Home' Trinidad and Tobago Guardian : August 23rd 2015 Contents SBG12 FINANCE
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt AUGUST 23 • 2015
The damage spans the globe.
Thailand s baht. Kazakhstan s
tenge. South Africa s rand.
Peru s nuevo sol.
In emerging markets worldwide, currencies
are plunging over fears that developing
economies are on the verge of a crippling fall.
Success stories until recently, emerging
economies are seen as casualties now --- of
slower growth in China, plunging prices for
commodities like oil and iron ore, the prospect
of higher US interest rates and homegrown
The damage has spilled across oceans, with
the turmoil jolting investors in New York,
Tokyo and Europe. Investors there worry that
China and other major emerging economies
will reduce their imports. They also fear a
trade-disrupting currency war as some coun-
tries desperately lower their currencies value
to gain a competitive edge. A lower-priced
currency makes a country s goods cheaper
The Dow Jones industrials plunged 328
points, nearly 2 per cent, in early-afternoon
trading Friday on top of a 358-point drop
Thursday. It s down more than 6.5 per cent
in the past month. Tokyo s Nikkei index shed
3 per cent Friday.
For all the markets jitters, many economists
say they remain confident that the US econ-
omy is resilient enough to withstand a slow-
down in the developing world. And Europe s
economy appears to be emerging from its
Even so, the trouble in emerging markets
is a surprising and unsettling reversal.
"It s remarkable just how things turned
around so quickly," says Neil Shearing, an
economist at Capital Economics and a former
British Treasury official.
Consider Peru. Three years ago, its capital,
Lima, hosted an International Monetary Fund s
meeting of global finance officials in what
was seen as a celebration of Latin America s
arrival in the economic big leagues.
But with the event six weeks away, Latin
America s outlook has descended from boom
to gloom. Peru s economy has steadily slowed,
and its currency, the nuevo sol, has plunged
2.5 per cent against the US dollar in the past
And Peru boasts one of the region s health-
iest economies. Brazil s economy is expected
to shrink this year and next. Its currency, the
real, is down seven per cent the past month
and more than 30 per cent the past two years.
It s hardly just Latin America. Kazakhstan s
currency plummeted this week after the gov-
ernment decided to let it trade freely. The
South African rand fell this week to a 14-
year-low against the US dollar. Turkey s lira
hit a record low against the dollar this week.
Hung Tran, an executive managing director
at the Institute of International Finance,
expects developing countries to post 3.8 per
cent economic growth this year, down from
4.3 per cent in 2014. The institute is on the
verge of cutting that forecast further.
Analysts point to a primary culprit:
"It s all coming from China," says
Masamichi Adachi, an economist with JP
Morgan Chase in Tokyo. "Brazil, South Africa,
many countries are commodity exporters,
and the final destination is all going to China."
The Chinese economy is slowing more
sharply than most people had expected from
the double-digit growth rates of the mid-
2000s. The world s second-biggest economy
is expected to grow 7 per cent this year, which
would be its slowest pace since 1990.
Beijing is trying to manage a transition
from rapid growth based on exports and
often-wasteful spending on factories, real
estate and infrastructure to slower, steadier
expansion based on consumer spending.
That transition means China would need
fewer raw materials: Chilean copper, Nigerian
oil, Brazilian iron ore. That helps explain why
China s pullback has loosed carnage in global
commodity prices: The Standard & Poor s
GSCI commodity index, which tracks 24
commodities prices, is down nearly 20 per
cent this year.
Emerging markets were already feeling the
squeeze last week, when China devalued its
currency, the yuan. That step ignited a semi-
"The devaluation is a red flag about China s
current economic situation," says Kurt Bray-
brook, who runs a Shanghai company that
does quality control work. A falling yuan
raises the risk that other countries will devalue
their currencies to catch up.
Most countries can t blame China and the
vagaries of the global commodities market
for all their problems.
South Africa is battling labour strife. Brazil
is contending with a corruption scandal at
state-owned oil giant Petrobas. Turkey is
struggling to form a government while its
military battles the Islamic State extremist
group and Kurdish separatists.
Adding to the pressure: America s Federal
Reserve is expected, perhaps at its September
meeting, to raise the short-term rate it controls
from near zero. Investors could respond by
moving even more money out of emerging
markets to seek higher US rates. That would
lift the dollar higher and emerging market
currencies even lower.
