Emerging markets may be trump card in euro crisis

THERE is one thing in all our doom and gloom over the global economy not many have factored in, as possibly the last card that could be played to rescue us from entering a similar scenario to the one faced in the 2008 credit crisis.

The gloom is understandable, as we face a glut of negative news about Greece’s immediate future, and the longer-term outlook for the euro-zone project.

Amid the uncertainty, the question is just what emergingmarket countries are going to have to do in response to growing pressure on their domestic economies, so as to navigate their way around a possible return to recession.

It’s pretty immaterial what happens to Greece and in turn its common monetary union members in the short to medium term. Whether there is an exit from the euro or not, we can be pretty sure that Europe won’t be inspiring growth to a significant degree in the global economy anytime soon.

It’s going to be left to the domestic US economy and emerging markets in Asia, Latin America and Africa to steady the global economy and to reinvigorate growth.

US jobs data come out later this week, which will either serve to assure investors that there remains hope for a rebound or re-ignite capital flight from risky assets. (The US is not as export-driven as Europe’s big economies such as Germany, with a stronger focus on the domestic economy.)

More jobs mean Americans will buy more.

That is America. Emerging markets have started to feel the negative effects of the European slowdown, evidenced by the decline in Chinese exports.

SA’s gross domestic product data for the first quarter are come out today, with not too many bright spots expected.

Brazil, which has been a source of much growth not only in Latin America but the global economy since the 2009 recession, is also starting to struggle.

To explain why these nations have more room than the US and European countries to loosen monetary policy to re-ignite their respective economies, we would need to look at policy responses after the 2009 recession. The US and Europe, which were not as affected by inflationary concerns as emerging markets, cut their lending rates to near zero.

As it sits, they have no other option in terms of further cuts.

But emerging market countries such as Brazil and ourselves have much more room. Even though South African rates are at a 30-year low, Reserve Bank governor Gill Marcus just last week said the Bank stood ready to act in either direction, depending on how the global economy shapes up over the coming months.

While SA is not as big an economy as some of our other illustrious emerging-market peers, it would be stimulus that sub-Saharan Africa would welcome.

Last year, in attempts to subdue a strengthening currency because of carry trade effects, Brazil moved to cut interest rates, ignoring inflationary concerns.

Such a risky move may not necessarily be repeated, as oil prices have been falling over the past couple of weeks. There are also reports of a great US crop harvest that would help ease global food inflation. Hard commodities are not in vogue at the moment. Emerging markets — if the weakness is sustained — sit in a plum position to further stimulate their economies.

“I believe there is room for many emerging markets to loosen monetary policy,” Antoine van Agtmael, the man who coined the term “emerging markets”, told Business Day from Washington yesterday.

Of course, for this room to be exploited, we need the US economy to play its part and for Europe to start its long road back. today. And last year, the belief we were in the midst of an economic recovery only left the building after poor US gross domestic product data hit the markets in July.

This month has been sobering, but next month promises to prove even more turbulent as European leaders, the International Monetary Fund and European Union have their say on what Greece’s politicians will need to do to get their house in order.

Let’s not even begin to mention what Greek politicians themselves are going to say to attract votes in the June 17 poll, after the anti-austerity fervour of the first.

Yesterday, opinion polls showing sentiment in favour of a Greek party that supports austerity and euro-zone membership helped to boost stock markets.

This is just the beginning of the next three weeks of your life.

E-Mail: derbyr@bdfm.co.za Twitter: @ronderby