Are the US and other developed countries responsible for the emerging market issues? Or in the alternative, are the all the emerging market troubles home grown? It will be interesting to see who the developed countries blame when the problems they created for emerging markets return home
There is going to be trouble down under. Australia is hosting the latest G-20 meeting. Finance ministers from most G20 countries will travel to Sydney. Christine Lagarde, the IMF’s managing director will be there as will the new chairwoman the Federal Reserve (Fed), Janet Yellen. The meeting might be a bit more contentious than most. The recent turmoil in emerging markets (EMs) has many pointing fingers at the Fed as the cause of their problems.
One of the most articulate is Raghuram Rajan, the governor of the Reserve Bank of India (RBI). Last month he accused the developed countries (DMs) of ignoring the issues of the EMs. He said, “Industrial countries have to play a part in restoring that [co-operation], and they can’t at this point wash their hands off and say, we’ll do what we need to and you do the adjustment.” He accused the DMs of ingratitude. “Emerging markets tried to support global growth by huge fiscal and monetary stimulus”. He was upset that developed countries, particularly the US, were insensitive to the problems created by the end of their stimulus programs specifically the quantitative easing (QE) program in the US.
Janet Yellen confirmed his view. She is focused on the US economy and that is it. She said, “Our sense is that at this stage these developments do not pose a substantial risk to the US economic outlook”. So as long as an EM melt down does not affect the US, it is their problem. Mr. Rajan thought that this view was too narrow. He warned that the DMs including the US “may not like the kinds of adjustments we will be forced to do down the line”.
Who is right? Are the US and other developed countries responsible for the emerging market issues? Or in the alternative are the all the emerging market troubles home grown?
One view is that since 2008, the central banks of the US, Europe and now Japan were irresponsibly flooding the world’s markets with cheap money. This led to an artificial devaluation of the dollar and recently the yen. Printing money to debase your currency may help exports, the cause of the Japanese market rally. But it also unleashes a flood of money into emerging markets as investors search for yield. This produced a credit boom. The boom created deficits and is turning into a bust. The deficits have lead to lower exchange rates, inflation, higher interest rates and inevitably slower growth.
There is another view. It is that the developed countries’ stimulus packages were valid attempts to stimulate their economies. Any spill over into emerging markets should have been dealt with by a change of government policies. India’s problem stems from a misguided agricultural policy that drives up food prices and increases inflation. The government has not been able to reform these subsidies, cut the budget deficit or reform the labour market. Turkey’s recent battering has been due to political turmoil and risk of flight capital.
I find any finger pointing at emerging economies failure to reform as enormously hypocritical. The developed countries have not been able to make substantive changed in their policies. Neither the EU nor Japan has had any luck in reforming their labour policies. Japan has one of the most bizarre agricultural regimes anywhere while the US just passed a trillion dollar farm bill with large subsidies.
In fact, the reason why central bankers in developed countries stepped in with their massive money printing stimulus programs was that their governments could not agree on a comprehensive program of fiscal stimulus and policy reform. Rather than limit themselves to what they are reasonably good at, delivering low inflation and some level of financial stability, central bankers embarked on huge experimental programs with unknown and unintended collateral consequences.
I would put all of the blame on arrogant and short sighted DM central bankers with one caveat. Almost a trillion dollars from developed countries flowed into emerging markets between 2007 and 2012. But this number is dwarfed by the $3 trillion rise in assets under management (AUM) by EM governments. Sovereign Wealth Funds and developing country central bankers have over $11 trillion under management and much of that is invested in developed countries. Since a great deal of these funds are no doubt invested in US treasuries, the EM countries themselves made it much easier for the US to employ its money stimulating policies.
Governor Rajan is definitely right in his pleas for cooperation. One of the reasons for the Great Recession, in my view, was that Alan Greenspan ignored the effect on US interest rates of China. China by buying large amounts of US treasuries to artificially keep its currency low also helped moderate US interest rates. Greenspan attributed it to his own abilities. The result was a disaster.