A Fed rate hike could also squeeze emerging
market companies that have borrowed in US
dollars. Those companies would struggle to
accumulate enough local currency to pay their
Hung Tran at the Institute for International
Finance says dollar borrowing by emerging
market companies surged from US$700 billion
in 2010 to US$2 trillion through March.
The rising dollar and the hoard of dollar
loans recall the 1997-1998 Asian financial
crisis. Back then, a currency sell-off triggered
an emerging market debt crisis that became
a disaster for countries such as Indonesia and
But the picture is less alarming now, analysts
say. For one thing, developing countries have
stockpiled foreign reserves that they can use
to buy their own currencies and stop a cri-
sis.What s more, emerging market companies
that borrowed in dollars in recent years tended
to take out longer-term loans, notes Joaquin
Cottani, Standard & Poor s chief economist
for Latin America. During the 97- 98 crisis,
companies had taken out short-term loans
and couldn t refinance when the loans came
due during a panic
"Countries have learned from their expe-
riences," says Monica de Bolle, visiting fellow
at the Peterson Institute for International
Sinking currencies and
Oil giveth and oil taketh away.
Discovery of the fuel transformed the barren deserts
of the Middle East to verdant oases. It also helped
countries like Norway and Russia become rich. Closer
to home, North Dakota experienced a boom, thanks
to the discovery of shale reserves.
But the recent surge of low oil prices threatens to
do more bad than good to these economies. Low oil
prices are hurting corporate organisations, states and
British oil giant BP announced US$6.3 billion in
losses earlier this year. Exxon Mobil and Chevron
announced similarly disappointing results recently.
And the IMF predicts that oil export losses from the
Middle East in 2015 will reach US$300 billion or 21
per cent of the total GDP for countries that comprise
the Gulf Cooperation Council.
A second transformation for Arab
Oil has sustained the revenues of most countries
in the Middle East, so the maximum impact of oil
prices is felt in their economies. Social discontent has
added a wrinkle to the situation because the region s
monarchies have increased social spending (earned
through hefty oil margins) to avoid a repeat of the
Arab Spring. The region s economies have already ini-
tiated a transition away from oil.
Consider, for example, Bahrain.
Its economy recorded an increase of 5.1 per cent in
the third quarter of 2014, despite the slump in oil
prices. In recent years, the share of mining and quarrying
(another term for oil production and exploration) in
the country s GDP has decreased by approximately 22
per cent from 2010 levels.
However, overall GDP numbers grew during this
period. The growth occurred because other sectors
picked up the slack. Bahrain has reinvented itself as
a center for finance and investment and the sector
now accounts for 16.7 per cent of total GDP. There
are 404 financial institutions that employ 14,000
people in the tiny state. The country is also emerging
as a transportation and communications hub within
the Middle East and became the first Gulf state to
sign a free trade agreement with the United States in
The UAE, which had begun diversifying away from
oil some time ago, has further doubled down on its
diversification strategy. Dubai, its biggest emirate,
avoided the emirate s budget deficit through its low
reliance on oil. It s already home to a thriving free
trade zone and banking and media sector. Abu Dhabi,
its richest emirate, has recently unveiled similar ini-
tiatives in its economic vision for 2030, which aspires
to a 64 per cent GDP contribution to its non-oil sector.
The case of Russia and Norway
Unlike the Arab economies, which took proactive
steps to minimise the impact of low oil prices long
before the actual event, Norway and Russia were
unprepared for low oil prices. Norway, where Statoil,
a government agency, is the largest oil company, cut
its GDP forecast from 2.1 per cent to 1.3 per cent due
to low oil prices, and the central bank cut its interest
rates to 1.25 per cent to stimulate the economy. The
government s sovereign wealth fund (the richest in
the world) has helped ensure the country s credibility
in international markets, but Norway is taking steps
to initiate structural reforms in its economy.
The country s finance minister, said the country
has established a productivity commission, reduced
taxes, and increased spending on research, development
and infrastructure. The country is working on a plan
to cut down to cut down the number of local gov-
ernments in 2017.
The bottom line
Low oil prices have served as a reminder to countries
(and the world economy at large) that it is a finite
resource. Economic diversification is the key to survival
for oil-based economies in the future. Investopedia.com
Low oil prices are forcing
economies to diversify
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