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Emerging markets need support to avoid a ‘lost decade’

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The writer is a senior fellow at Harvard Kennedy School 

The Latin American debt crisis in the 1980s and eurozone debt crisis in the 2010s both led to a lost decade of economic growth for those regions. A key question now is whether emerging markets are heading down the same path, saddled with debt incurred in response to the pandemic. Signs another crisis may be looming should prompt a rethink of the IMF’s tools.

There are two main scenarios ahead for debt-laden EM countries. One argues big twin deficits driven by trillions in American fiscal stimulus have pushed down fair value for the US dollar. Even though the real effective exchange rate has weakened since last summer, the Institute of International Finance calculates that the US dollar is 12 per cent overvalued. This should be good news for countries that have issued debt in US dollars, as it makes their burdens more sustainable.

But there are two powerful forces offsetting this narrative. Huge fiscal stimulus and a relatively successful vaccination rollout should boost US growth, strengthening the dollar. Treasury yields are rising and that could push the Federal Reserve to withdraw accommodation sooner than other major central banks. The resultant policy divergence would also cause dollar appreciation.

Higher Treasury yields are also an issue for debt-laden countries. The 10-year note yield, which recently topped 1.6 per cent, hasn’t been this low relative to growth estimates since 1966 — so there may be room to climb higher still. The rise in US long-term interest rates has dragged rates up globally. For some EM countries such as Turkey and Russia, borrowing costs are already rising due to accelerating inflation.

Investors seem to be voting with their feet on which scenario to believe. The IIF’s daily capital tracker (excluding Chinese debt), shows capital outflows in early March approaching levels seen during the 2013 “taper tantrum” as the Fed prepared to pare back quantitative easing. EM currencies have nearly all depreciated in the past two weeks. With rising debt levels, sagging potential growth rates and borrowing costs coming off their lows, the conditions that rendered EM debt sustainable for the past decade may be shifting.

Before a crisis comes, the IMF must beef up its firepower. G20 finance ministers recently signalled their support for a new allocation of special drawing rights. The distribution is likely to be as much as $500bn, dwarfing the $250bn and $33bn allocations during the global financial crisis. That helps but is not a silver bullet. Because the SDRs are distributed based on existing IMF quotas, the lion’s share (around 70 per cent) goes to developed markets and large EM countries with plenty of foreign exchange reserves. But, as a percentage of foreign exchange reserves, the SDR allocation would give some of the poorest and most debt-distressed countries the biggest lift.

IMF head Kristalina Georgieva says the fund will look into a reallocation system whereby wealthier countries can lend SDRs to poorer countries. According to JPMorgan, if G20 countries set aside just 10 per cent of their SDRs, it would more than double the additional funding for low-income countries.

But reallocating SDRs could come with demands for traditional IMF programme conditions, which borrowers would seek to avoid. Instead, the reallocated SDRs could top up funds for cheaper concessional IMF lending. Even so, given low income countries’ small quotas and high budget deficits, some could be pushed into insolvency. Reallocated SDRs could be offered as grants for pandemic spending and sustainable development goals, but this could face opposition in creditor countries.

Beefing up firepower isn’t enough; lending programmes must also be adjusted. The IMF has traditional bailouts with strict conditionality for basket case countries and facilities for countries with a stellar record. If borrowing costs continue to rise, a number of EM countries could fall in the middle: too robust to accept conditions but too weak to make it without support as the pandemic toils on.

Unlike in 2013, EMs (excluding China) were in current account surplus in the four quarters to September 2020, and foreign exchange reserves have risen sharply in recent years as well. Rapid distribution of vaccines to EM countries and faster-than-forecast global growth could forestall a new debt crisis. But the recent trend is worrying. This may be a perfect opportunity for US President Joe Biden’s administration to continue embracing multilateralism and re-establishing American leadership in the world. The US is doing a lot to boost its own economy. Supporting new programmes at the IMF will ensure help for EM countries as well.





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Emerging Markets

Technology will save emerging markets from sluggish growth

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The writer, Morgan Stanley Investment Management’s chief global strategist, is author of ‘The Ten Rules of Successful Nations’

Emerging economies struggled to grow through the 2010s and pessimism shrouds them now. People wonder how they will pay debts rung up during the pandemic and how they can grow rapidly as they did in the past — by exporting their way to prosperity — in an era of deglobalisation.

The freshest of many answers to this riddle is the fast-spreading digital revolution. Emerging nations are adopting cutting-edge technology at a lower and lower cost, which is allowing them to fuel domestic demand and overcome traditional obstacles to growth. Over the past decade, the number of smartphone owners has skyrocketed from 150m to 4bn worldwide. More than half the world’s population now carry the power of a supercomputer in their pockets.

The world’s largest emerging market has already demonstrated the transformative effects of digital technology. As China’s old rustbelt industries slowed sharply over the past decade, and ran up debts that threatened to explode in crisis only a few years ago, the booming tech sector saved the economy.

