Emerging Markets and Elements of Country Risk Analysis.

1
Lecture 2

• Emerging Markets and Elements of Country Risk
  Analysis.

2
World Trading SystemFour Phases

• 1952-1972 Development Strategies
• 1972-1980 Transition and Reorientation
• 1980-1990 Macro Adjustment, Trade Reform and
  shift in Development Strategies
• 1990-2007 New Globalisation Wave and WTO.

3
1952-1972 Development Strategies

• Industrialisation in LDC
• Import substitution industrialisation (ISI).
• Ideology socialist versus capitalist development
• Role of Government and private sector
• Role of Planning.
• Early shift to Export Led Growth (ELG) on mfg
• Asian miracle Korea, Taiwan, HK and Singapore
• Role of Global Markets
• Role of Government.

4
1952-1972World Trade

• Developing Countries dependent on OECD markets
• Export of primary commodities
• Import industrial goods.
• Trade Blocks
• North-South trade
• Little South-South trade.

5
1972-1980Transition

• Emergence of East and South East Asia Trade
  Block
• Growth of Trade in mfg in developing countries
• Success in ELG development strategy (also during
  oil crises 1975-1978).
• Failure of socialist development model
• Increase role of markets capitalist model
• Concern with price distortions.

6
1980sAdjustment and Development

• Financial and Macro Crises
• Inflation
• Financial capital flows and shocks
• Continued global trade liberalisation
• Spread of ELG development strategy.

7
Lessons (1)

• Failure of socialist development model
• No productivity growth
• Enormous distortions, rent seeking, and
  misallocation of resources.
• Failure of ISI development strategy
• Bias against agriculture
• Autarchy and ISI failed to insulate domestic
  economy
• Macro shock
• Protection and rent seeking high cost.

8
Lessons (2)

• ELG Strategy
• Comparative Advantage labour-intensive mfg
  exports
• Better performance for poverty alleviation and
  income distribution
• Importance of mfg trade in ELG
• Value added chains
• Declining importance of primary commodities ?
  Terms of Trade Problem
• Reforms as a reaction to a crisis
• First VS second generation reforms
• Its not a good strategy for development.

9
1990-2007New Globalisation Wave

• Expanded role of International Governance
• Entry of Developing Countries in WTO
• Expanded role of trade
• Trade in services
• Fragmentation of Production
• Value chains
• Productivity gains
• Continued Evolution of Global Trade Blocks
• LAC, Africa, East and South East Asia
• Asian Drivers China and India.
• Trade Policy and reforms slow down.

10
Why is CRA linked to Development Issues? (1)

• Emerging Markets DEF!
• 1980s by International Finance Corporation
• Middle-to-higher income developing countries
• in transition to developed status
• undergoing rapid growth and industrialisation
• Stock markets are increasing in size, activity
  and quality.
• CUT OFF point GDP per capita 25,000 USD
• 24 Countries the most dynamic are
• Asia (China! India! Indonesia!)
• Latin America (Brazil!)
• Africa (South Africa!)
• East Europe and Russia.
• BRIICS

11
Why is CRA linked to Development Issues? (2)

• How important are Emerging Markets?
• 70 of worlds population (5 times that of
  developed markets)
• 46 of land mass (2 times that of developed
  markets)
• 31 of GDP (1/2 that of developed markets).
• Forbes 2009 ranking of top global companies 3
  over 5 with the largest mkt capitalisation are
  from EM!
• 11 of the top 100 are from China (only USA has
  more companies listed!)
• Strengths and Opportunities
• Weaknesses and Threats.

12
Strengths and Opportunities
13
Strengths and Opportunities Economic Growth and
Income Convergence
14
Strengths and Opportunities Share in World Output
15
Strengths and Opportunities Industrial Production
16
Strengths and Opportunities Export Share
17
Export and Import Growth
18
Share of Industrial Countries in world export
19
Share of Developing Countries in world export
20
GDP, Export and Imports
21
Developed and Emerging Market GDPs, 1950-2050
22
Weaknesses and Threats volatility of per capital
income growth rates
23
Weaknesses and Threats Exchange Rate Instability
24
Weaknesses and Threats Default and Crisis
25
Weaknesses and Threats not only economic aspects

• NOT only economy features but also
  Socio-Political Elements!
• Weak Infrastructure
• Lack of specialised intermediaries
• Weak regulatory system
• Weak contract-enforcing mechanisms
• Instable political system

26
Invest or not Invest?

• YES!
• Growing economies
• Increasing investment opportunities
• High revenues.
• NO!
• Default risk
• Volatility and Instability.

