Emerg­ing mar­kets suf­fer in Greece's shadow


Greece has been hog­ging head­lines lately, but emerg­ing mar­kets have also had their share of tribu­la­tions with the Chi­nese stock mar­ket in con­vul­sions and the Brazil­ian econ­omy and cur­rency hit­ting the skids. China s stock ex­change has been in free fall since mid-June, un­der­go­ing a 30-per­cent cor­rec­tion af­ter hav­ing posted a dizzy­ing 150 per­cent rise the pre­vi­ous 12 months.

Fail­ure to stop the slide has crushed small in­vestors -- who ac­count for most of the mar­ket -and rat­tled con­fi­dence in Bei­jing s gov­ern­ment. But it has tran­spired as China s eco­nomic growth has slowed and man­u­fac­tur­ing sur­veys show con­trac­tion, rip­pling across the globe as more and more com­pa­nies de­pend on the world s num­ber two econ­omy. The pow­er­ful Fed­er­a­tion of Ger­man In­dus­tries re­cently noted that "Ger­man com­pa­nies were def­i­nitely pre­pared for a slow­down in Chi­nese growth but were nev­er­the­less sur­prised by the ex­treme jolts on the stock mar­ket."

Both Volk­swa­gen and BMW have warned the slow­down in China -- the world s top auto mar­ket and key source of growth for Western au­tomak­ers in re­cent years -- could un­der­mine sales this year. The Chi­nese slow­down has also ham­mered com­mod­ity prices, weigh­ing on the for­tunes of coun­tries which pro­duce and ex­port key raw ma­te­ri­als.

That has com­pli­cated the sit­u­a­tion for Brazil, which not so long ago had been hop­ing to ride the com­modi­ties boom to top rank eco­nomic sta­tus, but has in­stead found it­self stuck in a seven-year stretch of zero or neg­a­tive growth.

The Brazil­ian real has tum­bled to a 12-year low against the dol­lar, forc­ing the coun­try s cen­tral bank to jack in­ter­est rates up to 14.25 per­cent to sta­bilise the cur­rency and curb in­fla­tion. The gov­ern- ment, mean­time, has had to scale back its fis­cal sav­ings plans in or­der to prop up the econ­omy.

Stan­dard and Poor s last month switched the out­look on Brazil s BBB- rat­ing to neg­a­tive, which means the coun­try s in­vest­ment­grade rank­ing is at risk.

Brazil is in good com­pany in hav­ing its money pum­melled, with fel­low emerg­ing mar­kets like Mexico, South Africa, Colom­bia and Tur­key also wit­ness­ing their cur­ren­cies slide to multi-year lows.

Rus­sia s cen­tral bank has stopped its con­tro­ver­sial pur­chases of for­eign cur­ren­cies to ex­pand its re­serves due to a re­newed de­cline of the ru­ble in re­cent weeks. The slump in the value of emerg­ing mar­ket cur­ren­cies is in large part due to fall­ing prices of com­modi­ties -- af­fect­ing oil and met­als alike -- which fig­ure heav­ily in the ex­ports of many emerg­ing mar­ket na­tions. Min­ing groups An­glo Amer­i­can and Lon­min an­nounced plans to re­duce their head­counts by a com­bined 12,000 em­ploy­ees ow­ing to fall­ing met­als prices in a weak global econ­omy.

For economist Christo­pher Dem­bik at Saxo Banque, most emerg­ing mar­ket economies "have not un­der­taken the nec­es­sary struc­tural re­forms, (and) don t have the diver­si­fied in­dus­try or real con­sumer mar­ket" to ab­sorb ex­ter­nal shocks. He sees deeper prob­lems than the with­drawal of in­vest­ment funds from emerg­ing mar­kets by in­vestors seek­ing higher re­turns in dol­lar-de­nom­i­nated ven­tures ex­pected to ma­te­ri­alise with a loom­ing rise in US in­ter­est rates. While in­dus­tri­alised na­tions ben­e­fited from long pe­ri­ods of pros­per­ity to ad­just and con­sol­i­date their eco­nomic mod­els, Dem­bik does not be­lieve to­day s emerg­ing mar­kets will be so for­tu­nate.

Volatil­ity in fi­nan­cial mar­kets has com­pressed busi­ness cy­cles, mak­ing it im­pos­si­ble for emerg­ing mar­kets to adopt a sim­i­lar model. How­ever, Dem­bik con­sid­ers China to be a spe­cial case, and he is "op­ti­mistic for the medium- to longterm" for the coun­try, thanks to its large ac­cu­mu­lated pri­vate sav­ings and its in­ter­ven­tion­ist gov­ern­ment.

In­ter­na­tional Mon­e­tary Fund chief Chris­tine La­garde also voiced con­fi­dence re­cently that China could weather the cur­rent tur­moil bat­ter­ing its stock ex­changes. "We be­lieve that the Chi­nese econ­omy is re­silient and strong enough to with­stand that kind of sig­nif­i­cant vari­a­tion in the mar­kets," she said in an online press con­fer­ence last month.

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