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