Emerging markets, generally

Brazil – still the country of hope

Monday, October 29th, 2018

Now we know that Jair Bolsonaro will be Brazil’s next president. Can he make a positive difference to previous presidents?

What we do know is that right-wing president-elect Bolsonaro has many radical views which are not particularly popular in a European perspective. At the same time there is no doubt that Brazil needs to meet its burdening challenges much more decisively.

Several decades of economic and political muddling through should finally  come to an end. Will “Brazil’s Trump” – as he frequently is called by opponents – be the man to put Brazil on a more favorable track?

Bolsonaro – who is not very skilled in economics – seems to know what the Brazilians really are tired of, i.e. criminality and corruption. However, research also tells us that these kinds of institutional failures and problems are extremely difficult to combat. It remains to be seen whether Bolsonaro will find the appropriate sustainability and means to fight successfully against crime and corruption.

However, this is exactly the main reason why a majority of the Brazilian people voted for him. But his voters also want to see major improvements of the strongly underperforming educational system.

Good education on all levels for a small minority and poor educational conditions for a vast majority has been characterizing the stance of education during many years.

This negative spiral has to broken if Brazil ever can develop into a really future-oriented and successful economy – but also the continuous weak fiscal performance which means a real obstacle to many other necessary structural improvements as well.

One can question whether these objectives can be met by a real hardliner like Bolsonaro without jeopardizing achieved democracy.

In the early days of my professional career in the early 1980s, I was always told that Brazil is the country of the future. Somewhat later when I started visiting Brazil regularly, I heard the same story – and still today but with a more skeptical sound.

Brazil is another example from the international area where heavy protests against insufficient political and economic results these days more strongly come from the right than from the left.

As usual, I am reluctant to spontaneous comments when political changes happen in Latin America. Too often disappointments followed later on.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board


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The analysis of emerging markets is (partly) different

Thursday, September 27th, 2018

Many analysts think that the important country group of emerging markets currently is on the edge of a new crisis. May be – or may be not. We do not know yet – but increasing risks are certainly visible. Six of them are – or may be – most challenging. They are:

– domestic and global political risks, increasing protectionism included,

– rising interest rates in the U.S.,

– weakening economic growth in the advanced countries,

– contagion among emerging countries,

– increasing global risk aversion from OECD countries in emerging countries,

– accelerating psychological exuberance without consistent fundamental basics.

We have to recognize that emerging markets still depend to a high degree on developments in OECD countries – despite the fact that emerging economies already today have a higher share of global production (in PPP terms) than all the advanced countries (but with markedly lower GDP per capita than the first group of countries).

Special characteristics of emerging markets

Thus, the analysis of emerging markets must include developments in OECD countries but also certain own characteristics of emerging countries . If we watch these special characteristics from a risk perspective, factors like political and social risks, institutions, maturity of financial markets, economic reforms and stability in general terms play a particularly big role – mostly considerably more than in a mature country; this is, of course, exactly why we have this distinction between mature (advanced) and emerging countries.

The current account balance – often neglected by analysts

Sometimes also two other developments or indicators can become decisive for the development of an emerging market – the current account balance and foreign debt. In mature countries, these two economic indicators are not focused very carefully (with the Greek crisis a couple of years ago as an outstanding exception).

Normally, there are no particular analytical emergencies in this specific respect. But they occur. However, even professional economists appear sometimes very unskilled when it comes to knowledge and interpretation of current account deficits. This happens mostly when emerging countries are derailing.

Current account deficits mean that a country has more imports than exports of goods, services and cross-border financial transfers like the interest rate and dividend payments.

Unfortunately, the consequences of a substantial and persistent current account deficit sometimes turn out to be very negative. Of course, emerging markets can run limited deficits in cross-border business – may be up to 4-5 percent of GDP or so without any distortion; however, the internationally “accepted” upper limit is not static and certainly interpreted more strictly when the current account deficits worsen further and/or economic or political problems increase. At the end of the day, the international financial and non-financial community may lose confidence in the country.

