Emerging Markets in the 2020s

By Ichiro Suzuki Several years ago already, developing countries’ fast pace of debt accumulation was drawing considerable concerns in the international finance community. Money was almost free in a world of zero interest rates and credit spreads were narrower than ever. Borrowing money looked a rational decision. But here they are, as widely feared, sitting on the unfolding international debt crisis. Contrary to high expectations on them, these counties in Latin America, Africa and the Middle East never showed prowess in managing their economies and finances for a sustained period, ever since Latin America made its debut in the scene of international finance 200 years ago. Worse, some of them have proved to be serial defaulters. Despite who they are, they have always found willing lenders to when times were good. Their future always looked glamorous to the outsiders as well as to themselves. A famous Wall Street saying “Brazil is a country of the future, and will always be” can be applied to almost everywhere in the developing world. The lure of emerging markets has always been immense. By the end of the 20th century, Americans and Europeans, British in particular, have learned enough lessons. They all got fooled more than once, having been burned a few times in Latin America and Africa. Near the end of the 20th century, one region that they felt sure about bright future was East Asia, which was quickly developing as the world’s manufacturing hub in the 1980s. This region took off as Japan moved its production facilities in order to cope with rising labor costs, drawing a vast amount o capital into it. Then, a sky high optimism on the region got crushed in the 1997-98 Asian crisis as assets in Asia became grossly overvalued. At the turn of the century, developed countries’ Paris Club forgave a bulk of African debt while Asia paid back every penny after the crisis. Debt forgiveness set a stage for a new borrowing spree in Africa. The Chinese economy’s meteoric rise led to commodity prices' surge in the early years of the 21st century. China was not only growing fast but also was consuming commodities in a wasteful fashion, making a stronger impact on prices. Higher prices made Latin America and Africa feel rich, making their future look brighter than ever. Having been chronically worried about its external accounts, Brazil enjoyed a brief moment of current account surplus prior to the Great Recession of 2007-09. Fortunately or not for theses countries, there was one fool left who had not been taught a lesson from them. It was China itself, a new comer in international finance. Unlike the West that was aware of who they were, China was willing to lend a lot on an ambition of enhancing its presence in the developing world. Unlike the West, China did it without scrutiny and bothersome conditions such as human rights. African authoritarian rulers in particular loved it. Now, fossil fuel prices, the only thing that kept many of these economies going, are in an unprecedented slump (while gold bullion prices keep going north.) Crude oil producers are in a big trouble, the one they have never faced before. In the early years of the 21st century, commodity prices boom transferred wealth to producers from consumers of commodities, which are Europe, East Asia, India, etc. (The United States is neutral on this as both a producer and a consumer of energy.) Now, crude oil prices’ collapse is taking such windfalls away from producers, transferring wealth back to consumers. Amid slowing growth in the global economy, energy importers would be relatively better off. Even in the energy self-sufficient U.S., consumers in theory would benefit from sharply lower gasoline prices, amid overwhelming negative effects of job losses and pay cuts. Amid crude oil prices’ collapse, their dream of building a modern state on oil riches would once again fail to materialize. Crude oil prices’ surge in the early years of this century made their sovereign wealth funds (SWF) balloon in their size, gobbling up quality assets of all kinds, be they U.S. Treasury securities or real estate in London, New York, etc. Those mighty SWFs are not going to disappear suddenly, but definitely no longer grow, and most likely contract in their size going forward. It remains to be seen how the SWF’s changed fortune affects prices of assets into which they have poured their money. The age of savings glut is drawing close to its end. What would happen to those assets that have been underpinned by massive and rising savings in the developed world if and when they stop allocating additional funds to them? On top of debt they accumulated by the end of the last decade, many of the commodity producing developing counties are facing a humanitarian crisis caused by coronavirus. In addition to vast financial resources required to fight the virus, it is nearly impossible for their people to socially-distance each other in crowded slums in these countries’ large cities. They are right to ask creditors for debt relief. The Paris Club would listen to them eventually, or at least agree to reschedule it. However, the major creditor this time is China that is a great deal tougher than the Paris Club. As opposed to the Paris Group’s negotiation with a group of debtor countries, China has insisted on bilateral negotiations in its short history as a creditor. Without having their debt forgiven, these countries, especially those in Africa, would face a tough time to get their economy restarted, especially amid depressed commodity prices. China is by far the largest lender to the developing world since the beginning of the 21st century. How China approaches to debt rescheduling negotiations has a great deal to do with the fortune of the global economy. Today, the developing world, including China itself, accounts for over 40% of the global economy as opposed to just 15% at the time of the Latin America debt crisis in the 1980s. While China as a big crude oil importer is in theory is a beneficiary of oil prices’ collapse, it is a mixed bag since the country is by far the largest creditor to the countries whose economies are crippled with a mountain of debt. The aggressively advertised Belt & Road Initiative (BRI) is not likely to achieve promised results, since the BRI recipients tend to be commodity producers, on top of much lowered growth prospects for the BRI beneficiaries as well as the entire world.

About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan. 

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