be the last of the three major rating companies to elevate the nation to investment grade. Markets are responding to resilient Philippine growth, an improving fiscal profile and a current-account surplus.

India is in a currency crisis. Societe Generale and Macquarie Bank are betting on new lows for the rupee and desperate measures by the central bank to tighten the cash supply. But saving the rupee will slam an economy already expanding at the slowest pace in a decade.

China getting unique help from the World Bank indicates China is keeping an open mind by reaching out to an institution often seen as an extension of the US Treasury Department, and is not just good for markets, but all of humankind.

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BRIC Bust Seen in Emerging Market Discontent With Growth – Bloomberg 07-22-13

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Stretched budgets and sluggish growth are putting emerging-market governments on a collision course with rising pressures from recently empowered middle classes for more spending and better services. Policy makers face the end to an era of abundant global liquidity that helped fuel the fastest expansion in three decades. The BRICs have been slowing since 2010.

EPFR Global said investors pulled $40.3 billion from emerging-market bond and equity funds in the 8 weeks through July 17 versus inflows of $111 billion in 2012.

Angel Gurria at OECD said developing nations are punished more during downturns than their European counterparts because they depend on growth to mitigate social tensions. Gurria said Indonesia is a very good example of how you do not need to spend more money to reallocate resources better. Gurria said developing nations’ needs are much more elementary and brutal: e.g. families live with vermin because they don’t have cement on the floor, while big winds blow off roofs.

Nomura said 11 countries, including China, India, Russia, Argentina and Venezuela face the risk of market-moving civil unrest in the short to medium term, partly fueled by frustration with corruption by a middle class that swelled during the past decade.

Jim Yong Kim at the World Bank said people lifted out of extreme poverty are naturally going to want more. The World Bank said 50 million people in Latin America rose out of poverty during the past decade.

Ruchir Sharma at Morgan Stanley Investment Mgmt said investors can ride out the volatility by betting on governments that resist populist pressures for more spending and instead shore up long-term financial stability. Sharma said the same incumbents who benefited from the boom now face the wrath of the electorate, as they did not fully realize how much success was due to global factors and not their governance. Sharma said there are positive stories and while the selloff has been indiscriminate, attention will come back once the dust settles: he is underweight China, Brazil and Russia and overweight Mexico and the Philippines. Economists expect the Philippines to grow 6.2 percent in 2013.

Alastair Newton at Nomura said officials have the ability to defuse underlying social tensions, having strengthened their finances since the last round of emerging-markets crises toppled governments starting in the late 1990s, only now they will need to balance the mood in the streets with the discipline demanded by markets in the context of slowing expansions and tighter budgets. Newton said China’s slowdown is being domestically engineered but if the clean-up of speculative lending and real-estate prices fails, jobs will be lost, adding to social tensions that are increasingly apparent online where dissent is widespread. Sun Liping at Tsinghua University said the number of mass disturbances to social order doubled to 180,000 a year in 2010 from 2006 levels – China no longer makes such figures public.

The IMF cut its global growth forecast on a leveling off in China and the risk of capital outflows in countries that propelled the world economy. The IMF expects developing countries to expand 5 percent in 2013 versus the annual average of 6.6 percent over the past decade. Emerging markets account for nearly half the world’s economic output.

John Williamson at the Peterson Institute for Intl Economics said emerging markets are not heading toward another 90s-style balance-of-payments crisis. Governments have reduced their external vulnerabilities by building up record currency reserves and issuing more debt locally, while most countries have embraced free-floating exchange rates, and the IMF says inflation averages 5.9 percent, less than half 1995-2004’s 13.1 percent. Williamson said the buffers are extremely important, market reaction has been exaggerated, and does not see a slowdown in growth in the long run.

George Friedman at Stratfor said a number of regimes built their legitimacy on fast growth: when they can no longer deliver, they are set for a huge fall.

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