In reality, a current account deficit reflects a negative national savings performance. This means a debt in foreign currency vis-a-vis-other countries. This negative outcome has to be financed by inflows of foreign currencies. This can happen by definition in three ways:

– foreign direct investments (FDI; if foreigners still are interested when problems increase sharply),

– borrowing money abroad,

– selling stocks and bonds to foreign portfolio investors (if there is a capital market in the emerging country) – which also may become a major risk when foreigners because of increasing doubts suddenly sell these papers again.

The case of a big crisis

It also happens that current account deficits develop into an alarming crisis. This may happen when simultaneously a credit bubble is bursting. Another critical development may show up when there is a major minus in the current account and foreign debt is high at the same time.

Even worse: when in such a situation with a very weak current account balance and high foreign debt a substantial part of this foreign borrowing is short-term based. Such a situation can aggravate further when also the affected country’s currency more recently has been weakening largely – which recently happened in Turkey. In this specific case, foreign debt grows further.

Adding, for example, in the analysis of Turkey’s substantial deficits in the current account the high amounts of short-term foreign debt, it is quite easy to understand the uncomfortable future risks of the Turkish economy.

Still a lot of work to do

Above, some of the above-mentioned risks demonstrate very well that the analysis of emerging countries may differ quite a bit from the analysis of mature countries. This concerns particularly institutions, the balance of current account and the amount and also structure of foreign debt.

This kind of necessary expertise cannot be achieved by occasional studies of emerging countries. Instead, a lot of regular and deepening research and analysis is needed (otherwise, no applicable or reliable forecast on an emerging market economy can be launched).

Unfortunately, we are still far away from ideal preconditions for the analysis of emerging market countries. A lot of more homework has to be done also in our part of the world.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board


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Turkey’s enormous problems

Monday, August 13th, 2018

From my previous professional life as a bank chief economist I remember very well the Turkish banking crisis of 2000/2001, followed by a major economic downturn (GDP 2001: -5.3%). Prior to the banking crisis, macroeconomic imbalances in mainly the budget and the current account had worsened alarmingly and, thus, strongly contributed to fading international confidence in Turkey’s financial – and also political – system. The lira weakened strongly at the time. Foreign investors sold huge amounts of their Turkish T-bills and even stocks. Logically, the currency reserves shrank dramatically. At the end of the day, the IMF provided Turkey with a 10.5 billion financial rescue package. After this, a serious political crisis followed all the same – before an economic recovery could be noted and the weak banking system was reformed into a more stable shape.

Unfortunately, the acute starting position of the current Turkish crisis does not look very different from the one 17 years ago. Major macroeconomic fiscal and trade imbalances exist also today. The Turkish currency has dropped substantially not only in recent days but also by around 35 percent so far in 2018.

Political conditions, however, look partly different this time – with other kinds of political leadership in both Turkey and the U.S., giving the current economic problems in Turkey even stronger political dimensions than in the beginning of this century. But this does not necessarily mean that the current Turkish crisis “automatically” will end in a more benign way, particularly when considering president Trump’s current resistance to potentially needed major international global financial rescue actions.

Worst case scenario

Still, the worst case scenario is only a scenario. But the current situation is critical and can aggravate further. The worst case scenario could include major bank problems in Turkey with contagion to EU banks that have major loan and securities involvement in the Turkish financial system. Such a development could lead to major GDP losses in mainly Turkey but also to a more limited extent in the EU. Read, by the way, more about this relationship in the research of Hyman Minsky!

All this leads to the conclusion that the coming development in Turkey should be given very strong analytical attention. President Trump’s future ideas and action play certainly an important role in this respect. Sometimes, he changes his mind unexpectedly in another direction. But Turkey itself should also under all circumstances work more ambitiously with its ongoing macroeconomic imbalances, particularly since the country is highly indebted abroad – both what concerns private and public debt.

Experience from other countries with similar challenges shows that nervous or speculating financial markets usually are stronger than the defense lines set up by the pressured country with its currency reserves – unless the acute problems are combatted promptly or surprisingly positive news make the whole picture brighter.

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board


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