For most of the past year, the fast-growing economies in the emerging world watched the financial turmoil in the West from a distance. Their own banks rarely hold mortgage assets that destroy financial companies in rich countries. Due to the high price of raw materials, commodity exporters are thriving. China's economic giant started. From Budapest to Brasilia, ample credit stimulated domestic demand. Although more and more people talk that developed countries are suffering from the worst financial collapse since the Great Depression, emerging economies seem to be far from the center of the storm.
For most of the past year, fast-growing emerging countries have been watching the financial turmoil in western countries from a distance. Their banks only hold a small amount of mortgage assets, and similar assets have destroyed financial companies in developed countries. Due to the high prices of raw materials, commodity exporting countries are becoming richer and richer. China's irresistible economic power has started, and domestic demand stimulated by credit is abundant from Budapest to Brasilia. Although the topic of financial collapse in western countries after the Great Depression is increasing day by day, emerging countries seem to be far from the center of the financial storm.
Not anymore. With the flight of foreign capital and the evaporation of confidence, the stock markets in the emerging world plummeted (losing half their value in some cases) and the currencies plummeted. The paralysis of the credit market caused a catastrophe. Foreign banks suddenly stopped lending and even withdrew from the most basic banking services, including trade credit.
However, the situation is no longer like that. With the loss of overseas capital and the disappearance of economic confidence, the stock markets in emerging countries have plummeted (in some areas, they have halved) and their currencies have depreciated rapidly. As foreign banks suddenly stopped lending and contracted basic banking services, including trade credit, the credit market in emerging countries suddenly became chaotic and triggered a disaster.
Like the governments of developed countries, the government is also trying to reduce losses. This is the easiest for those countries with large foreign exchange reserves. Russia is spending $220 billion to support its financial services industry. South Korea has guaranteed10 billion dollars for its bank debt. Less affluent countries are seeking help. Hungary has received 5 billion euros ($6.6 billion) from the European Central Bank and is negotiating a loan with the International Monetary Fund, as is Ukraine. Nearly 12 countries are discussing financial assistance with the IMF.
Like developed countries' governments, emerging countries' governments are also trying to control losses. But for countries with sufficient foreign exchange reserves, it will be less difficult: Russia spent $220 billion to revive the financial services industry; The Korean government has guaranteed 654.38+000 billion US dollars in bank debts. Countries with insufficient reserves are asking for help everywhere: Hungary has successfully asked the European Central Bank for a lifeline of 5 billion euros (about 6.6 billion US dollars), and is also negotiating loans with the International Monetary Fund. At the same time, Ukraine also sought help from the International Monetary Fund. Nearly 12 countries are seeking help from the International Monetary Fund.
Those who have long-standing problems are being driven to despair. Argentina is nationalizing its private pension fund, as if to avoid default. But even determined people are beginning to become weak. According to the data released this week, China's economic growth slowed to 9% in the third quarter of this year, which is still a very fast speed, but much slower than the double-digit growth rate in recent years.
Countries with persistent problems are taking risks: Argentina is nationalizing private pensions in an attempt to prevent default. Even powerful countries are weak: data released this week showed that China's growth rate slowed to 9% in the third quarter of this year. Although the growth rate is relatively fast, it is much slower than the double-digit growth rate in recent years.
Blow cool on credit
Not interested in credit
Different emerging economies are in different readiness, but the cumulative impact of all this will be enormous. Most obviously, the performance of these countries will determine whether the world economy is facing a mild recession or a worse situation. In the past 18 months, the contribution of emerging economies to global economic growth was about three quarters. But their economic fate will also bring political consequences.
Many emerging economies have different aspirations, but their accumulated influence is extraordinary. Most obviously, the performance of these countries will determine whether the world economy is facing a milder recession or a more terrible situation. In the past 18 months of global economic growth, emerging economies contributed 75%. But their economic fate will also bring some political consequences.
In many places-Eastern Europe is an example-financial turmoil is hitting weak governments. But even a powerful regime will suffer. Some experts believe that China needs an annual growth rate of 7% to curb social unrest. More broadly, the upcoming conflict will affect the debate on world economic integration. Unlike many previous emerging market crises, today's chaos has spread from developed countries, mainly due to the increasingly integrated capital market. If emerging economies collapse-either in a currency crisis or in a severe recession-more people will question the wisdom of global finance.
