Emerging markets are going to pay the price again

JUDGING by the performance of emerging markets, you’d hardly know the world was suffering from a deadly pandemic. After a horrible March, according to the Institute for International Finance, non-resident portfolio flows into emerging markets increased tenfold to $32.9 billion in June. MSCI’S em currency index hit a one-month high last thursday. even currencies as weak as the south African rand are seeing a bit of a rally.

Of course, that doesn’t mean things are going well in developing nations themselves. If anything, many of them face longer and more troublesome recoveries than was anticipated at the depth of the market panic in March. Earnings aren’t expected to recover anytime soon. Here in India, the ratio of price to one-year forward earnings for stocks in the Nifty50 index is the highest it has been for a decade.

Behind this decoupling of markets and Main Street lies a familiar culprit: rich-world central banks. As they did after the 2008 financial crisis, the Federal Reserve, European Central Bank, Bank of England and Bank of Japan have pumped massive amounts of liquidity into their domestic markets. Those markets have rallied as intended and domestic investors, terrified at the prospect of missing out, have piled in. That in turn has forced institutional investors to search for yield in emerging markets.

If the entire process is disconnected from reality, that’s by design. The very purpose of unconventional monetary policy is to impose irrationality on markets.

Market insiders take this disconnect for granted; as Ajay Kumar of Bank of America Securities told Bloomberg TV, “sentiment and liquidity account for the bulk of your returns” at times like these. But the rest of the world doesn’t. And they’re right not to do so because, the last time this happened, emerging markets wound up badly damaged by the monetary policy of developed nations.

Yes, the Fed and others have done well to reverse the near-catastrophic outflows of capital from emerging markets that were visible in the early weeks of the pandemic. Though it wasn’t their intent, their actions helped EMS raise, by early June, more than $83 billion on global bond markets.

But, emerging markets should have learned by now that this is a poisoned chalice. Over the mediumand long-term, the West’s money printing will burden the developing world with volatility, instability, and subdued growth and investment.

Consider India’s experience. In the years after 2008, the country enjoyed a sharp liquidity- and stimulus-driven rebound. But then commodity prices shot up. That increased inflation, drained foreignexchange reserves and caused inflationary expectations to drift up unanchored.

Asset-price inflation caused endless pain domestically; real estate prices, for example, shot up so high

Emerging markets should have learned by now that this is a poisoned chalice. Over the mediumand long-term, the West’s money printing will burden the developing world with volatility, instability, and subdued growth and investment.

that the market is still not working properly. And, worst of all, cheap liquidity led to indiscriminate lending and a bad-loan crisis that has crippled Indian growth and investment.

Nor were we masters of our own fate: In the infamous taper tantrum, a word from former Fed chairman Ben Bernanke drove the Indian rupee down to record lows. The Fed’s actions had political consequences as well, as voters took out their anger on the hapless incumbent government.

Naturally, this process won’t unfold the same way twice. The driver won’t be oil prices this time, and perhaps not real estate. All we can say for certain is that something of the sort will indeed happen again. All that liquidity will have to settle somewhere and it will probably wind up flowing to whichever real asset is seen as being scarcest and most future-proofed on the margin. Rare earths, perhaps, in our new digital world?

The fact that share prices and currency indices are so detached from reality is the surest sign that the process is underway. These are the first conduits through which the irrationality of central bank actions elsewhere begins to affect emerging economies. The MSCI index of EM equities has had a great quarter but remember, the last time it had such a good quarter was 2009.

Inevitably, the combination of unrestrained liquidity and a crisis mentality will weaken already fragile governance structures in both financial markets and the real economy. Central banks in the West have been warned of this often. Raghuram Rajan, who as governor of the Reserve Bank of India had to deal with the consequences for India of unconventional monetary policy elsewhere, has constantly argued for setting “rules of the game” for central banks so that they don’t destabilize emerging markets.

Rajan makes a simple, if underappreciated point: “The bottom line is that simply because a policy is called monetary, unconventional or otherwise, it may not be beneficial on net for the world.” The failure to learn the lessons of the last stimulus may now doom emerging markets to another decade of subpar growth and political instability.

