Is a new economic crisis at hand?
The two-day sell-off of currencies
and shares of several developing countries last week raises the question
of whether this is the start of a new financial crisis.
AT the end of last week, several developing countries saw sharp falls
in their currency as well as stock market values, prompting the
question of whether it is the start of a wider economic crisis.
The sell-off in emerging economies also spilled over to the American and European stock markets, thus causing global turmoil.
Malaysia was not among the most badly affected, but the ringgit also
declined in line with the trend by 1.1% against the US dollar last week;
it has fallen 1.7% so far this year.
An American market analyst termed it an “emerging market flu”, and
several global media reports tend to focus on weaknesses in individual
developing countries.
However, the across-the-board sell-off is a general response to the
“tapering” of purchase of bonds by the US Federal Reserve, marking the
slowdown of its easy-money policy that has been pumping billions of
dollars into the banking system.
A lot of that was moved by investors into the emerging economies in
search of higher yields. Now that the party is over (or at least winding
down), the massive inflows of funds are slowing down or even stopping
in some developing countries.
The current “emerging markets sell-off” is thus not explained by ad
hoc events. It is a predictable and even inevitable part of a boom-bust
cycle in capital flows to and from the developing countries, coming from
the monetary policies of developed countries and the investment
behaviour of their investment funds.
This cycle, which is very destabilising to the developing economies,
has been facilitated by the deregulation of financial markets and the
liberalisation of capital flows, which in the past was carefully
regulated.
This prompted bouts of speculative international flows by investment
funds. Emerging economies, having higher economic growth and interest
rates, attracted investors.
Yilmaz Akyuz, chief economist at South Centre, analysed the most recent boom-bust cycles in his paper
Waving or Drowning?
A boom of private capital flows to developing countries began in the
early 2000 but ended with the flight to safety triggered by the Lehman
collapse in September 2008.
The flows recovered quickly. By 2010-12, net flows to Asia and Latin
America exceeded the peaks reached before the crisis. This was largely
due to the easy-money policies and near zero interest rates in the
United States and Europe.
In the United States, the Fed pumped US$85bil (RM283bil) a month into
the banking system by buying bonds. It was hoped the banks would lend
this to businesses to generate recovery, but investors placed much of
the funds in stock markets and developing countries.
The surge in capital inflows led to a strong recovery in currency,
equity and bond markets of major developing countries. Some of these
countries welcomed the new capital inflows and boom in asset prices.
Others were angry that the inflows caused their currencies to
appreciate (making their exports less competitive) and that the
ultra-easy monetary policies of developed countries were part of a
“currency war” to make the latter more competitive.
In 2013, capital inflows into developing countries weakened due to
the European crisis and the prospect of the US Fed “tapering” or
reducing its monthly bond purchases.
This weakening took place just as many of the emerging economies saw
their current account deficits widen. Thus, their need for foreign
capital increased just as inflows became weaker and unstable.
In May to June 2013, the Fed announced it could soon start
“tapering”. This led to sudden sharp currency falls, including in India
and Indonesia.
However, the Fed postponed the taper, giving some breathing space. In
December, it finally announced the tapering — a reduction of its
monthly bond purchase from US$85bil (RM283bil) to US$75bil (RM249bil),
with more to come.
There was then no sudden sell-off in emerging economies, as the
markets had already anticipated it and the Fed also announced that
interest rates would be kept at current low levels until the end of
2015.
By now, however, the investment mood had already turned against the
emerging economies. Many were now termed “fragile”, especially those
with current account deficits and dependent on capital inflows.
Most of the so-called Fragile Five are in fact members of the BRICS,
which had been viewed just a few years before as the most influential
global growth drivers.
Several factors emerged last week, which together constituted a
trigger for the sell-off. These were a “flash” report indicating
contraction of manufacturing in China; a sudden fall in the Argentinian
peso; and expectations that a US Fed meeting on Jan 29 will announce
another instalment of tapering.
For two days (Jan 23 and 24), the currencies and stock markets of
several developing countries were in turmoil, which spilled over to the
US and European stock markets.
