November 29, 2023

Slowdowns in Emerging Markets, Well Ahead of Any Fed Action

JAKARTA — Higher long-term interest rates in the United States as the Federal Reserve signaled it might change its policies were already causing hardship for millions of businesses and workers in emerging markets from Indonesia and India to Turkey and Brazil.

But the economic slowdowns and falling currencies precipitated by capital flight back to the United States seem less severe so far than other recent downturns.

The impact may be further dampened because the Federal Reserve’s monetary policy-making committee concluded its meeting Wednesday saying it would not retreat from its long-running stimulus campaign of buying $85 billion a month in bonds.

Emerging markets around the globe had been feeling the effects of investors’ expectations that the American central bank would begin tightening monetary policy as the American economy improves. As long-term interest rates have risen this summer in the United States on bets that the Fed will begin tapering its bond purchases, institutions and rich individuals have shifted tens of billions of dollars out of emerging markets. They have been moving them into dollar-based investments that offer higher yields. The flight of dollars caused currencies to fall against the dollar.

But the Fed’s announcement Wednesday afternoon took currency traders by surprise and the dollar plunged against major currencies. The dollar fell a little more than 1 percent against the euro and the yen after the announcement giving companies in the developing economies a little more breathing room.At the IGP Group, Indonesia’s dominant manufacturer of car and truck axles, sales plummeted 95 percent and stayed down for six months when the Asian financial crisis hit in 1997. Four-fifths of the company’s workers lost their jobs.

When the global financial crisis began in 2008, IGP’s sales briefly dropped by nearly a third, and a quarter of the employees were put out of work as temporary workers’ contracts were not renewed.

The latest downturn, which began in early August, has been much more modest. IGP’s axle shipments are down 10 percent in the past month from a year ago. The company’s work force has barely shrunk, to 2,000 from 2,077 at the end of July, though it plans to reach 1,900 by the end of this year.

“These are challenging times, but I don’t think they will be the same as in 2008 or 1998,” Kusharijono, IGP’s operations director, who uses only one name, yelled over a clanking, cream-colored assembly line here for minivan rear axles.

Business leaders and economists across the developing world expect emerging markets to face tougher times in the months and maybe even years ahead. Emre Deliveli, a Turkish economic consultant and columnist, said, “Even if all goes well and emerging markets end up rallying, the era of easy money and abundant capital flows will officially be over on Sept. 18,” when the two-day Fed meeting ends.

But while previous exoduses by investors from volatile emerging markets have caused waves of bank failures, corporate bankruptcies and mass layoffs, the latest retrenchment has been much milder so far.

That partly reflects the belief that when the Fed does move, it will very gradually scale back its bond purchases, business leaders and economists around the world said in interviews this week. The effects have also been limited partly because banks and companies and their regulators in many emerging markets have become much more careful about borrowing in dollars over the past two decades, except when they expect dollar revenue with which to repay these debts.In 1997 and 1998, “the whole problem began with the banking sector. Now I think the banking sector is much better,” said Sofjan Wanandi, a tycoon who is the chairman of the Indonesian Employers’ Association and part owner of IGP.

Trading in currency and stock markets seems to suggest that some of the worst fears over the summer are starting to recede. The Brazilian real has recovered about 8 percent of its value against the dollar since Aug. 21 and a little over a third of its losses since the start of May, when worries began to spread in financial markets about the vulnerability of emerging markets to a tightening of monetary policy. Stock markets from India to South Africa have rallied from lows in late August, with Johannesburg’s market up 14.7 percent since late June after a swoon earlier than most emerging markets.

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Rupee Drops, and Outlook Grows Darker for India

India’s economy slowed in early summer to its weakest pace since the bottom of the global economic downturn in 2009, government statistics released Friday evening showed.

The Central Statistics Office in New Delhi said that the economy grew 4.4 percent in the quarter ended June 30, well below economists’ expectations of 4.8 percent. The quarter was the weakest since output grew 3.5 percent in the quarter that ended March 31, 2009.

The accumulating signs of economic distress — slower growth, a widening current-account deficit, higher oil prices and rising inflation in general — suggest that the monthlong fall of the Indian rupee in currency markets may be a symptom of fundamental troubles in the Indian economy and not just part of the broader difficulties experienced by Asian emerging market currencies in recent weeks.

Hints that the Federal Reserve in the United States may soon shift to a tighter monetary policy have prompted global investors to shift billions of dollars out of financial markets from São Paulo to Jakarta to Mumbai, eroding the value of local currencies in developing economies. But the Indian rupee has fallen the fastest of any emerging market currency in the last month, down 8.1 percent. Broader investor disenchantment with emerging markets has been compounded here by worries about India’s economy, the third-largest in Asia after China’s and Japan’s.

Manufacturing and mining have been hit the hardest. A court-ordered halt to most iron ore mining across India for environmental reasons has hurt steel and other sectors; state governments have been raising taxes on the sector, and broader demand has begun to falter.

“The fact is, yes, the manufacturing sector has slowed down,” said Raj K. Singh, the chairman and managing director of the Bharat Petroleum Corporation, an oil refining and marketing company that is two-thirds owned by the Indian government and is one of the country’s largest businesses.

The data was released after stock market and currency trading had ended for the day, despite government promises to stay with the regular Friday morning release. After a week of considerable volatility, the rupee and the Mumbai stock market both had showed modest gains earlier Friday.

India enjoyed annual growth of 8 to 9 percent in the years leading up to the global financial crisis but has struggled to reach 6 percent since then, despite heavy government spending and large fiscal and trade deficits.

From corner stores to corporate boardrooms, the consensus in Mumbai these days is that stagnation may continue over the next few months, although almost no one expects a steep downturn.

