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Emerging markets turmoil: Danger or opportunity?

The combination of higher interest rates, economic slow down, and poor information means that the revelation of the true health of emerging markets-EM financial systems will not surface until the problems are too large to hide

Last week markets fell. Most of the pull back was blamed on turbulence in emerging market currencies. Actually the fall of emerging markets (EM) currencies is nothing new. It has been going on since last May, when US Federal Reserve chairman, Ben Bernanke, announced the possibility of a tape of the bond-buying program known as quantitative easing (QE). Since then currencies of Argentina, Brazil, Chile, India, Russia, Turkey and South Africa have fallen between 10% and 20%. The question is whether this is the beginning of something far more serious?


The reflexive response is to look at the last major meltdown of emerging market currencies. Is the present situation similar to what happened during the Asian crises of 1997? Most commentators would answer soothingly in the negative. They would point out that today’s investors look at emerging markets as an increasingly diverse group of economies. Problems with one or two emerging markets may have nothing to do with others. It is true that there is more diversity, but the currency issues hit four out of the five BRICS countries (Brazil, Russia, India and China). This would indicate that the problems are more pervasive among emerging markets.


Emerging markets growth has slowed, but in general they are still in good shape. Advocates point out that they are still growing faster that most developed countries. So despite this recent slowdown they should benefit from a general global expansion. This is a rather narrow view. The US, Europe and Japanese economies seem to be recovering, but much of the rest of the world seems to be slowing. As I pointed out in my recent piece on the Fragile Five, these economies make up 14% of the world economy. Problems in these countries will have a major negative impact on any nascent global growth.


The big argument against a repeat of 1997 is the question of “original sin”. This is the general name for debt incurred by an entity, either corporate or the state, in an emerging market in a currency other than its own. Unlike 1997, much of the recent borrowing has been denominated in local currency. So the lenders, not the debtors, assume the currency risk. The idea is generally true, but this type of borrowing is still going on. According to a recent article in Moneylife “RBI that 60% to 65% of corporates’ forex borrowings were un-hedged”. I am sure Indian companies are not the only sinners among emerging markets.


The fall in EM currencies does indicate strength. Fewer countries peg their currencies. With flexible currency policies, large reserves and deeper local currency capital markets, EMs should be able the weather the storm far better than in 1997. Since EM investments are relatively cheap, rather than a crisis, optimists regard this pull back as an opportunity to invest.


Or is it? There is one major problem with the optimistic case: debt. In order to protect their currency, the Turkish central bank held a special midnight meeting and raised its interest rate. Turkish central bank ostensibly more than doubled the benchmark from 4.5% to 10%. But the effective rate on Turkey’s interbank rate was already above 7% before the rise. So the rise was not as great as it seemed. South Africa also raised rates by 50 basis points, but presented it as one off move. Markets were not impressed by either move and continue the sell off.


But more important than the currency issue is the interest rate. Raising interest rates in any country will further slow the economy. A rise in interest rates in almost all of the emerging markets including China, will put pressure on the debtors. This is important because unlike 1997, there has been a large rise in the amount of debt taken on in the EMs. The easy money policies of the developed countries plus the large loans made by the Chinese financial system have created an ocean of debt. As interest rates rise and currencies fall, the probability of default will explode.


In a blog last Monday, The Economist published an article also comparing the present situation to 1997. They saw two real threats. The first was political instability, which in my view is always with us. The second threat was that there “might be a sense that the emerging economies are fibbing about the state of their financial systems.” In short information is the problem. No one really knows how bad the debt situation is.


I can assure the blog’s author that the level of bad debts in all emerging markets is far greater than is presently known. Why the certainty? Simple, compare them to a developed economies. All of the developing countries have less stringent regulation than the European Union (EU). But even with better regulators, it has still taken the European Central Bank years and numerous stress tests to determine the real extent of bad loans. All of the EMs have large state-owned banks that have made loans for political purpose. The true state of these loans will also be hidden for the same reason. China carefully controls information, so the probability of getting an accurate number is near zero.


The combination of higher interest rates, economic slow down, and poor information means that the revelation of the true health of EM financial systems will not surface until the problems are too large to hide. By then it will be too late and this week’s currency turbulence will look like a summer squall compared to a tsunami.


(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.)



Simple Indian

3 years ago

EMs will offer growth prospects to both FIIs and domestic investors so long as they have strong decisive political leadership heading stable governments. India has obviously gone from bad to worse thanks to losing out on both these counts. From all indications, the upcoming LS polls may throw up an even more fractured verdict.

Ramesh Poapt

3 years ago

very good article! Thanks Moneylife. Pl continue...

Treasure chest of money sitting idle - why can't we put this to use?

A special committee may be appointed by the Prime Minister as to how the idle funds in companies can be diverted towards national development projects

In the recent past, shareholders of various companies used to regularly receive the annual statement of accounts, in nicely printed booklets, giving details of the activities of the company concerned, welfare of the employees, photographs of the factory, range of products and the charitable activities done during the year.


Though some companies still continue this practice, most have switched over to send these details by email, as a sequel to going "green" policy - a good step to improve our environment.


However, on demand, it is obligatory for the company concerned to supply a printed version of the annual accounts. In practice, what really happens is that the receiver of the mail (shareholder), simply "deletes" the message. Unless the company gives a detailed press release which covers their planned future activities, shareholders are in the dark.


