Newspaper article The Christian Science Monitor

Emerging Markets Hit Hard by Wall Street Crisis

Newspaper article The Christian Science Monitor

Emerging Markets Hit Hard by Wall Street Crisis

Article excerpt

Slower growth in Asia. Weaker currencies in Turkey and South Africa. Austerity in parts of Eastern Europe. Rising inflation in India. More defaults on loans by companies in Russia and Ukraine.

While the main drama of the financial crisis plays itself out in New York and London, the ripple effect on the wider world is palpable. Investors in emerging markets - the second-tier economies - predict an era of faltering growth and currency weakness.

Overall, emerging stock markets are already down 33 percent this year - far worse than Wall Street's performance. Concern over the viability of Washington's $700 billion bailout plan contributed to Tuesday's tumble of the South African rand by more than 2 percent. The Indian, Turkish, and Russian stock markets all skidded more than 3 percent.

But few market analysts foresee a return to the financial tumult that overwhelmed Asian economies in 1997 and Russia, Brazil, Argentina, and Turkey in subsequent years. Emerging market economies today generally boast far more robust finances, with healthy surpluses accumulated for just such a rainy day. Some may even appear attractive to investors wary of Wall Street and London.

"The unfortunate reality is that in one way or another everyone in the world is exposed, but that doesn't mean there won't be winners and losers," says Arnab Das, head of emerging markets research at Dresdner Kleinwort, an investment bank in London.

Mark Williams, an analyst of emerging Asian economies at Capital Economics, a London consulting firm, adds: "Whenever something like this has happened, risk aversion has always won out and emerging markets tend to suffer more than most when the world gets into trouble."

Of immediate concern are those countries running large current account (trade) deficits, which continue to rely on international investment to balance the books. South Africa's deficit, for example, runs at close to 10 percent of gross domestic product. In some countries in the Balkans, and the Baltics, and in Central and Castern Europe, it's even higher; Turkey's trade deficit is also cited as cause for concern.

"The financial stress leads investors to avoid things that are high risk," warns Nigel Rendell, senior emerging markets strategist at Royal Bank of Canada. "Emerging markets can be a high risk and an area to keep out of." He says that if investment flows dry up, then these countries could be left short of cash. The only option then would be to allow currencies to slide.

The currency "is either devalued, or allowed to depreciate, or you have to slow down the domestic economy and slow imports from coming in at such a rate," Mr. Rendell says. That could mean a sharp slowdown in growth rates in Turkey and Eastern Europe.

India leaking capital

India, too, has been leaking capital, resulting in a falling currency that in turn has put upward pressure on inflation, currently more than 12 percent. …

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