Home' Trinidad and Tobago Guardian : December 6th 2015 Contents SBG14 FINANCE
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt DECEMBER 6 • 2015
In finance things that grow quickly
have an irksome tendency to blow up.
American subprime mortgages prior
to 2008, southern-European sovereign
debt in the run-up to 2010 and Japan-
ese banks in the 1980s are but recent
It therefore is worrying that bank lending
in emerging markets has ballooned in recent
years, from about 77 per cent of GDP in 2007
to 128 per cent at the beginning of this year,
according to JP Morgan Chase. That 51-per-
centage-point jump dwarfs the mere 20-point
rise in credit in the rich world between 2002
Now that the economic prospects of emerg-
ing markets have dimmed, banks from Shang-
hai to São Paulo are in the spotlight. Once
trouble in such places barely would have reg-
istered in global financial circles. In 1990 only
three of the world s 100 biggest lenders by
assets were in developing countries.
Now, though, the world s four biggest banks
are in China, and the fifth-biggest, HSBC,
does much of its business from Hong Kong.
More than a third of the world s biggest banks
have their headquarters in emerging markets,
and plenty of rich-country banks---such as
Standard Chartered, based in London, or BBVA,
a Spanish bank---operate there.
Banks that have expanded at such a rapid
clip in the past typically have issued more
than a few dud loans along the way and
stretched their balance sheets beyond comfort.
Happily, regulators in most emerging markets
have learned the lessons of past crises, so sys-
temic turmoil is unlikely. It is the banks ability
to finance a return to rapid economic growth
that is in doubt.
The Institute of International Finance, a
trade group, predicts that 2015 will be the first
year of net capital outflows from emerging
markets since 1988. The good news is that
emerging-market banks have little trouble
funding themselves. Many emerging
economies, especially in Asia, have high savings
rates. That leaves most lenders with more
deposits than loans, even though loans have
been growing faster of late. Rich-country
banks, in contrast, have to make up for a short-
age of deposits by tapping fickle wholesale
markets, leaving them more vulnerable to sud-
den changes in sentiment.
If liquidity is not an issue, solvency may
be. Banks in emerging markets tend to be
profitable: The listed ones generated net income
of US$563 billion last year, up from US$94
billion a decade ago. Unlike their Western
peers, few have investment-banking arms,
which have attracted profit-sapping regulation
and fines from watchdogs.
However, profits also can be wiped out by
dud loans, which must eventually be written
off. Though lending to consumers is growing,
emerging-market banks lend mainly to com-
panies. Unfortunately, troubled industries such
as property, infrastructure development and
commodities feature prominently in loan books.
In India nonperforming or restructured loans
now account for more than 14 per cent of the
assets of public banks, which control three-
quarters of the market. In China they are low
but growing fast.
Currency mismatches are another concern.
The prospect of higher interest rates in Amer-
ica, plus declining commodity prices tied to
a slowdown in the Chinese economy, has
pushed most emerging-market currencies
down relative to the dollar. Collectively they
have fallen by around 30 per cent against the
greenback since early 2013.
That can affect banks directly, if they have
borrowed dollars to finance loans in local cur-
rencies---a trick that is profitable when cur-
rencies are steady. Regulators in Asia, whose
banks were caught in this trap in 1997, now
monitor banks exposure to currency move-
ments. Their counterparts in Nigeria and
Turkey, in particular, have not been so exact-
Even if banks have avoided currency mis-
matches, their customers are not always so
prudent. Low interest rates in America have
sent some developing countries on a dollar-
denominated borrowing spree: External cor-
porate debt in emerging markets amounts to
US$1.3 trillion, according to the Bank for Inter-
Dollar-denominated loans make up 25 per
cent of corporate lending in Russia, perhaps
30 per cent in Turkey and probably even more
in Nigeria---the data are fuzzy. Companies will
struggle to repay those dollars with devalued
rubles or naira.
Commodity producers normally would be
immune to this problem, since their income
is in dollars, but the plunge in commodity
prices has ensnared them too.
Inflation, which has been stoked by deval-
uations in several emerging markets, also will
Rising prices sap consumers purchasing
power and prompt hikes in interest rates, which
are in double digits in Brazil and Russia. That
can make it hard for borrowers to service their
debts. The share of household income going
to debt service seems to be rising in Brazil,
China and Turkey, among other places.