Instead of a conscience vote, what took place apparently was a command vote based on the lopsided results and the party affiliations of those who voted against the renewal of the franchise. It was a wishful thinking for the naive supporters of the network to hope that ABS-CBN would be given an impartial hearing and fair judgment in Congress. It is no secret that the network had earned the ire of President Duterte when ABS-CBN did not air President Duterte’s political advertisements and instead featured anti-duterte ads during the closing period of the last presidential campaign. Furthermore, the President on a number of occasions had denounced ABS-CBN for its political bias and publicly declared that it would be a better option for the network to just sell the network since it would never get its franchise renewal. During the exhaustive hearing of the ABS- CBN application, Speaker Alan Peter Cayetano spoke before the crucial voting and pontificated: “As the committee hearing the franchise of ABS-CBN approaches the day where its members have to decide on the fate of the network, the House leadership would like to reiterate that each vote must and will be based on the appreciation of the facts as they have been

presented by both sides during these exhaustive proceedings, as well as the application of the relevant laws and public policy.” He said earlier that “from the start, we’ve been urging a conscience vote. That’s why we made the hearings public, so that the people can decide for themselves. So, this is one of the rare cases where representatives will decide for the people.” Elegant words spoken by a bible-quoting leader of the House ostensibly from a high moral ground which sounded music to the ears of wishful-thinking Filipinos. Yet, despite the findings and declarations of most, if not all, regulators and government agencies who were invited at the hearing that the network had not committed violations, the voting members disregarded such fact and overwhelmingly rejected ABSCBN’S bid for a new franchise. Can we then state matter-of-factly that the House panel had voted based on the facts, the pertinent laws and policy and, most of all, according to their conscience and honest conviction per assurance by the Speaker. Did the Committee members have sufficient opportunity to review the recommendations of the TWG before voting was called? Based on the people’s reaction, it would seem that the answer is a resounding “No.” How can the pawns disobey the wishes of their king? If the adverse decision was decided “for the people,” had the panel members consulted with their constituents before casting their votes? The collective wisdom of their constituents should have been a more reliable guide in arriving at a just and fair decision. The elected representatives should not completely arrogate upon themselves the decision-making particularly on matters involving significant public interest.

Another disappointing act during the hearing which Congressman Edsel Lagman called a “charade” was the complete somersault by the NTC after it committed to Congress that it would issue a provisional authority for the network to operate after it was agreed that the Senate and the HOR would issue resolutions authorizing the NTC to grant the network a provisional authority to air its programs. The Solicitor General filed a quo warranto petition with the SC charging ABS-CBN of violating its franchise on several counts. The Solgen also warned that it shall take legal action against the NTC if it proceeds to issue a temporary authority since the power to issue a franchise is an exclusive power of Congress. Without advising both the HOR and the Senate, NTC issued a cease-and-desist order mandating ABS to stop broadcasting until Congress has renewed its franchise. NTC had completely ignored due process by not giving the network a showcause order why its operation should not be shut down before issuing the CDO. Later, when ABS-CBN aired its show on cable and satellite TV channels, which the network claimed were not covered by the 25-year franchise, NTC sought Solgen’s opinion whether its earlier CDO already covered the TV Plus set-top boxes. Meanwhile, Congress strongly warned that a graft case against the NTC was in order for allowing ABS-CBN to operate with an expired franchise. An alias CDO was issued by the NTC banning the network from showing its program through its digital channels. NTC’S flip-flopping actions only showed that it has “the moral backbone of a chocolate éclair,” to borrow a quote from former US President Teddy Roosevelt. It gives us a feeling of insecurity when a government official is not firm on his resolve and decides and acts out of fear of losing his position.

But the greatest tragedy is when Filipinos no longer give a damn on what our congressmen do or say. Do we still care when we see our so-called honorable legislators behave deplorably or depravedly? Are we concerned if the quality of our political institutions like Congress has declined? Where are the leaders who can defy their party to serve the national interest? Show us the lawmakers made of sterner stuff; men of courage and conviction who will not subordinate the people’s will in exchange for political pelp, prestige and power. We need elective officials with political courage and integrity who are not afraid to lose their seat on a matter of principle. An ideal politician is one who thinks of the next generation and not of the next election. He should be above any political party and selfish partisan interest.