Emerging Markets

External exposure of the emerging markets

For some time now, the world of finance has been watching the emerging markets with bated breath, partly owing to the new US trading strategies. In this context, the crisis in Turkey has shown quite baldly how fatal a situation can arise if a critical (economic) policy combines with weaknesses in the external balance of trade. Problematic structures in relation to external balance sheets can send a tense situation into turmoil as key cushions to absorb the shock of the crisis are then lacking. A country with appreciably poor key financial ratios has little scope to err as regards macroeconomic management or political escalation. One can debate how such weaknesses can best be identified, and the list of possible indicators is no doubt long. However, a glance at the classic key external financial ratios – the current account balance, the scale and structure of external liabilities, and the strength of…

Little risk of a global emerging markets crisis

After a brief recovery, the pressure on the Turkish currency and government bonds has increased again. A series of rating downgrades served to put additional strain on a situation that was already far from good. As a result, the question of whether the Turkey crisis could become contagious and spread to other emerging markets is back firmly in the limelight. In terms of the real economy and the financial world, the escalation of the crisis should not result in appreciable risks of contagion. Turkey is not a very substantive trading partner for the relevant emerging market players. Russia, Bulgaria or Romania are all of a certain significance as regards foreign trade and a sharp drop in Turkey’s GDP would probably strain growth there, but would not result in a manifest crisis. Moreover, it would seem, or so BIS data shows, that the credit relations are more with banks in the…

Political tensions allow the lira to slump further

The dollar/lira currency pair climbed over the TRY 5.00 mark for the first time yesterday evening – and remained on this trajectory this morning. The lira currently continues to mark new record lows against the common European currency, too. Since the start of the year, the Turkish currency has depreciated by more than 22% against the euro and by as much as 25% against the greenback. The Argentinian peso was the only other noteworthy currency to underperform even more. The lack of resolve by the Turkish central bank and the related, legitimate doubts about its political independence remain the key reason behind the weakness of the Turkish currency. However, the latest slump was due to the escalation of the diplomatic differences that prevail between Turkey and the US. The US administration is demanding the immediate release of the US pastor Andrew Brunson and yesterday imposed sanctions against two Turkish ministers…

Turkey: Current lack of positive perceptions

Among the larger emerging markets, hardly any is as greatly reliant on a benevolent risk perception by markets as Turkey. Faced with a chronic current account deficit and high share of short-term foreign liabilities, the country has to rely strongly on external financing. A distinct lack of currency reserves can also be noted. The alternative to a favourable risk assessment is – so to speak – an increase in refinancing costs. In recent weeks, a number of factors have put a damper on the risk perception of Turkey. This trend was precipitated by strained diplomatic relations over the independence efforts recently voiced by the (Iraqi) Kurds or the dispute between Washington and Ankara after both sides had stopped granting visas. Remarks of the rating agency S&P didn’t help much either. The agency issued a commentary identifying the new „Fragile Five“, i.e. countries likely to be especially vulnerable in conditions of…

Globalisation cannot be just – but creates more prosperity

Globalisation – no other topic has been discussed as fiercely and emotionally. The debate tends to hinge on two questions: Can globalisation be just? And: Does globalisation improve our prosperity? The honest answer to the first question is: No. And the answer to the second question is: Yes. So why is that the case? The gap in prosperity between the emerging markets and the industrialised countries has significantly closed in a relatively short period of time. This trend has been driven by well above-average growth in the emerging markets. Growth was, in turn, triggered by strong wage differences and a corresponding relocation of labour-intensive processes from the industrial countries into the emerging markets, with the emerging markets’ business model being strongly export-driven and less dependent on the domestic economy. While the emerging markets got such a boost from the shift of certain work processes from the industrialised nations, this had…

China is groaning under the weight of its debt burden – but still shuns reform

China’s debt level has increased dramatically since the financial crisis in 2008/2009 and is now one of the highest worldwide. The inflated housing market, the shadow banking sector which has seen strong growth and numerous state-owned “zombie” companies present considerable risks and render the country vulnerable. Beijing is sustaining a vicious circle of efficiency loss, slowdown in growth and ever-increasing debt. There is a growing risk that these imbalances will culminate in a crisis at some point. However, due to the central government’s immense financial power, a systemic financial crisis should be preventable. Continued low economic growth, on the other hand, seems unavoidable. The International Monetary Fund (IMF) and the Bank for International Settlements (BIS) are above all concerned about the strong momentum behind debt accumulation in China. They draw alarming parallels between its development and that of other countries which have recently experienced a financial crisis, such as Spain…