China Research

A discussion forum on emerging markets, mainly China – from a macro, micro, institutional and corporate angle.

Poland – do (central) banks ever learn?

June 15, 2016

Trying to lower costs for interest rate payments is a natural human ambition. But nothing is free of charge. Risks may be increasing when potential gains seem to be achievable. In credit terms this is often about exchange rate risks for borrowing in foreign currencies. (This problem is, by the way, usually part of my classes in the first semester).

These considerations on credit conditions may happen by applying three alternatives: comparing nominal interest rates between two countries, expectations of a stronger own currency or both of these two alternatives as a simultaneous mix. However, the mostly existing exchange rate risks make things particularly difficult and speculative; the calculations have to be based on a forecast – and everybody should know that currency forecasts in principle are impossible. In other words: a lot of luck is needed if a credit in foreign currency really turns out to be profitable. In my view, taking such a risk is neither prudent nor smart.

But these speculations happen again and again – despite all the negative stories about it. In Sweden, we have some bad experience from the times of devaluations around 35-40 years ago when greed or limited intellectual capacity led to massive loans in Swiss francs to Swedish farmers; later on, accidents happened with lending in yen for pure domestic Swedish purposes. The same kind of mistake was also committed before the eruption of the so-called Asian crisis in the late 1990s, with several countries in mainly South East Asia being heavily involved. And the story behind the financial crisis in the Baltic countries more recently was not very different either.

Unfortunately, Poland also went into this trap – an accident I did not expect ten years ago after having met so many well-educated and well-understanding leaders at this country’s central bank from as soon as the early 1990s. From around 2006 onward, however, too many new Polish mortgage loans were granted in Swiss francs, combined with strong expectations of an ever strengthening zloty. In 2008, finally, this development was reversed. The zloty weakened on trend. The central bank and the banks should have reacted before that. The zloty moved at last on a long-lasting downward trend. Thus, previous expectations of very favorable credit conditions were not met anymore.

Consequently, many mortgage credits in foreign currency have become very expensive in the past few years. For this reason, the Polish government now tries to launch a package for converting these burdening credits in foreign currency into stable zloty loans. However, his transmission will not be easy – and very costly, too.

The question remains: Will banks – and even central banks – ever learn?

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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Re-visited (2): China’s status as a market economy

June 1, 2016

The topic of China’s future status as a market economy (or not) is getting hot in Brussels and some EU-member countries – but not really in Sweden. Recently, the European Parliament put a lot of pressure on the European Commission, expressed in a resolution that the EU should not grant China the attractive status as a market economy any time soon (see also blog contributions by Langhammer, March 2, and Fromlet, April 26, in www.chinaresearch.se).

Fifteen years after WTO entry in 2001, Chinese officials think that being accepted as a market economy should happen more or less automatically – a position that the European Parliament does not want to share. This rejection has, however, to a high extent political angles. This includes the possibilities of trade impediments and sanctions against China when rules for cross-border trade obviously have been violated, particularly when it comes to price dumping. There are certainly also labor market considerations.

As I have argued before, the market-economy decision should exclusively be based on the answer to the question if China really meets the economic and institutional criteria of a market economy (or not). The whole issue should not be more complicated than this.

In other words: Does China stick to the rules of a market economy – or not?

 

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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Brazil – a country of the future as usual?

May 24, 2016

10-15 years ago, many analysts were hoping that Brazil finally was about to establish itself on the right track for more sustainability of economic growth.

Since 2001, the so-called BRIC markets (Brazil, Russia, India, China) received increasing attention by (international) investors, mainly based on good growth expectations for all four countries – despite the fact that they clearly had different fundamental preconditions. In the past few years, however, Brazil’s economy was more and more disappointing.

Having dealt with Brazil for quite some years, I had my doubts about Brazil ‘s economic growth prospects already around 2005 or so, i. e. during the latter part of the first Lula regime which altogether with the second term had a number of promising years between 2003 and 2010 all the same.

Unfortunately, Lula’s successor Dilma Rousseff never got on the right track with all necessary reforms. Real structural progress was not noted in the first 5 1/2 years of her presidency which in the past two years was determined by power conservation without major future-oriented changes, accompanied by a GDP decline of 8 percent in the past 24 months (however, also caused by declining global commodity prices).

No wonder that markets reacted positively when Rousseff recently was suspended from office the other day, now facing an impeachment. Brazil’s currently acting president Michel Temer on the other hand seems to be quite impopular already now and hardly able to win direct presidential elections, particularly if he really will implement tough measures against Brazil’s rapidly rising government debt. Sensitive areas such as labor markets, social benefits and pensions could be hit by possibly coming austerity measures.

Sorry to say: my long-time lasting experience has been confirmed again: Brazil remains unable to achieve sustained good economic growth. It is really an “up- and-down economy” – with variable periods of ups and downs.

This distorting phenomenon will not be wiped out before Brazil really can manage far-reaching and continuous reforms regarding a broad and good human capital formation, better institutions and a fairer distribution of income – accompanied by much more effective and future-oriented political leaders all over the country.

This is what both experience and economic research tells us.

In my early days as an economist, Brazil was often introduced as a country of the future. It still is! Forever?

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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