Now, often by adopting rather than innovating, China’s emerging market peers are getting a push from the same digital engines. Since 2014, more than 10,000 tech firms have been launched in emerging markets — nearly half of them outside China. From Bangladesh to Egypt, it is easy to find entrepreneurs who worked for Google, Facebook or other US giants before coming home to start their own companies.

As well as the so-called Amazon of China, there are Amazons of Russia, Poland, Latin America and south-east Asia. Local firms dominate the market for search in Russia, ride-hailing in Indonesia and digital payments in Kenya. 

By one key metric, the digital revolution is already as advanced in emerging economies as developed ones. Among the top 30 nations by revenue from digital services as a share of gross domestic product, 16 are in the emerging world. Indonesia, for example, is further advanced by this measure than France or Canada. And since 2017, digital revenue has been growing in emerging countries at an average annual pace of 26 per cent, compared with 11 per cent in the developed ones.

How can it be that poorer nations are adopting common digital technologies faster than the rich? One explanation is habit and its absence. In societies saturated with bricks-and-mortar stores and services, customers are often comfortable with and slow to abandon the providers they have. In countries where people have difficulty even finding a bank or a doctor, they will jump at the first digital option that comes along. 

Outsiders have a hard time grasping the impact digital services can have on underserved populations. Nations lacking in schools, hospitals and banks can quickly if not completely redress these gaps by establishing online services. Though only 5 per cent of Kenyans carry credit cards, more than 70 per cent have access to digital banking. 

The “digital divide” is narrowing in many places. Most of the big countries where internet bandwidth and mobile broadband subscriptions are growing fastest are in the emerging world. Last decade, the number of internet users doubled in the G20 nations, but the biggest gains came in emerging nations such as Brazil and India.

The digital impact on productivity, the key to sustained economic growth, is visible on the ground. Many governments are moving services online to make them more transparent and less vulnerable to corruption, perhaps the most feared obstacle to doing business in the emerging world.

Since 2010, the cost of starting a business has held steady in developed countries while falling sharply in emerging countries, from 66 per cent to just 27 per cent of the average annual income. Entrepreneurs can now launch businesses affordably, organising much of what they need on a smartphone. Lagos and Nairobi are rising as local fintech hubs, where leading executives vow to raise Africa’s “digital GDP” by widening access to internet financing.

It’s early days, too. As economist Carlota Perez has shown, tech revolutions last a long time. Innovations like the car and the steam engine were still transforming economies half a century later. Now, the fading era of globalisation will limit the number of emerging economies that can prosper on exports alone, but the era of rapid digitisation has only just begun. This offers many developing economies a revolutionary new path to catching up with the living standards of the developed world. 



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China’s wolf warriors refuse to back down

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Late last month the EU, acting in concert with the US, UK and Canada, imposed sanctions on four obscure Chinese officials for alleged human rights violations in Xinjiang, where hundreds of thousands of Muslims have been systematically detained over recent years.

China retaliated immediately, imposing counter-sanctions on 10 European individuals, including five EU parliamentarians from five different political parties.

In doing so President Xi Jinping’s administration threatened a contentious trade deal provisionally agreed on last year between the EU and China, despite US opposition. The sanctioned parliamentarians’ parties are now reluctant to start reviewing the deal unless Xi’s counter-sanctions are lifted.

Before Beijing imposed sanctions on the EU MPs, it was expected that the European parliament would eventually ratify Xi’s geopolitical coup, which had strong backing from France’s Emmanuel Macron and Angela Merkel, the German chancellor.

But when Merkel and Xi spoke on Wednesday, China’s official account of the call did not mention the trade deal or Xinjiang.

“We had seven years of negotiations for the deal,” said Joerg Wuttke, head of the European Chamber of Commerce in China. “Now it looks like it will take another seven years.”

The Xinjiang sanctions exchange is just the latest diplomatic dispute that Xi’s pugnacious “wolf warrior” foreign ministry officials are embroiled in. Chinese diplomats are sparring with countries and organisations that Beijing enjoyed relatively good relations with during Donald Trump’s one-term presidency. But they are expressing no regrets.

Chinese vessels anchored at Whitsun Reef off the Philippines’ Palawan Island © Philippine Communications Operat/AFP

Yang Jiechi, China’s top diplomat, set the tone for Beijing’s clashes with a long lecture to his US counterpart on March 18 in Alaska, where he told Antony Blinken that no country would ever again “speak to China from a position of strength”.

Victor Gao, a former Chinese diplomat who worked for Yang, said his former boss’s diatribe was “groundbreaking”. “Chinese leaders believe they have momentum and time is on their side,” he added. “Nothing can stop their rise.”

Chinese state media contrasted Yang’s comments with paintings of foreign colonial powers lording it over late Qing dynasty officials, who were repeatedly humbled in a series of conflicts with European, Japanese and American enemies.

The country’s “century of humiliation”, according to the Chinese Communist party, ended only after its revolutionary victory in 1949.

