Crippled emerging markets seek new lease of life<\/p>\n
BRASILIA (Reuters): Indonesia has been knocked off its feet,
\nRussia is on its knees and Brazil is hobbling on crutches. For
\nemerging market specialists, the crippling events of 1998 will be
\nhard to forget.<\/p>\n
Bankers, stung by a year of spectacular losses, are now
\ncynical about the market once seen as the El Dorado of risk-
\nhungry investors -- dubbing them \"submerging markets\" and \"a
\nmarket you cannot emerge from in an emergency.\"<\/p>\n
It began as a promising year for many developing countries.<\/p>\n
Chastened by a global market crisis triggered by a devaluation
\nin Thailand in mid-1997, emerging nations appeared to be
\nimplementing long-delayed political and financial reforms and
\nsteering their economies towards a cautious recovery.<\/p>\n
But a series of shocks, first in Hong Kong, then in Russia,
\nsent new tremors around the world, landing on the doorstep of
\nBrazil, which only narrowly avoided becoming the next -- and
\nbiggest -- victim of the global financial meltdown thanks to an
\ninternational bailout.<\/p>\n
Capital flows to 29 leading emerging economies should slow to
\nless than $160 billion in 1998 from $242 billion in 1996 and $308
\nbillion in 1995, according to the Washington-based Institute for
\nInternational Finance, which represents private banks.<\/p>\n
But it noted that foreign direct investment, a top indicator
\nof investor faith in the long-term economic potential of
\ndeveloping economies, would fall only slightly to $106 billion in
\n1998 from $120 billion in 1997.<\/p>\n
\"It's been a pretty disastrous year for emerging markets,\"
\nsaid Geoffrey Dennis, head of global emerging market equity
\nmarkets at Deutsche Bank in London.<\/p>\n
\"Within that, the highlights of the year have unquestionably
\nbeen Russia, and to a certain extent Brazil,\" he said.<\/p>\n
When Russia devalued the ruble and declared a partial
\nmoratorium on debt in August, foreign investors feared that
\nBrazil might also crumble under the weight of its heavy public
\nsector deficit.<\/p>\n
A currency collapse in Brazil, which accounts for 40 percent
\nof Latin America's gross domestic product, would probably hurl
\nthe whole region into recession, with potentially dire
\nimplications for the United States and the rest of the world.<\/p>\n
Rich nations and the International Monetary Fund (IMF),
\ndesperate to regain credibility after a series of bungled
\ninterventions, appear to have stemmed the bleeding with a $41
\nbillion credit line for Brazil while the government gets its
\nfinances in order.<\/p>\n
But analysts say shell-shocked investors are likely to sit on
\ntheir cash for a while, not only in emerging markets but also in
\nindustrialized countries, which could be hit soon by a global
\neconomic slowdown.<\/p>\n
The World Bank is warning that, despite a recent round of
\ninterest rate cuts in the United States and Europe, the world
\neconomy will grow by only 1.9 percent in 1999, compared with 1.8
\npercent in 1998 and 3.2 percent in 1997.<\/p>\n
\"Without reasonably strong growth in the U.S. and Europe, the
\nemerging markets will struggle even more, with a magnified effect
\non regions like Latin America,\" said Neil Dougall, Latin American
\neconomist at Dresdner Kleinwort Benson in London.<\/p>\n
The fate of Latin America in 1999 will continue to hinge on
\nBrazil's progress in implementing a sweeping fiscal austerity
\nplan to tackle its bloated budget deficit, economists say.<\/p>\n
\"The fact that there is no safe haven or counter-Brazil play
\nin Latin America means that Brazil is really the determinant of
\nwhat is going to happen in the Latin American market,\" said
\nSantiago Millan, chief economist at I.D.E.A. in New York.<\/p>\n
The Brazilian government's recent defeat in passing a key
\nelement of the plan, designed to save $23.5 billion in 1999, has
\nagain raised questions about President Fernando Henrique
\nCardoso's muscle in the country's notoriously unruly Congress.<\/p>\n
\"The situation in Brazil in 1999 is going to remain tense at
\nbest, and at worst the tensions will become so great that there
\nwill be an adjustment in the currency band,\" said Millan.<\/p>\n
Asian tigers<\/p>\n
Unlike their gloomy Latin American counterparts, Asian stocks
\nyielded a few golden nuggets in 1998, but the sluggish pace of
\nreforms in most countries will dissuade foreign investors from
\nrushing for profits, analysts said.<\/p>\n
Thai and South Korean stocks have notched up gains of 20
\npercent and 50 percent respectively in dollar terms so far this
\nyear, reaping the rewards of economic reform programs set up in
\nexchange for IMF-led bailouts.<\/p>\n
But analysts said a repeat in 1999 was unlikely.<\/p>\n
\"(Thai authorities) win high marks for reform, but the sheer
\nscale of the underlying problem with their banking system is
\nmind-boggling and will take many years to resolve,\" said Anand
\nAithal, strategist at Goldman Sachs in Singapore.<\/p>\n
\"There is no easy way out, even if you are the IMF's poster
\nchild,\" he added.<\/p>\n
The Greater China markets -- Hong Kong, Taipei, and the B
\nshare markets in Shanghai and Shenzhen -- are a better bet
\nbecause of the relative strength of the banking systems in Taiwan
\nand Hong Kong, even though China's economic prospects remain
\ncloudy.<\/p>\n
The real surprise could come from the region's two most
\nunstable economies, Indonesia and Malaysia.<\/p>\n
Indonesia is on the brink of economic collapse. Months of
\ndecay have revived the social unrest which led to the ousting
\nearlier this year of president Soeharto after 32 years in power.<\/p>\n
The interim government has set general elections for next
\nJune, and analysts say even a moderate stabilization in the
\ncountry's political situation could help the Jakarta market out-
\nperform, simply because it would start from such a low base.<\/p>\n
In Malaysia, efforts to restart the economy could succeed and
\nturn the Kuala Lumpur stock market into Asia's \"dark horse\"
\nperformer in 1999, despite lingering investor fury over the
\nsurprise announcement of capital controls in September.<\/p>",
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