27
Further Reforms could decrease risk?

• YES Second Generation Wave of Reforms
• Complex domestic regulation service regulation
  technical standards IPR, administration and
  competition rules
• Improve the business-climate!
• Link between trade policy and domestic economic
  policy and institutional reforms
• Less dependent on trade negotiation and
  international organisation foreign-policy agenda
• More transparent!

28
Developing Countries and The Financial Crisis (1)

• Financial sector
• Decrease in the capital inflow
• Risk of capital outflow
• Increase in the risk ratio of these countries
• Devaluation of exchange rate
• Negative feed-backs on real investment!
• Real Economy
• Decrease in the demand for export
• Decrease in FDI inflows
• Lower commodity prices ( and -)

29
Developing Countries and The Financial Crisis (2)

• Central and Eastern Europe are being the most
  adversely affected
• Large current account (fiscal and external)
  deficit
• Latin America
• tight financial condition and weaker external
  demand
• Brazil and Mexico more hurtled from the world
  crisis
• Emerging Asia
• Reliance on manufacturing exports
• BUT domestic demand and strong policy stimulate
  the economy!
• Africa and Middle East
• Lower GDP decrease than other regions
• Commodity exporters
• Lower remittances
• FDI and aid flows reduction.

30
Russia Federation and Brazil
31
China and India
32
The Role of EM post the crisis.

• Expected rise in EM (CHINA!) consumes as a
  necessary condition for a stronger world economy
• One-child-generation
• Rural Reforms.
• EM increasing role in the international financial
  architecture
• Reduction in the global imbalances ?US trade
  deficit ? US savings!

33
Does CRA regard only Developing Countries?

• NO! The recent Financial Crisis!

34
Global GDP Contraction
35
(No Transcript)
36
Whats behind the crisis in the real economy?
37
The Financial Crisis
38
The consequences for the private sector
39
The impact on the macroeconomics indicators (1).
40
The impact on the macroeconomics indicators (2).
41
The Causes of the Financial Crisis

• Deregulation in the Financial Sector
• Debt/Capital ratio from 115 to 140
• Decrease the weight of mortgages in the capital
  formation of banks
• Off-balance sheet activity (Basel II) ?
  securitisation in the IB!
• American Dream zero equity mortgages

42
Macroeconomic Policies

• Fiscal Policy measures
• Stabilize the financial sector
• Support demand and improve confidence
• BUT risk of increasing public deficit!
• Monetary Policy
• Accommodative policy (decrease i not in
  developing countries!)
• Cross-Border Coordination/Consistency in the
  financial sector policies to avoid distortions.

43
Is the Financial Crisis over?

• No a second Depression thanks to government
  stimulus package and low interest rates
• The recovery in Europe (and USA) is fragile
• Economy still dependent on government support
• an exit strategy is needed but BE CAREFUL!
• Average unemployment across the OECD 9
• Weak domestic demand
• Risk of Sovereign Default (Greece and the PIIGS)

44
PIIGS
45
References

• Credit Suisse (2010) Global Investment Returns
  Yearbook 2010 Research Institute, February
  2010.
• Credit Suisse (2009) The World post the
  Crisis Research Institute, September 2009.
• Razeen Sally (2009) Globalisation and the
  Political Economy of Trade Liberalisationin the
  BRIICS, chapter 4 in Lattimore and Safadi
  (2009) Globalisation and Emerging Economies,
  OECD.
• IMF (2009) Global Economic Policies and
  Prospects, G20, London 13-14 March 2009.
• Will, M. (2001) Trade policy, developing
  Countries and Globalisation, World Bank,
  Development Research Group.