Capital availability is the key question for emerging markets in 2009. Those who have it should do well. As for those who don’t—it may be better not to ask.
Click here for breakingviews.com
The year isn’t going to be easy for the developing world. Lower commodity prices and slumping Western economies will damage growth. But with the US, western Europe and Japan all in recession and unlikely to emerge quickly, whatever growth there is in the world will be concentrated in emerging markets.
The JPMorgan EMBI Global index of emerging market bonds closed 8 December at a spread of 776 basis points above US treasurys compared with 250 basis points in early January 2008 and 286 basis points in late June. The Morgan Stanley Capital International Emerging Markets Index closed at 537.09 on 8 December, down 57% from its 1 January 2008 value.
Merrill Lynch and Co. Inc.’s LDM Plus Index of local-currency sovereign notes in 18 developing countries rallied 8.2% in US dollar terms in December—the biggest rise since the index started in 2006. Indonesia’s domestic securities gained 29%, India’s 12.6% and Brazil’s 6.6%, Merrill published.
Domestic momentum, high savings and relatively clean banking systems should allow some countries to flourish. China, Taiwan, South Korea, Malaysia and Brazil, for example, don’t rely heavily on foreign capital and have large reserves of foreign currency—Malaysia has a savings rate of 37%.
Cash crunch: IMF headquarters in Washington, DC. As it has done in the past, IMF is trying to ease the pain of transition with bailouts.
They can stimulate their own economies and pick up bargains elsewhere. Continued growth in China and India, even at lower rates, should keep commodity prices from total collapse, providing support for primary product exporters.
But life will be hard for countries that need to borrow. Spreads on emerging market bonds, according to the JPMorgan EMBI Global index, have trebled since January 2008. For countries with junk credit ratings, it’s hard to get new finance at any price. Further, emerging market stock markets have suffered greater price declines than rich country markets, so foreign buyers of new shares have also largely disappeared. Developing countries with large current account deficits are especially vulnerable, even if their total foreign debt is moderate.
In the old days, the International Monetary Fund would ease the pain of transition. It is trying again, with bailouts agreed or expected in Ukraine, Hungary, Iceland and Pakistan. But the Ukrainian experience—the funds have been nearly exhausted in a few weeks—suggests that the cash drain may be too great for bailouts to be effective.
The leaders of the borrowing countries will be busy fighting off troubles in 2009. But if they have a few spare moments, they might spend them contemplating the rewards harvested by their more prudent brethren.