There is little sign yet that bad debts will
reach catastrophic levels. Unless banks face
up to them, however, their long-term conse-
quences nonetheless could be grim. Lenders
often try to sweep their problems under the
carpet. One common strategy is to "extend
and pretend," giving companies with little
prospect of paying back a loan years of for-
bearance. This ties up scarce capital in zombie
firms, which can lead to years or even
decades---in the case of Japan---of subpar
There are signs that emerging-market banks
are hiding losses in this way. Chinese ones,
for example, put nonperforming loans at only
1.6 per cent of assets, less than half the global
average. Investors plainly don t believe them:
Their share prices imply dud loans of more
than eight per cent, according to Barclays. By
the same token, international banks that do
business across emerging markets often disclose
far higher levels of distressed loans than do
Emerging-market banks no longer are the
undersized runts of global finance. The way
they are run matters more than ever. Their
balance sheets are healthy enough to weather
the aftermath of the credit bender they ini-
tiated, but whether they bounce back or limp
along depends on how quickly they admit
@2015 The Economist Newspaper Ltd.
Distributed by the New York Times Syn-
It is easy to make the case that modern business is too
frenetic. This week 10 billion shares of America s 500
largest listed firms will have changed hands in frenzied
trading. Their bosses will have been swamped by
750,000 incoming emails and a torrent of instant data
about customers. In five days these firms will have
bought US$11 billion of their own shares, not far off what they
invested in their businesses. With one eye on their smartphones
and the other on their share prices, bosses seem to be the bug-
eyed captains of a hyperactive capitalism.
Many bemoan the accelerating pace of business life. Long-
term thinking is a luxury, these critics of capitalism say. When
managers are not striving to satisfy investors whose allegiance
to companies is measured in weeks, they are pumping up share
prices in order to maximise their own pay.
Executives feel harried, too. Competition is becoming ever
more ferocious: if Google or Apple is not plotting your downfall,
a startup surely is.
Such perceptions do not bear close scrutiny, however. Short-
termism is not the menace it seems, and the problem with
competition is that it is not fierce enough.
Start with short-termism. The fear that capitalism is too
myopic has a long history. John Maynard Keynes observed that
most investors wanted "to beat the gun." For more than 50
years Warren Buffett has made money on the premise that
other investors behave like headless chickens.
This drum seldom has been banged more loudly than today,
however. If she wins the White House, former Secretary of
State Hillary Clinton wants to end the "tyranny" of short-ter-
mism. The Bank of England and McKinsey & Co, a consultancy
trusted in boardrooms, worry that investors cannot see past
their noses. The French have legislated to give more voting
rights to longer-lasting shareholders. Economists fret that com-
panies reluctance to invest their profits hurts growth.
Since the 1990s the clock of business has whirred faster in
some ways. Silicon Valley upstarts have unsettled some mature
industries. Computers buy and dump shares in the stock market
within milliseconds. Even so, and even in America Inc, the
home of hyperactive capitalism, "short-termist" is the wrong
Since the crisis of 2008-2009, companies horizons in fact
have lengthened. New corporate bonds have an average maturity
of 17 years, double the length they had in the 1990s. In 2014
departing chief executives of S&P 500 firms had served for an
average of a decade, longer than at any point since 2002 and
longer than most presidents.
The average holding period of an S&P 500 share is a pitiful
200 days, but that is double the level in 2009. Constant trading
masks the rise of index funds whose holding period, like Buffett s,
is "forever." Larry Fink, CEO of Blackrock, the world s biggest
asset manager, asks companies to draw up five-year plans.
Nor are companies investing less. The same system that is
accused of myopia recently financed the US$500 billion shale-
energy revolution, a boom in experimental biotech companies
and the electric-car ambitions of Elon Musk, a maverick entre-
preneur. Relative to assets, sales and GDP, American companies
investment has held steady. The mix has shifted from plant
and machines to things like software and research and devel-
opment, but that is to be expected as equipment costs fall.
Economists grumble that listed companies are not investing
Stressful times for
Continued on Page 15
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