In many areas similar to eastern Europe, the current financial chaos is aimed at weak governments; But tough regimes will also suffer. Some experts believe that China needs an annual growth rate of 7% to prevent social unrest. Generally speaking, such disputes will definitely affect the discussion of global economic integration. Different from the previous emerging economic crisis, this chaos began in developed countries and was largely attributed to the integrated capital market. Once emerging economies collapse, whether it is a currency crisis or a serious economic depression, more people will doubt whether financial globalization is a wise move.
Fortunately, the situation is not generally bad. All emerging economies will slow down. Some countries are bound to face a serious recession. But many countries are facing the current danger with unprecedented strength. They have huge foreign exchange reserves, flexible exchange rates and strong budgets. Whether at home or in developed countries, good policies can still avoid a disaster.
Fortunately, the above-mentioned terrible scenes have not happened in every corner of the world: all emerging economies will slow down their development, and some will face deep depression; However, in the face of the current crisis, more countries have stronger forms than ever before, arming themselves with sufficient reserves, flexible currencies and strong budgets. Good policies in emerging countries and developed countries can avoid disasters.
One reason for hope is that the direct economic consequences of disasters in rich countries are controllable. Falling demand in the United States and Europe has hurt exports, especially in Asia and Mexico. Commodity prices have fallen: oil prices have fallen by nearly 60% from the highest point, and many crops and metals have performed worse. This is a mixed effect. Although it hurts commodity exporters from Russia to South America, it helps commodity importers in Asia and reduces inflation concerns everywhere. A poorly managed country like Venezuela is fragile (see article), but considering the scale of past prosperity, the commodity depression so far seems unlikely to cause a widespread crisis.
At least one reason is hopeful: the direct economic impact of this disaster on developed countries is still under control. The sharp drop in demand in Europe and America is undoubtedly a blow to exports, especially to Asia and Mexico. Commodity prices are lower: crude oil prices have fallen by 60% compared with the peak period, and many food and metal commodities have fallen even more. These two phenomena have had mixed effects: although the commodity (energy) exporters from Russia to South America have been hit hard, they have helped the commodity (energy) importers in Asia and eased the concerns about inflation everywhere. The situation in Venezuela has been very bad and fragile; However, due to the extreme prosperity in the past, the decline in commodity prices will not trigger a widespread crisis at present.
The more dangerous impact comes from the financial sector. As asset prices fall, wealth is being squeezed. For example, house prices in China have started to fall. This will hurt domestic confidence, although consumers have much less debt than rich countries. Elsewhere, the sudden lack of foreign bank loans and the flight of hedge funds and other investors from the bond market put a brake on credit growth. Just as prosperous credit once supported strong domestic consumption, credit crunch will mean slower growth.
Something more shocking has happened in the financial sector than commodity prices. Due to the decline in asset prices, the level of wealth is being squeezed. Take China's house price as an example, it has already started to fall. Although the debt level of consumers in emerging countries is much lower than that in developed countries, this situation will still dampen domestic economic confidence. In other respects, the sudden lack of loans from foreign banks and the flight of hedge funds and other investors from the bond market suddenly stopped credit growth. Just as credit in developed countries once strongly supported domestic consumption, credit crunch will mean slower growth.
Similarly, the impact will vary from country to country. Due to the huge current account surpluses of China and Gulf oil exporting countries, emerging economies as a whole still send capital to rich countries. But more than 80 countries have deficits exceeding 5% of GDP. Most of these countries are poor countries that rely on foreign aid to live; But some larger companies rely on private capital. For countries like Turkey and South Africa, the sudden slowdown in foreign financing will force them to make drastic adjustments. What is particularly worrying is Eastern Europe, where many countries have double-digit deficits. In addition, due to global financial integration, even some surplus countries, such as Russia, have become accustomed to loose foreign loans. Bank bailouts in rich countries may limit austerity, but capital flows to the emerging world will slow down. The Institute of International Finance, a bankers' group, predicts that the net flow of private capital will drop by 30% compared with last year.