If this situation continues this week, it may just signal a new phase
of investor disenchantment with emerging economies, reduced capital
inflows or even outflows. This could put strains on the affected
countries’ foreign reserves and weaken their balance of payments.
The accompanying fall in currency would have positive effects on
export competitiveness, but negative effects on accelerating inflation
(as import prices go up) and debt servicing (as more local currency is
needed to repay the same amount of debt denominated in foreign
currency).
This week will thus be critical in seeing whether the situation
deteriorates or stabilises, which may just happen if the Fed decides to
discontinue tapering for now. Unfortunately, the former is more likely.
Contributed by Global Trends Martin Khor
> The views expressed are entirely the writer’s own.
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Fed Slows Purchases While U.K. Growth Picks Up: Global Economy
The global economic expansion is
speeding up, data this week are projected to show. In the U.S.,
a gain in fourth-quarter gross domestic product probably
completed the strongest six months of growth in almost two years
for the world’s largest economy. The pickup combined with
progress in the labor market means Federal Reserve policy makers
meeting this week may ease up again on the monetary accelerator.
Across the Atlantic, the U.K. economy may have grown over
the past 12 months by the most in almost six years, while in
Germany, business confidence probably improved to the highest
level since mid-2011.
This week also includes central bank meetings in
Mexico and
New Zealand. In Mexico, monetary officials may keep the
benchmark interest rate unchanged as more government spending
reduces the need for stimulus. Such a decision is less clear in
New Zealand, where odds of an interest-rate increase have
climbed.
U.S. ECONOMY
-- Gross domestic product advanced at a 3.2 percent
annualized rate in the fourth quarter as spending by American
consumers climbed by the most in three years, economists
forecast the Jan. 30 figures will show. Combined with a 4.1
percent inventory-fueled gain in the prior period, GDP in the
second half of the year was the strongest since the six months
ended March 2012.
-- “A substantial acceleration in private sector demand
led by stronger consumer spending and a significant pickup in
exports after weakness through the first part of the year should
drive a second straight quarter of near 4 percent real GDP
growth even with an expected drag of 0.5 percentage point from
federal government spending, largely reflecting lost work hours
during the government shutdown,” Ted Wieseman, an economist at
Morgan Stanley in New York, wrote in a Jan. 17 report.
-- “The first cut of Q4 GDP will be more about the
internals of the report than the headline,” economists at RBC
Capital Markets LLC, led by
Tom Porcelli, wrote in a research
note. “While we look for a 2.8 percent annualized advance in
top-line growth, the details should seem even brighter with real
personal consumer consumption rising 4 percent. We anticipate
that the inventory swing will hold growth back a full percentage
point.”
FOMC MEETING
-- Ben S. Bernanke will chair his final meeting of Federal
Reserve policy makers on Jan. 28-29 before handing over the
reins of the world’s most powerful central bank to Janet Yellen.
Bernanke and a different cast of regional Fed bank presidents
who’ll vote on the Federal Open Market Committee are projected
to
reduce the pace of Treasury and mortgage-backed securities
purchases by a total of $10 billion to $65 billion as the
economy improves.
-- “We expect the Fed to announce another $10 billion
taper and possibly strengthen its guidance,” Michael Hanson,
U.S. senior economist at Bank of America Corp., said in a
research note. “The Yellen-led Fed will see numerous personnel
changes in 2014, but we still expect a patient and very
accommodative policy stance.”
-- “The FOMC will likely upgrade its summary of current
economic conditions in its policy statement,” BNP Paribas’
Julia Coronado, a former Fed Board economist, said in a research
note. “The Q4 performance is expected to be driven by final
demand, in particular a surge in consumer spending on goods and
services. The January FOMC statement could acknowledge this
better performance by stating that ‘economic growth picked up
somewhat’ of late.
‘‘The confirmation of their long-held optimistic
expectation for stronger economic growth and tranquil financial
markets will likely lead the Committee to announce another
‘measured step’ in the tapering process. We expect another $10
billion cut in the pace of QE asset purchases.’’
U.K. ECONOMY
-- Britain will be the first Group of Seven nation to
report
gross domestic product for the fourth quarter when it
releases the data on Jan. 28. Economists forecast growth of 0.7
percent, close to the 0.8 percent expansion in the prior three-month period.
