Emerging economies still face headwinds in 2014
Eight Chinese, led by Premier Li Keqiang, have made it to the US magazine Foreign Policy‘s list of 100 “Leading Global Thinkers of last year”.
The leaders on the list were acknowledged for their “courage to lay their reputations on the line, the cunning to seize opportunities, or the wisdom to recognise that the worst enemy of the political establishment is often inertia”, according to the magazine.
Li’s selection for the list is not doubt well-deserved.
As a leading emerging economy, China adopted effective measures in the past year to achieve stable growth, improved the quality and efficiency of its economy, and made progress in terms of economic transition and upgrading. Core indicators such the speed of growth, inflation and employment were maintained at reasonable levels.
Li’s policies have produced enviable results and his guiding principles have won wide recognition.
However, the overall picture doesn’t look very good for emerging economies as a whole. Risks already grew considerably last year for these countries after a round of rapid growth.
Just as China’s traditional growth model is no longer sustainable, other emerging economies also felt growing pressure to effect a transition, while at the same time they face a slowdown in their economies. The combination of both factors has led to concern as to whether the emerging economies have come to a critical stage of their development.
Brazil appeared to be the most promising member of the camp as its economy continued to bounce back, with growth reaching 2.5 per cent in the third quarter.
South Africa and China, on the other hand, enjoyed relatively stable growth.
Russia and India, though, continued on their downward slope. Russia’s economy stopped growing in the third quarter, while growth in India fell below 4 per cent in the third quarter, its lowest level since 2009.
Taken as a whole, the International Monetary Fund (IMF) has estimated the overall annual growth of emerging economies and developing countries for last year at 4.5 per cent – 0.4 percentage points lower than in 2012 – in other words a continuing decline, in clear contrast to the improving performance of the developed economies.
In my opinion, this year will remain a year of mixed prospects for emerging economies, and downward pressure remains high on the BRICS.
First, I would argue that while external conditions continue to improve, they will only have limited warming effects on the emerging economies. The economic upswing in the US and the euro zone is expected to continue this year; the IMF has projected an overall growth for them of up to 2 per cent. But their recovery remains fragile.
Take the United States, which has arguably enjoyed the best recovery among developed economies, as an example. Its revised rate of growth for the third quarter reached 4.1 per cent, the highest since late 2011. However, the employment rate still reached 7 per cent, compared with the historic average of about 5.5 per cent before the crisis.
In this year, Japan is set to raise its consumption tax from 5 per cent to 8 per cent. This is expected to have a negative impact on exports from emerging economies, especially East Asian countries. Meanwhile, the Japanese government may continue to devalue the yen to offset the economic impacts of a higher consumption tax. This, too, would increase the negative impact on exports to Japan.
Secondly, quantitative easing has heightened the financial risks to the emerging markets.
On December 18, last year, the US Federal Reserve announced its decision to decrease from January the size of assets bought each month from US$85 billion to US$75 billion. As a result, the flow of short-term international capital from the emerging economies to the developed countries has accelerated in early this year. In its Global Financial Stability Report released on October 9, last year, the IMF forecast that private funds flowing to the emerging economies this year would fall to US$1.11 trillion, a decrease of nearly US$4 billion from last year.
Capital outflows have led asset prices to slump. This has not only spoilt investor sentiment but may also create systemic risks in the financial system. In the first half of last year, for instance, the non-performing loan ratio at banks in India surged to a new five-year high of 3.92 per cent.
Capital outflows from countries with a double deficit (both current account and fiscal deficits), such as India, Indonesia, Vietnam, Brazil and South Africa, have exacerbated financial difficulties, resulting in a higher rate of default for sovereign debt. The exit from quantitative easing will boost the value of the greenback and expectations that prices of bulk commodities will fall.
This may exacerbate the risk of debts held by countries that rely heavily on the export of resources, among them Russia, South Africa, Brazil and Indonesia.
The reverse of capital flows has also made it harder for the emerging economies to implement monetary policies. They have had no choice but to raise interest rates in order to curb capital outflows and worsening domestic inflation. This has, in turn, discouraged investment and consumption, causing their economies to slow down further.
Moreover, multinational companies have become more cautious in directly investing in the emerging economies. In 2012, foreign direct investments made by the developed countries dropped by 23 per cent. According to the estimates by the UN Conference on Trade and Development (Unctad), transnational direct investments (TDIs) last year lingered at the level of 2012.
|The leaders of the BRICS countries at an informal meeting in Russia prior to the G20 summit last year. Photo: Xinhua|
My third argument is that emerging economies face more difficulties in readjusting their economies than developed economies.
Compared with emerging economies and developing countries, developed countries are making more evident progress in their readjustment. They have basically accomplished the task of “deleveraging” and removed the danger of systemic risks occurring in the financial system.
Breakthroughs have also been made in re-industrialisation. Private consumption has revived. Real-estate markets are continuing to recover. Export competitiveness is improving.
In contrast, as emerging economies saw a rebound shortly after the financial crisis, they were less willing to adjust their economies and saw no urgency to do so. They had gotten used to their original growth models and this delayed their decision to adjust their economies.
Emerging economies frequently find themselves torn between short-term and long-term goals. For instance, they need to keep real-estate markets growing for the sake of employment, while imposing restrictions on industries to prevent excessive growth. To boost consumption they have to raise salaries, but higher salaries increase business costs, making life harder for smaller companies.
In a word, the emerging economies still have a long way to go before their economic transition can be completed. So far, Brazil and Russia still heavily rely on the exports of bulk commodities. Countries such as India and Indonesia remain highly dependent on foreign investments, rendering them unable to improve the so-called “double deficits” in both current account and fiscal balance sheet.
Meanwhile, China is increasingly troubled not only by worsening problems regarding resources and the environment but also by serious overcapacity. Weak foreign demand and capital outflows have worsened the structural problems of the emerging economies. As a result, they face slower economic growth and higher financial risks.
Will this year be a turning point for the emerging economies? The IMF is quite optimistic. It predicts that the emerging economies will grow by 5.1 per cent this year, 0.6 per cent higher than last year. While I feel emerging economies offer great potential for growth in the long term, their structural adjustments have only just begun for the short to medium term. They need time to ease downward economic pressure.
All things considered, the emerging economies may not see a turning point soon in their growth, although some may be out of the woods sooner than others. This year, they may face even more complicated financial conditions. They will have to choose appropriate policies to meet the external financial challenges. They will also have to give priority to adjusting their economic structures and not worry excessively about short-term economic fluctuations.
People hope the Chinese government can do even more this year to adjust the economic structure and growth model so that China can continue to lead other emerging economies in growth. Luckily, the Chinese government was early in realising its problems, and a broad consensus has been reached on reform matters. Optimism here would be justified.
The author is a researcher at the Development Research Centre of the State Council.