It appears that Ben Bernanke and now Janet Yellen are making the same mistake. Ignoring the risk to emerging markets from the beginning of QE was a major mistake. Japan’s central banker Kuroda is only increasing the problems. It all might have been worth it if these programs actually worked, but they haven’t. Growth in the US and Japan remains lacklustre and neither government has had any success in streamlining their policies to create an environment necessary for real and sustainable growth.
Governor Rajan is also correct that central bankers may not like what is coming down the line. John Dunne’s famous observation that no man is an island applies to global economics as well. It will be interesting to see who the developed countries blame when the problems they created for emerging markets return home.
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)
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Watch out for a close below 6,085 on the Nifty for a change in the trend
A higher than forecast climb in a measure of US manufacturing in February boosted the sentiments in India stock market. Back of the positive performance from the US on Thursday and over all optimism among the Asian indices on Friday made the indices back home zoom up and cover up almost all of the loss of Thursday.
The BSE 30-share Sensex opened at 20,601 while the NSE Nifty opened at 6,108. The day’s low was almost at the same level. The indices hit the intra-day high at near the end of the session at 20,725 and 6,160. The benchmark closed almost at the near the day’s high. Sensex closed at 20,701 (up 164 points or 0.80%) while the Nifty closed at 6,155 (up 64 points or 1.05%). The NSE recorded a volume of 47.10 crore shares.
On the political front, lawmakers passed a bill to create India's 29th state on Thursday despite chaos in the Parliament, as opponents made a futile last attempt to stop the upper house carving landlocked Telangana from coastal Andhra Pradesh. Thursday's vote fulfils a promise made by the government in 2009, and comes just weeks before a national election in April.
The government's allocation of Rs11,200 crore for capital injection into state-run banks is credit negative as it is much smaller than estimated requirements, global credit rating agency Moody's Investors Service said on Thursday.
India should prepare a plan to respond to volatility in global currency markets that may come as the US Federal Reserve reduces monetary stimulus, the International Monetary Fund staff said in a report. While India’s finances have improved since last year, a coordinated plan is needed in case capital account pressures re-emerge, the IMF said. High inflation remains a “central macroeconomic challenge,” and reducing that “will require a tightening of the monetary stance, possibly over a protracted period, which inevitably will weigh on growth prospects,” the IMF said. The IMF estimates Asia’s third-biggest economy will expand 4.6% in the year to March 2014 and 5.4% in the next year.
India is "stuck in a rut" as weaker consumption and stalled investments prevent the economy from building any sort of momentum, HSBC said in a report on Friday adding "slow recovery" could start post elections. HSBC for now is "underweight" on Indian equities but some of its preferred sectors include energy which is likely to gain from subsidy changes, power (stands to benefit from distribution reform), non-ferrous metals (corporate restructuring) and telecoms (more clarity post the auctions).
US Indices closed in the positive on Thursday. US factory activity accelerated in February at its fastest pace in nearly four years.
The Markit Economics preliminary index of US manufacturing increased to 56.7 in February. On the other hand the Labor Department figures indicated fewer applications for unemployment benefits last week.
Except for Shanghai Composite (down 1.17%) all the other Asian indices closed in the positive. Nikkei 225 (up 2.88%) was the top gainer.
Group of 20 finance ministers meet in Sydney this weekend, with US stimulus cuts and political turmoil from Ukraine to Venezuela stoking concern over emerging-market volatility.
German Finance Minister Wolfgang Schaeuble said in a TV interview broadcast today, 21 February 2014, that emerging markets should get their own houses in order before demanding solidarity from other nations. The troubles in emerging markets would be the main topic discussed by finance ministers and central bank chiefs at the G20 summit in Sydney this weekend, Schaeuble said.
Meanwhile, global rating agency Standard & Poor's today, 21 February 2014, cut its long-term foreign currency rating on Ukraine by one notch to CCC, saying the country's worsening political situation is putting the government's capability to service its debt at increasing risk.
European indices were showing a mix performance, while the US Futures were trading higher.
UK retail sales fell more than economists forecast in January, led by a drop in demand at food and clothing stores. Sales including fuel plunged 1.5% from December, when they surged 2.5%, the Office for National Statistics said on Friday in London. The drop is the biggest since April 2012.