Tag Archives: Emerging Markets

Korea Joins the Bailout

South Korea was one of the major casualties of the 1997-98 “emerging markets” crisis. I put “emerging markets” in quotes because, at the time, Koreans were very proud that their country had the 11th-largest economy in the world. Today it is 13th, by nominal GDP.

Yesterday South Korea announced its version of the bailout plan that is sweeping the world – $30 billion in foreign currency reserves made available to its banks, and a $100 billion guarantee on new foreign debt of its banks. But in Korea, the stakes are higher than in the US and other G7 countries. Korea is another of those countries whose banks’ have a disproportionately high level of foreign currency obligations. Rolling those over suddenly got a lot harder in the last month, for reasons we all know; now as creditors fear that banks may not be able to pay them off, the currency declines, making them even harder to pay off, and so on. The central government has $240 billion in foreign currency reserves, but that may or may not be enough to support its banking sector, which has $235 billion in foreign liabilities.

Korea is important not just because my family is from there, but because it is so big, economically – three times as big as Iceland, Hungary, and Ukraine put together in GDP terms. If the crisis spreads to countries of Korea’s scale, it’s not clear that the IMF has the resources to bail them out (and an IMF bailout would be enormously unpopular in any case).

Recession in China?

OK, that may be a bit of a stretch. But there’s little doubt that the global recession will take its toll on China’s double-digit growth rates.

One (emailed) response to our recent Washington Post op-ed criticized us for overlooking the role of China (although we did discuss China in the following Forbes article). In particular, the reader said, “it is my opinion that China holds all of the cards and I believe they will likely play some of them early in the next U.S. administration” – this because of China’s role in financing the U.S. deficits by investing in Treasuries. This may be true in the long run, although of course China cannot try to damage the U.S. economy without also crippling its own export-dependent economy. More immediately, though, China is facing an old-fashioned slowdown of its own.

All Things Considered did a story this past week on the impact of the global slowdown on Chinese exporters. One figure jumped out at me: 80% of the toy factories in Guangdong province have closed.

Also, the Baltic Dry Index, a measure of bulk cargo shipping costs and hence of global demand for heavy stuff (largely commodities) has fallen off a cliff this year (see the second chart in that post) – one reason why the Shanghai Composite Index is down more than 60% this year.

China is a place I won’t claim to understand. But as we all know, the Chinese government relies on an unsteady equilibrium in which it uses economic growth to legitimize the political system and convince the growing middle classes not to question the political order. Tocqueville’s observation (which I alluded to in my previous post) about the tendency of political strife to arise not out of prolonged abject misery, but when increasing expectations are dashed, could turn out to be particularly appropriate for China.

Update: Thanks to Randy for his comment (below). I fixed the error regarding the Baltic Dry Index.

Update: The Economist has a post with almost the same title as this post – but no question mark.

Emerging Market Developments

One of our readers raised some good questions about emerging markets on another post, and I’ve been planning to give you a brief update about events outside the G7, especially since we’ve been warning about potential problems.

First, according to Satyajit Das on Planet Money, Iceland’s stock market has lost 80% of its value, its currency has lost 95% of its value, and people are beginning to wonder if the country will have enough foreign currency to import enough food. In Iceland, as many people have reported, the main issue is a rapid de-leveraging as a banking sector that grew rapidly using foreign borrowing collapses as credit dries up.

Second, Hungary and Ukraine are looking for aid packages – Hungary received 5 billion euros from the European Central Bank, Ukraine was looking for $14 billion from the IMF. Dominique Strauss-Kahn, the managing director of the IMF, said, “Many countries seem to be experiencing problems because of the repatriation of private capital by foreign investors or the reduction of credit lines from foreign banks.” In other words, in a global credit crisis, people don’t want to lend to emerging markets. (The FT also published more analysis of Eastern Europe by Stefan Wagstyl.)

Finally, Newsweek has a story about the crisis in Pakistan. While domestic political instability certainly predates the financial crisis, now the economy is also under pressure. One problem: “Whereas the previous government was able to finance its current account deficit through privatization proceeds, bonds issues, and foreign direct investment, these channels have dried up with Pakistan’s security woes and the global credit crisis.” As of today, Pakistan is potentially looking to the IMF for an aid package. I assume most American readers know why instability in Pakistan is a bad thing.

One common thread is that, when lenders stop lending, emerging markets are among the first to lose access to money. Iceland is perhaps the most extreme case, where entire economy had the characteristics of an overleveraged Wall Street bank. But other countries with significant foreign-currency debts are suffering from crises of confidence by external lenders who want to get their money out before everyone else does.

Besides potentially causing steep domestic recessions and severely reducing the purchasing power of local populations, emerging market problems spill back into wealthy countries in at least two ways. First, as banks (or countries) default on their debt, lenders in those wealthy countries have one more asset they have to write down on their balance sheets. Second, the fewer strong economics out there, the fewer people available to buy our exports. Finally, the other thing we should be concerned about is political instability. Economic crises – especially after periods of increasing prosperity (see Alexis de Tocqueville) – have a way of triggering political crises in which unsavory authoritarian governments, or at least anti-Western, anti-capitalist governments, come to power. Let’s hope it doesn’t come to that this time.

Next Up: Emerging Markets

In Washington this weekend, there seems to be remarkably little realization of the difficulties already facing emerging markets.  Even if things start to go much better in and for the G7 in the next 48 hours, you cannot easily get back to the situation before Iceland’s banks failed and effectively Iceland was left to its own devices.  And, of course, it is impossible to return to where we were before the series of unfortunate events surrounding Lehman and AIG.

But what exactly does this imply for various kinds of emerging markets?  Countries with clear pre-existing vulnerabilities were already in trouble last week, those with any kind of small cracks in their economic armour are now being tested, and even the apparently invulnerable may come under pressure.  According to our analysis, now published in Forbes.com, this will be a stress test like no other.