From a year earlier, GDP probably rose 2.8
percent, driven by domestic demand, which would be the best
performance since the first three months of 2008.
-- ‘‘To date, the recovery has been somewhat unbalanced,
led by consumption, so we remain skeptical about the
sustainability over the medium-term,’’ said Ross Walker, an
economist at Royal Bank of Scotland Group Plc in
London.
‘‘Still, there is clearly sufficient momentum in the short-term
data to underpin trend-like rates of growth.’’ Walker sees the
economy expanding 2.7 percent this year, just above the
Bloomberg consensus estimate of 2.6 percent.
GERMAN BUSINESS CONFIDENCE
-- German
business confidence is heading for its highest
reading in 2 1/2 years, underlining the strength in an economy
that’s helping to power the euro-area recovery. Economists in a
survey, set for release on Jan. 27, see the business climate
index increasing to 110 in January from 109.5 last month.
Germany will continue to outpace the euro area this year, with
the International Monetary Fund forecasting 1.6 percent
expansion, compared with 1 percent for the currency region.
-- Thilo Heidrich, an economist at Deutsche Postbank AG in
Bonn, said the ‘‘mood in the German economy is likely to have
brightened at the start of the year.’’
-- ‘‘The near-term outlook remains one of cautious
optimism,’’ Bank of America economists including Laurence Boone
said in a note. ‘‘Domestic demand, in particular, should support
growth in coming years.’’
JAPAN TRADE
--
Japan’s
trade deficit narrowed to 1.24 trillion yen
($12.1 billion) in December from a month earlier, even as import
growth probably accelerated, according to a Bloomberg survey of
economists before data due Jan. 27. A record run of monthly
deficits shows the cost of the yen’s slide against the dollar
and the extra energy imports needed because of the nuclear
industry shutdown that followed a disaster in 2011.
-- ‘‘Throughout the year, few manufacturers believed that
the yen would stay weak, let alone depreciate further,”
Frederic Neumann, Hong Kong-based co-head of Asian economics at
HSBC Holdings Plc, said in a research report. “As a result,
(dollar) prices charged for goods sold overseas were not cut
amid fears that such a move would have to be reversed once the
currency strengthened again, something that few firms like to
do. All this meant nice profits for Japanese firms (higher yen
earnings for their shipments) but no gain in export market
shares.”
NEW ZEALAND RATES
-- Economists and markets are split on whether the Reserve
Bank of New Zealand will increase the official cash rate for the
first time in 3 1/2 years at its Jan. 30 meeting. Governor
Graeme Wheeler said late last year the RBNZ will need to raise
interest rates in 2014 as growth and inflation accelerate and
unemployment declines. While only three of 15 economists predict
Wheeler will lift the rate by 25 basis points to 2.75 percent
this week, markets are pricing in an almost 70 percent chance he
will do so.
-- “The lists of reasons are long for both the ‘why wait’
and ‘why not’ sides of the fence,”
Nick Tuffley, chief
economist at ASB Bank Ltd. in Auckland, said in a research
report. “The RBNZ can justify either outcome, and we put the
chances of a rate hike as 1 in 4. That is to say, not our core
view, but a significant risk.”
MEXICO RATE DECISION
-- Mexico’s central bank on Jan. 31
may keep the overnight
interest rate unchanged at a record-low 3.5 percent in its first
decision of 2014 as increased government spending stimulates the
economy.
-- “There’s no need to reduce the rate any more” after
0.25 percentage-point reductions in September and October, Marco Oviedo,
chief Mexico economist at Barclays Plc, said in an e-mailed response to
questions. “The economy has shown signs of
recovery.”
-- Policy makers have “sent the message that they’re
comfortable with the current level of interest rates,” said
Gabriel Lozano, chief Mexico economist at JPMorgan Chase & Co.
With sales tax increases fanning inflation, “real interest
rates are temporarily negative, but the central bank will be
confident this is a transitory situation that will correct in
the second half of the year” as inflation slows.
Contributed b
y Vince Golle Bloomberg