Sometimes, one wonders, if it is not possible to design a simpler version of the audited accounts, highlighting the relevant details, and explaining the plans of the management as to what they hope to do in the year ahead? This summary (brief) report must be designed in such a way to incorporate every important fact and made uniform for all registered, public limited companies to provide.


In the last one month, more than 50 advertisements appeared in the press, most of which gave details of the company's activities, for the period ending 30th September (3rd quarter). Details of some of the company reports are given below:


Name of Company

Paid-up Capital (Rs lakhs)

Reserves (Rs lakhs)

Allahabad Bank



Bank of India



Bank of Maharashtra



Canara Bank



Karur Vysya Bank



Oriental Bank of Commerce



State Bank of Mysore



Yes Bank



Karnataka Bank



LIC Housing Finance









Container Corporation







In the above list, which contains mostly government-sponsored organisations, the reserves are substantial. What is not shown, however, is the actual percentage holding of the government! Why can not the Company Law Board, or whoever is the most appropriate authorised authority, to direct them to show the percentage holdings and, if possible, show the amount as the paid up capital invested by the government? All these organisations can afford to give special dividends to shareholders. A closer look will reveal how many of these rewarded the shareholder with bonus?


Now, let us take a look, at some other accounts that also appeared in the same period.


Name of Company

Paid-up Capital (Rs lakhs)

Reserves (Rs lakhs)




Larsen & Toubro



Tata Coffee






Exide Batteries



Jindal Steel Power













Many of the above named companies have taken extremely good care of their shareholders, and helped them to create their wealth; they have shared the prosperity of the company with not only employees but also have made contributions to charity. In recent times, Larsen & Toubro have hinted the near term possibility of spinning off companies in the group; and most of them not only give excellent dividends but have given bonus to one and all. After all, distribution of wealth creates further wealth!


There are others who have built a very strong reserve and who may be actually sitting on the fence to know the outcome of the ensuing elections before they take actions on the wealth that has already been created. These are:


Name of Company

Paid-up Capital (Rs lakhs)

Reserves (Rs lakhs)




Dewan Housing



TVS Motor






Transport Corporation of India



India Infoline



Shriram City






All these companies, and there will be a lot more if we can keep a watch on them when the annual reports are published from April onwards. These companies can actually give large dividends; some of them, in the months ahead, may spin off and reward the shareholders; some others might offer bonus in addition to special dividends. But it is in the reader's interest to consult a financial accountant and also carry out desk research on the information provided by the company itself in their websites.


Other points of interest are to know the procedure followed in establishing the book value, and ponder if this needs to be looked at seriously by some special body. When it comes to buy-back proposals, here again, the promoters should also be forced to part away with some of their holdings. And, in order encourage public holdings, government must make a unilateral decision not to "accept" any more bonus from the companies in which they have holdings, and refrain from accepting any "preferential" allotment of shares from existing companies where they have already shares!


Since substantial funds are lying practically unutilised in these government companies, a special committee may be appointed by the Prime Minister as to how these idle funds can be diverted towards national development projects?


(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)



Dr Anantha K Ramdas

3 years ago

Mr Shiralai: The article covers both government and private sector, and have to be viewed separately.

When the government wanted to divest the shares of Coal India, there was a huge cry from its employees who threatened to go on strike. In this case, Govt owns 80% of the shares, like in many other organisations listed. So how was this overcome? On a share of Rs 10 (face value), the Board of CIL gave Rs 29 per share as INTERIM dividend, thus helping the government to mop up Rs 18,000 crores. Cash lying idle with companies can fetch 7 to 8% interest, but on high dividend payouts, government can also collect tax at about 30%. In the next few months you will observe govt companies will start giving high dividends - like NMDC, Oil India etc.

According to a recent study by Crisil, top 20 PSUs have an estimated cash holdings of Rs 1.6 Lakh crores and they can very well afford to pay special dividends of Rs 27,000 crores, without impacting their capital expenditure. The tax on these dividends would also be substantial. Nobody can stop these govt owned companies from giving huge or special dividends, as buy back, with huge reserves would reduce their holdings.

In so far as private companies are concerned, though most of the listed companies give good dividends (100% and above on face value of shares), they are sitting on huge pile of cash for years on end. The point that I am making is why not they also give special dividends and bonus to shareholders and reward them?
Yes, you are right, govt can not give directions to companies, in which they have no shareholdings. Larsen & Toubro gave some 650% dividend on the Re 2 share and also bonus.

Govt owned companies can be "directed"; but others can only be "persuaded" to invest in govt securities.

Look at ITC. They reward regularly the shareholders by bonus apart from high dividends. Take JSPL, they have a small capital base, but look at the reserves! Its mind boggling; so, it is now left to shareholders to demand that they be paid special dividends; they can also move resolutions in the AGM to direct the companies to invest in govt bonds etc for the overall benefit of the country.

jaideep shirali

3 years ago

If companies have maintained reserves, they would use them at some stage for their progress. Why should the Govt interfere with this ? A new committee would only waste public funds, there are innumerable committees that have been set up, given their reports and the reports have been trashed. And what about the public individual shareholders, should they be at the mercy of some bureaucratic recommendation ? The Indian Railways spend over 90% of revenues on their own costs, Air India has become a mega cash guzzler, many PSUs at central and state level are sick, so how is the Govt qualified to tell companies how to spend their money ?

Ramesh Poapt

3 years ago

very good article!

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