Emerging markets may have seen the worst during a traumatic 2018, but an ever-present risk of trade-war escalation and shockwaves from the Brexit deadlock means there can be no complacency, a raft of experts speakers said last week at a Copenhagen-held event.
The US-China trade war in particular held sway among the speakers as a source of real concern going forward after a further round of tit-for-tat measures in the first week of May, they said at Nordea’s 19th annual emerging-markets seminar.
Central & eastern Europe
An IMF bigwig outlined the trade war as the major risk for central & eastern Europe after the turmoil of 2018, but also pinpointed Brexit and ongoing emerging-market volatility as components of a potential cocktail that could derail the region’s recovery.
The IMF Europe deputy head, speaking under Chatham House Rules*, was hopeful nevertheless that EM exposure to further turmoil was relatively limited and that while there was little to support the view that the region could delink itself from the global backdrop, the more likely scenario if things took a turn for the worse was likely to be a slowdown rather than a recession.
The IMF boss warned against complacency nevertheless and stressed that there was a requirement throughout the region to build the necessary buffers to withstand shocks given the level of uncertainty pervading the global landscape.
Meanwhile, Russia could potentially benefit from the US focus on its dispute with China, a Nordea expert on the country said, and if that meant a lessening of the sanctions threat down the line, there was every reason to believe the ruble could continue its stellar progress in 2019 after it suffered a traumatic slide in value through 2018. (Read more here)
Seminar attendee Charlotte Koefoed knew what she wanted from her first emerging-markets seminar with Nordea, and was delighted to see it deliver. “On the Turkey presentation, I got a real feel for the problems it is facing,” said the Novozymes credit controller. “I work a lot in emerging markets and it’s important to know the kind of things we are facing so we can work the best we can with them.” Koefoed, was also positive about the pragmatic, hands-on-experience that, she said, had been a key reason for her sign-up. “I wanted a little more focus on how it is to work in these countries. It gave a lot of insight into what’s going on in the regions.”
* Interview not subject to Chatham House Rules.
Turkey’s fine line
Russia was not the only country to endure a traumatic 2018 in FX terms and the travails of the Turkish lira last year were effectively a currency implosion, said a former Turkish government official speaking also under Chatham House Rules, in a keynote speech to the seminar.
He said that Turkey’s way out of a crisis part led by global difficulties and part self-inflicted depended on creating a rule-based framework in collaboration with international bodies like the IMF and with the approval of parliament that would help build trust in institutions.
The Turkey expert said if the country could get these things right, then its potential was considerable, but the firm establishment of a rule of law was absolutely key and that could be an issue given the presidential system and the country’s vulnerability to strongman syndrome. The challenges for Turkey were huge ahead and he could not rule out a depression in a worst-case scenario of increasing capital flight and capital controls, but pointed out that no emerging-market country would have come out unscathed from the difficulties that it faced in 2018.
He added that with the Syrian refugee crisis ongoing, the threat to the nation’s sovereignty from the breakaway PKK movement straddling the Syria-Turkey border and a fear of runaway inflation given the drop in the value of the currency, some help from the international global community would not be unwelcome.
The danger was that Turkey could end up cosying up to Russia even though it is a NATO member if Europe and the US continued to keep Ankara at arms length, adding that the block on the country joining the European Union has been a particular source of frustration.
The prospects for Narendra Modi and so-called Modinomics may not have initially seemed that rosy in the run up to last week’s general election, but the incumbent’s subsequent landslide has given him a real mandate for success in the future, said a local Bloomberg chief.
Modi’s BJP-led National Democratic Alliance boosted its majority to 303 seats on his 2014 breakthrough and that would give him an a strong mandate to push through his far-reaching reform programme, said the India economist.
The economist said the salient point centred not on the next five-year period under Modi but the subsequent five years when the reforms he is undertaking will really start to filter through the system.
He predicted that if India could get its act together right, then it could emerge as a real manufacturing power with a sustainable growth rate of around the 8-8-5% mark per annum.
He added that India was not immune to global shocks but Modi’s strengthened position should encourage the type of market reforms the country needs and see an increase in capital inflows. He shied away from suggesting that India could emulate China’s astonishing double-digit growth figures that helped rocket it into the economic big league through the 1990s into the 2000s, but was convinced current rates were sustainable.
Brazil’s shock decision to elect the far-right Jair Bolsonaro as president in 2018 may have looked like a game-changing move, but viewing Bolsonaro as a pivot on which the country could launch a full-scale recovery would be a mistake, said a think-tank chief.
The think-tank boss, who has resided in Brazil for two decades, said that the real defining moment in recent Brazilian political history was the impeachment of former president Dilma Rousseff for corruption in 2016. But, he said, that was just a starting point and any expectation of quick change in Brazil like addressing the fundamental need for pension-age reform would neither be quick nor sufficiently fundamental to truly address the problem.
While Brazil may never have suffered the kind of hyper-inflation that plagued the likes of Argentina and Venezuela, it was a long way from emulating the success of star-performer Chile which has led the way in South America, outstripping Brazil by a considerable margin in capita per head terms in the last 2-3 decades.
The Brazil expert held out the hope that Bolsanaro’s appointment of internationally-renowned and recognised economist Paulo Guedes as economy minister could be the gamechanger. He said Guedes, if given the freedom to enact reform, could be a catalyst for the right kind of changes, but suspected that Brazil would go for a middle-of-the-road, muddled solution to its problems that would mean nothing more than an inadequate outcome.
The economy was deeply divided, he said, between the three quarters who lived a lifestyle roughly equivalent to the average in India and the one quarter who enjoyed levels of disposable income on a par with the mean in Belgium.
It’s the way it is in Brazil, the think-tank head said.
At the coalface
While it can all be well and good applying theory to the business of working in emerging markets, sometimes it’s all about the nitty gritty and what that means in actual practice, said a business leader from a multi-national pulp, paper and energy services provider.
The company representative outlined the specifics of overcoming issues in Indonesia as an example of what can happen after the central bank introduced regulations that banned the use of foreign currency for domestic transactions in favour of the Rupee a few years ago.
It required a lot of extra effort to make it work, said the company spokesperson, but it was exactly the type of thing that could come up when working in an emerging-market environment.
The success of the event, the brainchild of Nordea veteran Jana Poulsenova, could be measured by the attendance rate that stayed consistently high through the day. Ably moderated by chief analyst Anders Svendsen and opened by Henrik Kall, Nordea Markets global head of market sales & distribution, the feel-good factor at the end of the day was evident.
Roll on 2020 and the next event!
Nordea’s Emerging Markets seminar is an annual event that takes place in Copenhagen. To find out more, contact Jana Poulsenova. firstname.lastname@example.org
*Chatham House rules allow participants to use the information received but neither the identity nor the affiliation of the speakers, nor that of any other participant, to be revealed.
Top image: Istanbul at sunset. Photo: Alexander Spatari/gettyimages
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