Home' Trinidad and Tobago Guardian : June 18th 2015 Contents JUNE 2015 • WEEK THREE www.guardian.co.tt BUSINESS GUARDIAN
INTERNATIONAL | BG19
Aperfect storm is
brewing this summer
for emerging markets,
and it could hit hard
After years of impressive growth, coun-
tries like China and Brazil face steeper
challenges this year, World Bank President
Jim Yong Kim said in a report released
"Developing countries were an engine
of global growth following the financial
crisis," Kim said. "Now they face a more
difficult economic environment."
The World Bank isn t the only organ-
isation expressing concern. The Federal
Reserve debated the negative affect of a
Fed rate hike on emerging markets at its
last meeting. Concern is rising.
Three things could culminate in Sep-
tember to send investors scrambling from
1. The strong US dollar;
2. Low commodity prices due to China s
slowdown and a lack of demand;
3. A Federal Reserve rate increase.
Issues with a Fed rate hike: Many experts
expect the Fed to raise rates in September,
something it hasn t done since 2006.
That would cause two things. It would
increase borrowing costs---interest on
loans---for companies in emerging markets.
And it would make American debt more
attractive to investors, meaning emerging
market debt could see a selloff.
Anytime the Fed moves an inch, it
makes emerging markets shiver in fear. In
2013, when former Fed Chair Ben Bernanke
signaled that the bank would eventually
end its stimulus programme, emerging
markets had a "taper tantrum." So a Fed
rate hike isn t welcome news.
Storm clouds ahead: The rocky outlook
for emerging markets this year is a far
cry from just a few years ago when the
US dollar was weak, interest rates were
near zero and commodity prices were
"All that was a perfect storm for
emerging markets to perform well. But
that rug has been pulled out," says Win
Thin, global head of emerging market
currency strategy at Brown Brothers Har-
riman. "I m pretty nervous for emerging
markets this year."
Not all emerging markets will struggle,
Thin says. Countries like India, China
and Colombia are better positioned than
Brazil and South Africa. Generally, Asian
countries are expected to fare better than
Latin American and African nations.
The dollar s surge, like rising interest
rates, makes it harder for emerging
nations and businesses to pay off their
debt. And emerging economies engine
of growth---commodities like oil, copper
and soy---have fallen off a cliff in the past
year. It s a triple whammy.
Earlier this spring, emerging market
stocks, which are cheap, were surging,
up 10 per cent in late April. But that was
just their moment in the sun.
Reality is starting to set in that a Fed
rate hike is coming. (Fed Chair Janet
Yellen basically said so in May.) The MSCI
emerging market index is now only up
2.2 per cent this year.
The major concern is that all these
factors could cause cash to flood out of
emerging markets and companies this
"The US Federal Reserve s first interest
rate increase since the global financial
crisis could ignite market volatility and
reduce capital flows to emerging markets,"
the World Bank said in its report. Kim,
the bank s president, said it will try to
help these countries. CNN Money
Unable to match China's offer
of US$250 billion in invest-
ment in Latin America, the
EU sought ways on Thurs-
day to avoid being margin-
alised in the region, offering
new trade deals, visa-free travel and deeper
At a two-day summit with Latin American
leaders in Brussels, European leaders briefly
put aside concerns about Greece, Ukraine and
Britain's future in Europe to stress they had
not forgotten former colonies.
"We have seen that China has built up very
intensive trade relations," said German Chan-
cellor Angela Merkel.
"Europe and Latin America should also in-
crease their trade."
The European Union's meeting with the
Community of Latin American and Caribbean
States follows China's summit six months ago
with the 33-country bloc, at which President
Xi Jinping pledged US$250 billion in invest-
ment over 10 years.
Struggling with the impact of a debt crisis
that nearly broke up the euro zone, Europe
has little fresh cash to invest.
Instead it is opting to use its influence as the
world's largest trade bloc, gradually creating a
patchwork of deals. EU officials said that, as
China's demand for Latin America's commodi-
ties lessens, Europe has a chance to reassert
The EU agreed with Brazil to again try to un-
block long-stalled talks with the South Ameri-
can trade bloc Mercosur, committing to
exchange offers on opening up their respec-
tive markets by the end of this year.
Brussels will launch talks to deepen trade
agreements with Mexico and Chile to reduce
barriers to business. Ecuador is in the process
of implementing a free-trade accord with the
Other agreements at the summit included
five Caribbean states winning visa-free travel
to Europe, with Colombia and Peru next in line.
The EU and Brazil discussed plans for a
US$185 million undersea communications
cable from Lisbon to Fortaleza to reduce
Brazil's reliance on the United States. Brazil
wants to shield its Internet traffic from U.S.
surveillance after Washington spied on Brazil-
ian President Dilma Rousseff's phone and
Despite US sanctions on Venezuela, the EU
avoided criticism of socialist President Nicolas
Maduro, who is facing civil unrest and did not
attend the summit.
Venezuela's socialist ally Ecuadorian Presi-
dent Rafael Correa rejected any rebuke of
Maduro, saying the US position describing
Venezuela as a national security threat was
"absurd". Spanish Prime Minister Mariano
Rajoy expressed frustration, saying as he left
"I believe that the future of Venezuela is in
dialogue, democracy, freedom, and the respect
for the law."
Europe tries to compete
with China's influence
in Latin America
Concern growing over
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