External Expansion Limited

Tuesday, 25 February 2014

THE RISKS POSED BY EMERGING COUNTRIES

In these last days begin to appear data on major emerging economies, and there are visible imbalances in some of them. The ghosts of the recent crisis that has suffered internationally do not totally disappear and come back on new alarms. Meanwhile, developed countries play the role of disinterest or are busy in their own affairs, when they should maintain a primary care to meet the unknown yet how events unfold in the new international scenario approaches.
Historically, when a crisis begins in any country, not usually taken into account by the other nations in an increasingly globalized and connected world, so it usually falls to the latter by surprise and with relative crudeness. The Great Recession, named to the crisis triggered in the U.S. in 2008 is still the process of contagion and its effects persist in some countries. While it has also been called the "crisis of the developed countries," and that its consequences are seen in the world's richest, maybe now this mutating as before, from the U.S. to the EU, and is beginning to affect the large emerging countries, mainly China in Asia and Brazil in Latin America .
In the past three years, emerging markets have experienced currency appreciation due to massive capital inflows, but since the U.S. announcement to phase out stimulus is causing strong shaking in the opposite direction. There are doubts about the Chinese banking system and the Brazilian economy is overheated, so there are lower growth expectations on both countries. They have already been problems in weak economies like Argentina and Turkey, as well as Thailand political instability has caused the brake to foreign investment projects, in public infrastructure and domestic consumption. The first two countries and India, have high interest rates to defend their currencies and probably others follow them. In turn, this change in American politics affect the EU because the euro has remained high throughout the crisis hampering recovery via exports, for the latent threat of deflation in the absence of monetary policy of the ECB that counter it, and by overfitting in some countries.
Data from China that turn on alarms, the country will show steady growth with risk financing and production overcapacity. This means that 2014 will be a year with tensions for the Chinese economy, which is facing divergent trends in the macro and micro economy. It could attend a negative impact on their real economy as a result of the reforms that his government would apply, and the credit risk associated with increased financing costs. China's GDP is expected to remain stable in 2014, and that fall moderately to 7.2% yoy mainly due to higher inflation. While in Brazil starts detected a rise in inflation mainly due to higher prices of agricultural products due to lack of rains in the fields. The first definitive estimates of the Brazilian GDP growth is at 2.3% for 2013 related to increased 7.3% in agriculture, 1.3% in the industrial sector, 2.1% in the service sector, 2.3% of household consumption, 1,8% of government consumption, all obscured by the deterioration of the external sector with 8.7% of imports to only 2% of exports.
The Chinese government it is posing a representative lower growth target in the acceleration of reforms, while geting a slight improvement in exports and investments associated with the global recovery. In turn, the Government should continue stimulating the construction encouraging private sector investment in infrastructure, mainly in the construction of networks of populations in the regions of central- west and north-west, have already announced that fiscal policy will remain stable, with the private sector who will finance these projects. Internally it has liberalized the interest rate during 2013, most bank loans obeying the demands of the market, so you should monitor the increase in funding costs and observed a slow increase in the weighted average interest rates during that year, and since there is little interbank market could result in an increase in interest rates more pronounced. On the other hand, many corporate bonds and local governments should be addressed during 2014, leading to a shortage in liquidity. This would particularly affect small and medium enterprises, which traditionally have not been to facilitate access to bank credit. The government also seeks to address overcapacity, affecting smaller and inefficient in dealing with cost increases and political uncertainties companies.
Analyzing each Chinese industry separately, the utilization rate of the steel industry remained low in 2013 and the equity ratio of large and medium enterprises in this sector remains at a level of 231%, showing that the mills operate strongly leveraged and if this ratio is increased further, would create a greater risk of insolvency and default, given the current levels of benefits and difficulties of generating cash flow. The coal industry is undergoing restructuring due to new environmental standards and reducing its capacity, leading to a significant decrease in demand. This is related to the flat demand for the steel and cement, which currently remain stable coal prices but increase the excess supply, not only locally but also internationally. The automotive sector also affected by measures to control the number of cars in major Chinese cities, bet on the production of more environmentally friendly vehicles impacting negatively on Japanese automakers. The electronics and computer industry experienced a reduction in exports of medium sized appliances during 2013 while still in good health and could rebound to the U.S. recovery and Europe in 2014. For the sector of retail there are several factors that create uncertainty prospects, among which we mention the government's efforts to eradicate corruption, yuan appreciation was pushing consumption abroad, declining revenues the VAT, investment plans and customs fees increase.
