The global economy has yet to fully recover from the recession that began in the late 2000s with the US subprime crisis. Andy Haldane, chief economist at the Bank of England, argues that we are now facing part three of the crisis.
Part one was the 2008-09 recession in “Anglo-Saxon” countries; part two is the ongoing debt crisis in Europe; and part three, an emerging-market crisis, is developing.
Many emerging-market (EM) currencies have deteriorated sharply (the Brazilian real is at its lowest-ever level against the US dollar), and EM sovereign bond ratings are falling. Some media accounts are going so far as to predict EM weakness could result in another global recession.
Such reports note the slowdown in China and a weakening of the country’s official currency, the renminbi, will further curtail Chinese import demand. Additional apprehensions linked to EM turmoil include weak commodity prices, the strength of the US dollar, and continuing problems in the eurozone.
Because the emerging economies are not a monolithic group, the impact of several economic factors on various EMs will differ widely. A number of dynamics will determine the depth and length of the downturn in each economy.
EM growth will be determined by the dependence of the economy on commodity exports, the vulnerability of the economy to the downturn in China, and the openness of the economy to capital outflows.
Dependence on Commodity Exports
Hydrocarbon exports can account for over 80% of total exports. In Algeria the figure is nearer 100%. Some countries, such as Qatar and the United Arab Emirates, have built huge reserves to reduce the risk associated with high dependency.
In contrast, traditional oil exporters in some African countries have not been exporting for many years and consequently have fewer reserves to combat falling revenues. Exporters of other commodities have a lower but still high dependency on their primary exports.
Vulnerability to China’s Downturn
A number of countries have seen their economies grow strongly as Chinese demand for their products increases. Many Asian countries have built up their export dependency on China over the past 15 years.
Openness to Capital Outflows
Paradoxically, the more open the economy, the more vulnerable it is to changes in investor sentiment and therefore outward flows of capital. If the country is running an account deficit and is exposed to high levels of foreign borrowing, this will add pressure on the local currency, raising risks even further.
During the 1997-98 Asian financial crisis, the Malaysian economy was arguably able to contain the downturn better than South Korea or Thailand by introducing capital controls.
Is There a Part 4 or Part 5 Ahead?
On the cover of the fifth book in Douglas Adams’ best-selling Hitchhikers Guide to The Galaxy series, a line notes the “increasingly inaccurately named Hitchhiker’s trilogy.” Will there be a part four or even a part five to this “economic trilogy,” and if so, what will they be? The IMF is already worried that low interest rates will negatively impact the ability of life insurers in Europe to meet their commitments, which could create yet another liquidity crisis.
Dr. Warwick Knowles is the Deputy Chief Economist on D&B’s Global Data, Insight & Analytics team. Based in Marlow, UK, he covers global issues and the Middle East and North Africa for D&B Macro Market/Country Insight Products. Previously he taught Middle East politics and political economy for almost a decade at both Newcastle and Durham Universities and has published widely on regional issues and the hydrocarbon sector.