Home' Trinidad and Tobago Guardian : November 13th 2014 Contents NOVEMBER 2014 • WEEK TWO www.guardian.co.tt BUSINESS GUARDIAN
THE ECONOMIST | BG21
Investors in emerging markets know
how quickly things can turn sour. In
the mid 1990s fast-growing Thailand
and Indonesia became known as the
"Asian Tigers," but by 1997 they were
suffering currency crises and had to
be bailed out by the International Monetary
Now, almost 20 years later, two members
of the so-called "BRICs"---Brazil, Russia,
India and China---lionised for propping up
global growth in 2010 are close to recession.
The mixture faced by Brazil and Russia,
including falling currencies, high inflation
and slow growth, could make 2015 a bad year
Trouble has been brewing awhile. More
than a year ago, James Lord of Morgan Stanley
labeled Brazil, India, Indonesia, South Africa
and Turkey the "fragile five" of the emerging
markets. His concern was that the combi-
nation of high inflation and big current-
account deficits meant that exports were too
expensive, and their currencies topped his
list of those likely to tumble.
Since then four of the five have ground
against the dollar, but a sixth emerging-mar-
ket currency, the Russian ruble, has fallen
much further. On November 5 the central
bank scaled back its expensive and futile
efforts to prop up the currency, leaving it
floating almost freely.
These "suspect six" countries have com-
mon problems, particularly high inflation.
Each of the fragile five has a "twin deficit,"
budget shortfalls that mean that debt is piling
up and current-account gaps that make them
reliant on foreign-capital inflows. Their
prospects have diverged, however. India and
Indonesia look secure: The rupee is up against
the dollar since August 2013 and the pub-
lic-sector deficit is falling and, while the
Indonesian rupiah has been less solid, losing
10 per cent since the end of August, inflation
has moderated and growth is strong.
The remaining four are faring less well. The South
African rand and the Turkish lira look likely to fall fur-
ther, since both still combine big current-account gaps
with high inflation. For government economists in
Pretoria and Ankara, however, there are chinks of light.
Energy prices have dropped, which is great news for
Turkey, since more than 90 per cent of the oil and
natural gas that account for 60 per cent of its energy
supply is imported. In South Africa the strikes which
have stunted exports of minerals have abated, and the
economy could grow by 2.5 per cent next year.
Brazil and Russia, by contrast, are in really bad shape.
The largest emerging economies after China, together
they have the heft of Germany, and in both countries
the currency is sliding. The Brazilian real hit new lows
in November, after data revealed that the budget deficit
reached a record in September. The ruble is dropping
faster yet, down 27 per cent in a year and 10 per cent
in the past month. Both face stagflation, as rising
prices couple with growth rates likely to be below 1.0
per cent this year.
Some of their pain comes from abroad. Brazil s main
trading partners are China, which is slowing, the euro
area, which is stagnant, and Argentina, which is tanking.
Not only are export volumes down, but also the prices
of the things Brazil sells, such as iron ore, petroleum,
soybeans and sugar, are dropping as global demand
falters. Russia is feeling the slowdown too, as energy
prices fall. It is one of the world s biggest producers
of oil and natural gas, with its big five energy firms
employing close to one million workers. Exports worth
US$350 billion flowed through pipelines to Europe
and Asia in 2013. As prices drop, Turkey s gain is
Russia s loss.
Brazil s and Russia s problems have domestic roots
as well, however. Since the 1990s Brazil has tended
to aim for a primary surplus---before interest pay-
ments--- of close to 3.0 per cent of GDP, enough to
begin reducing its debts. However, the newly re-elected
President Dilma Rousseff has played havoc with Brazil s
public finances. In 2014 spending has expanded at
twice the rate of revenues, even allowing for one-off
gains from the sale of Libra, an oil field, and the 4G
telecommunications spectrum. Brazil s debt-to-GDP
ratio is rising fast.
Russia s self-inflicted wounds are even more severe.
President Vladimir Putin s invasion of Ukraine led to
American and European sanctions that gradually have
been tightened since they were imposed in July. The
rules limit Russian companies access to American
debt markets. They also ban American firms from
selling equipment or advice to Russia s energy giants.
There could be worse to come. The drop in com-
modity prices looks likely to last. Meanwhile, in order
to crimp inflation and stem the slide in their currencies,
the central banks in both countries raised their rates
last month: They stand at 11.25 per cent in Brazil and
9.5 per cent in Russia. At the same time worried finance
ministries are keen to bolster their books. In Brazil
fuel-tax hikes are being discussed, and tax breaks on
car purchases may be scrapped. In Russia a rule that
caps the budget deficit at one per cent of GDP may
require austere fiscal policy.
This frugality will hurt. Banks could prove vulnerable
as public-sector spending cuts hit incomes and high
interest rates make loans hard to service. In Russia
things are particularly bad, with non-performing loans
rising and savers draining the banks of rubles.
Bond markets could be another flashpoint. Both
countries have big foreign-exchange reserves: Despite
losing around US$100 billion in the past year, Russia
has close to US$370 billion. They also have big dollar
debts, however, debts that become harder to service
as their currencies fall. Russia faces some US$90 billion
of repayments in the next six months.
Even optimists think that the pair will be lucky to
grow at all in 2015. Pessimists see tumbling currencies,
bond-market routs and even bank runs.
@2014 The Economist Newspaper Ltd. Distributed
by the New York Times Syndicate
The worst of the suspect six
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