In the Brazilian case, the products of the agricultural sector mainly affected prices higher are coffee (12.5%), meat (19%), corn (6.5%) and eggs (11%) as the heat increases the mortality of the chickens. These increases could lead the other foods such as sugar, vegetables and fruits by inflation index although droughts because also affect the production of these foods. Also stresses that soy is gaining ground these crops will for a better price in the international market and can become world leaders in this crop beating USA. For the domestic market, it already beginning to experience a reduction of 0.2% in retail sales in December, easing the progress of the sector to 4.3% yoy, meaning the lowest result in 10 years and below all past forecasts for 2013. The slowdown in the growth rate of the wage bill did little to advance the segments of hypermarkets, supermarkets, food products, beverages and snuff. The only sectors that helped keep the retail market have been the pharmaceutical, medical, perfumery, automotive, spare parts and construction. This depletion demonstrate the country's growth based on domestic consumption. The surplus in the trade balance in the last 13 years without interruption, the deficit is on track for 2014 according to estimates bleak due to the concentration of 65.3% of exports in commoditys (soybean, steel, pulp, juice orange, ethanol, lubricants, fuel, coffee, sugar, etc.) whose prices are formulated according to rumors in the international market, and it is predicted that they will continue to fall due to the slowdown in consumption in China and the recovery of the U.S. economy.
European leaders, who have been some signs of stability and recovery in the countries of the Union, are concerned about what is beginning to happen in emerging countries and underestimate the risks of contagion time. Many European leaders not stop repeating that the brunt of the crisis has passed and that the bailouts worked in Europe. At the last meeting of ministers, Spain was praised celebrating success bailout and encouraged to continue reforms, regardless of many of its companies are present in market troubles, recovery is pale and unemployment is at 26%. Sure default form of political discourse, the principle of all they have to show real signs of strength, but the reality is different and certainly the new crisis that would be expected in emerging countries, end up affecting the rest of the world economies. Many European countries are strongly related to economies that are beginning to show signs of weakness, through the interests that have their business there and because its exports have increased destined for these countries are beginning to slow.
In Europe it is believed that its current position is different from the countries that are involved in new difficulties and to keep progress with reforms and fiscal policies, since these turbulence would be related with the currency markets and U.S. policies. It seems that the EU has forgotten that its banking system must re-pass stress tests and although no entity require much capital as to threaten a sovereign, concentrating those needs in an Italian bank, Portuguese, Spanish and some other German regional bank, without assuming a financial risk, but perhaps politically for these countries. Depending on the strength of that evidence is likely to drop some bank on Europe and the consequences could be catastrophic. The ECB will lower the benchmark interest rate and deposit rate in negative, sending a message to the euro to devalue and this would help Union exports.
In the U.S. last summer lived a delicate situation regarding the transfer to monetary normality, when Ben Bernanke was first referred to the timing of withdrawal of stimulus, and this year did not leave the responsibility to press for the current movements at currencies Turkish and Argentina. Meanwhile, the International Monetary Fund led by Christine Lagarde, follow close each activity by the risks posed to the global economy, but so far no significant effects observed by adjustments in global investment portfolios in emerging economies but calls on the Fed to communicate its strategy well and remove the stimuli without haste, having it announced a cut in $10 million of its agenda at monthly bond buying. The new management of the Fed, Janet Yellen, must achieve a difficult balance, as the U.S. recovery progresses ahead of the rest and that justifies moderate liquidity in the economy through what has been a billionaire buying bonds.
Already, investors would be reshuffling their portfolios that are emerging as attractive as during the 2008 financial collapse and that the fall in commodity prices hurts most, this will likely lead to higher interest rates in the bonds, particularly if the Fed has no intention of raising interest rates. Investors know that when the Fed is at a turning point in its policy, from one moment to another, there is an emerging market crisis in a specific site.
USA is a heavy burden in emerging markets as the Fed does things right again capital through investors who rely on the history of American growth. It should be clear that investors put their money in emerging markets for high performance and this global liquidity has a significant short-term impact in emerging markets. If China is the largest emerging country, which in turn influences them, weakening we probably have dragged the rest.
We must not forget that the Asian crisis of the 90's ended up affecting the U.S. and would eventually be seen whether new breaks, because there is sufficient evidence that something is beginning to change. In short, it should not be overlooked that nobody is safe from a new wave of fear in the markets, and especially in an interconnected world.
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Until the next article...

Leonardo Dufau
LinkedIn

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