It needs to be reiterated that the performance of shocks varies from country to country. Thanks to the huge current account surpluses of China and Gulf oil-producing countries, the new economies as a whole continue to send capital to developed countries. However, the fiscal deficit of more than 80 countries exceeds 5% of GDP, most of which are countries that rely on foreign aid to live in poverty; But there are also some big countries that rely on private capital. For countries such as Turkey and South Africa, the sudden slowdown in overseas financing has forced them to make major adjustments. The situation in Eastern Europe is particularly worrying, with deficits in many countries reaching double digits. In addition, in Russia, a surplus country, its banks have gradually adapted to the loans that can be easily obtained from foreign countries, which is naturally due to global financial integration. The rescue plan of developed countries may limit the extent of wealth squeeze, but the speed of capital flow to the emerging world will undoubtedly slow down. The Institute of International Finance predicts that the net flow of private capital will decrease by 30% compared with last year.
Wings and prayers
Wings and prayers
The credit crisis will be severe, but most emerging markets can avoid disaster. The largest ones are relatively good in shape. The more vulnerable groups can (and should) be helped.
The credit crunch is bound to be daunting, but most emerging markets can escape, and the biggest market situation is quite good. Fragile markets can (and should) be helped.
Among the giants, China is unique, with 2 trillion US dollars in reserves and a current account surplus, and has little contact with foreign banks. The budget surplus provides a lot of room for stimulating spending. As China's leaders have made it clear that they will make every effort to buffer growth, China's economy may slow down, perhaps to 8%, but it will not collapse. Although this is not enough to save the world economy, this growth in China will provide support for commodity prices and help other countries in the emerging world.
Among these powerful giants, China stands out: it has US$ 2 trillion in reserves, a surplus under the current account, and few contacts with foreign banks. The surplus budget leaves enough room for promoting expenditure. In view of the fact that China's leaders have made it clear that they will buffer the slowdown of economic growth at all costs, China's economic growth should slow down to around 8%, but it will never collapse. Although this is not enough to save the world economy, the growth rate will bottom out commodity prices and help other countries in the emerging world.
Other large economies will be hit harder, but they should be able to tide over the difficulties. India has a huge budget deficit, and many Brazilian companies have huge foreign exchange risks. But Brazil's economy is diversified, and both countries have sufficient foreign exchange reserves to smoothly turn to slower growth. Russia has $550 billion in foreign exchange reserves, which should be able to prevent the devaluation of the ruble. At least in the short term, the most vulnerable countries are smaller countries.
Other economic powers will be hit harder, but they should be able to withstand this storm. India's fiscal deficit is huge, and many Brazilian companies face huge foreign exchange risks. However, Brazil's economy has diversified, and both countries have sufficient reserves to make a smooth transition to slow growth. With a reserve of $550 billion, Russia should be able to stop snapping up rubles. At least in the short term, small countries are the most vulnerable.
As the credit crunch forces adjustment, there will be pain. But wise and rapid international assistance will make a huge difference. Several emerging countries have sought liquidity support from the US Federal Reserve. Some people hope that China will help them. A better way is undoubtedly the International Monetary Fund, which has rich expertise and loans of about $250 billion. Sadly, it is a shame to borrow from the International Monetary Fund. This needs to change. The IMF should develop faster and more flexible financial instruments and try to reduce the conditions attached to loans. In the past month, flexible policy-making has avoided the disaster in China. It is time for the emerging world to take similar measures.
Adjustment under the pressure of credit crunch is bound to bring pain, but rapid international assistance is wise because it will bring great changes. Some emerging countries have sought help from the Federal Reserve to ease the liquidity problem; Others hope that China can save them from fire and water. A better recourse is the International Monetary Fund (IMF), which has a lot of expertise and a loan of $250 billion. Unfortunately, people think that borrowing from the IMF is a shame, and the International Monetary Fund should introduce faster and more flexible financial instruments, while minimizing the conditions for borrowing. In the past few months, wise decisions have dispelled disasters in developed countries. It is time for something similar to happen in the emerging world.
Supplement: Economic articles