“China today is not the China of 1840,” Xu Guixiang, a senior party official in Xinjiang, said last week. “The days of Chinese people being bullied by the west have passed. We are not an easy target any more . . . We will fight tooth for tooth until the end.”

Many Chinese officials viewed Trump’s years in office as an unprecedented “strategic opportunity” to build bridges with Washington’s frustrated allies. But analysts said that, like Trump, those officials also believed that the Chinese Communist party could benefit domestically from diplomatic confrontations.

“Heated nationalism is good for strengthening the legitimacy and authority of the central government and [Xi],” said Yun Sun, a Chinese foreign policy expert at the Stimson Center in Washington.

“It all comes back to [Xi’s] mentality and the course he has charted,” she added, especially as the CCP prepares to celebrate the centennial of its founding in July. “The party needs to demonstrate its strength and achievements. A soft approach is not going to work.”

Last week Beijing challenged comments by Tedros Adhanom Ghebreyesus, the World Health Organization director-general who had previously been criticised for his reluctance to confront Beijing. Tedros said that Chinese officials had withheld information from WHO experts investigating the origins of coronavirus.

“After coming under pressure from the Europeans, Canadians and Americans, Tedros didn’t want to give China a pass because that would have provoked a crisis with the west,” said a diplomat involved in the WHO’s deliberations.

“Meanwhile the Chinese had to stick to their rhetoric that ‘[Covid] is a bigger problem, we had it and we dealt with it, but now we have to look elsewhere [for its origin]. They have bats in Myanmar and Laos, too’,” the diplomat added.

“It also has to be seen in the context of what had just happened in Alaska where they said don’t lecture us and don’t talk down to us.”

Chinese diplomats have recently clashed with Manila, too, over an alleged incursion of Chinese fishing vessels in Philippine territorial waters, as well as Tokyo over Japan’s concerns about the Xi administration’s policies in Xinjiang and Hong Kong.

Wang Yi, China’s foreign minister, warned his Japanese counterpart on Monday not to join US efforts targeting China.

“A certain superpower’s will does not represent the international community,” Wang said. “As a neighbour Japan needs to show at least a modicum of respect towards China’s internal affairs.”

Steve Tsang, director of the Soas China Institute in London, sees no end to such disputes. “Xi has said multiple times that Chinese officials and diplomats must unsheathe swords to defend the dignity of China,” he said. “The wolf warriors are just acting on Xi’s call to arms.”

Additional reporting by Xinning Liu in Beijing



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Saudi Aramco raises $12.4bn from oil pipeline deal

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Saudi Aramco said on Friday it had raised $12.4bn from the sale of a minority stake in a newly formed oil pipeline venture to a consortium of investors. 

Saudi Arabia’s state energy giant said it had sold 49 per cent of Aramco Oil Pipelines to investors led by Washington-based EIG Global Energy Partners. 

The move comes as Saudi Aramco, which listed on Riyadh’s Tadawul stock exchange in 2019, seeks to monetise assets to generate cash for the government, its main shareholder. 

Saudi Aramco will lease the usage rights of its pipelines to the new venture, which is valued at $25.3bn and has rights to 25 years of tariff payments for oil transported through the kingdom’s crude network. 

The state company will hold a 51 per cent stake in the oil pipeline business while retaining full ownership and operational control of the network. 

Saudi Aramco did not say which other groups were part of the consortium.

It is understood that EIG is still in talks with Mubadala, the UAE sovereign wealth fund, about joining the investor group, while BlackRock and Brookfield Asset Management pulled out after initial discussions. Mubadala, BlackRock and Brookfield declined to comment.

Under Crown Prince Mohammed bin Salman, Saudi Arabia has leaned on its biggest revenue earner to raise funds to plough into non-oil sectors — from technology to tourism — as it seeks to diversify its economy. 

Amin Nasser, chief executive of Saudi Aramco, said the transaction “will help maximise returns for our shareholders”. 

Saudi Arabia, which is the world’s largest oil exporter, has taken a massive financial hit in the past year as the coronavirus pandemic battered the global economy and drastically cut demand for energy. 

Saudi Aramco, which has pledged to pay the bulk of $75bn in annual dividends promised to the state, alongside taxes and royalties, is also expected to lead a new domestic investment plan to modernise Saudi Arabia. 

The latest move is similar to infrastructure deals undertaken by the Abu Dhabi National Oil Company, which has raised billions of dollars through selling and leasing back oil and gas pipeline assets.

Yasir al-Rumayyan, chair of Saudi Aramco and head of the kingdom’s Public Investment Fund, which is Prince Mohammed’s chosen vehicle for his reforms, said the kingdom would try to monetise additional assets. 

“Historically speaking, [Saudi Aramco] used to do everything themselves . . . they had their own airports, their own fleets, their own pipelines,” he told the Financial Times earlier this year. “Now, if it makes sense for us to divest some of these assets, we’re definitely going to do it. It could include anything except the main operations.”

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