Sitting in his office on Friday morning in front of an abstract Indian painting in blues and yellows, Mr. Singh voiced concern about a 7.2 percent drop in nationwide diesel consumption during the first three weeks of August from a year ago. Nationwide diesel consumption was also down 5.9 percent in July from a year ago.

But heavy monsoon rains have limited the need for diesel in irrigation pumps, making the comparison less clear, Mr. Singh cautioned. Rohit Dawar, the top diesel demand expert at the Petroleum Ministry in New Delhi, said in a telephone interview that diesel consumption had been artificially inflated in July and August last year by a peculiarity in government fuel subsidies, since removed, that temporarily made it cheaper to burn diesel instead of other fuels in industrial boilers.

Even allowing for all of these factors, however, “there is a slight slowdown” in diesel demand recently, Mr. Dawar said.

Plentiful monsoon rains, a key indicator for the Indian economy for thousands of years, have produced lush fields that could yet help stabilize broader measures of the economy in the coming months and forestall a steeper slowdown. While World Bank data show that value added in agriculture is only one-sixth of the economy these days, a good harvest could still play an outsize role in limiting recent increases in food prices.

Inflation will probably remain a problem, however, given that India relies almost entirely on imported oil, which becomes more expensive with each drop of the rupee. So important is oil to India’s trade deficit that desperate bidding for scarce dollars by Indian refiners helped drive the rupee briefly to a record low on Wednesday, before the Reserve Bank of India stopped the rout that evening by arranging to transfer dollars from its reserves to oil importers.

“Prices are rising for everything — petrol is more expensive, vegetables are more expensive,” said Bharat Hirji Gada, a local shopkeeper.

India has some advantages compared with European and other Asian countries that have experienced steep economic downturns following currency declines over the last two decades. The biggest advantage may be that the Indian government has long prohibited borrowing in foreign currencies by poor or middle-class households and by small and medium-size businesses.

Foreign debt has been concentrated among blue-chip companies and wealthy individuals. Many of these loans are to borrowers whose revenue is largely denominated in dollars, limiting their currency exposure, said Haseeb A. Drabu, the chief economist for the Essar Group, one of India’s heavy industry giants.

“The bulk of it would be hedged,” he said.

Neha Thirani Bagri contributed reporting.

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Stocks in Emerging Markets Take Brunt of Fed Fears

LONDON — Shares around the world, particularly those in emerging economies, fell Tuesday as investors braced for the phasing out of an American central bank stimulus program that has shored up markets for the past few years.

Stock benchmarks and currencies in developing countries like India and Indonesia have been hammered as funds flowed out of their markets in anticipation of a reduction in stimulus from the Federal Reserve.

Indonesia’s benchmark index, which dived 5 percent on Monday, suffered another 3.2 percent drop Tuesday. India’s Sensex was down 0.3 percent after sliding 5.6 percent in the previous two sessions. India’s currency, the rupee, fell to a record low of 64.11 rupees to the dollar.

Emerging markets have been hit by expectations that the Fed would reduce the amount of financial assets it buys in the markets — currently $85 billion a month — amid signs of improvement in the American economy. The stimulus was intended to spur borrowing and investment through easy access to liquidity. Many investors used the cheap money to buy stocks, particularly in fast-growing developing economies.

“The shift in sentiment and capital flows back towards developed markets is being keenly felt, leading to a major pickup in volatility,” said Michael Every, an analyst at Rabobank International.

Financial assets in emerging economies weren’t the only ones taking a hit on the expectation that the Fed would begin tapering its stimulus next month. Stocks on Wall Street have recorded a four-day losing streak for the first time in 2013 as borrowing rates in the markets have edged up to their highest levels since 2011.

The Fed is likely to remain the focus of attention in markets over the rest of the week, especially on Wednesday, when the minutes to the Fed’s July policy meeting are published. Investors will be looking for any hints of when the bank might begin cutting back on its stimulus.

In Asia, it wasn’t just the emerging markets suffering. Japan’s Nikkei 225 index, the regional heavyweight, tumbled 2.6 percent to finish at 13,396.38, its lowest close since June 27. Hong Kong’s Hang Seng dropped 2.2 percent to 21,970.29 while Australia’s SP/ASX 200 lost 0.7 percent to 5,078.20. South Korea’s Kospi fell 1.6 percent to 1,887.85.

Trading in the currency markets was choppy, with the euro 0.7 percent higher at $1.3427 and the dollar 0.3 percent lower at 97.30 yen.

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News Analysis: Asian Economies Encounter Stiff Winds

For the last few years, Asia’s developing economies — like China, Indonesia, the Philippines and Thailand — have been powering ahead of much of the rest of the world, buoyed by a heady cocktail of stimulus from policy makers at home and investment flows from abroad. In 2011, the region grew more than four times as fast as the American economy, and last year’s 6.5 percent growth was nearly three times that of the United States. Stock markets in the Philippines and Thailand were among the world’s best performers in 2012.

Over the past couple of months, however, some of the shine has come off the Asia story.

“The music has stopped playing,” said Frederic Neumann, a co-head of Asian economics at HSBC, which on July 9 slashed its growth forecasts for Asia, outside of Japan, to 6.1 percent for this year and 6.5 percent next year. The bank had projected 7.2 percent growth for both years.

One week later, the Asian Development Bank followed suit, trimming 0.3 percentage point off its projections for developing Asia. (The bank’s definition includes more countries than HSBC’s.) That leaves it with forecasts of 6.3 percent expansion this year and 6.4 percent in 2014.

The region was expected to bounce back from its “relatively sluggish” growth pace in 2012 but is now expected to pick up “only slightly,” the bank said in its regular review of the region’s economic outlook.

And Wednesday, the latest evidence of weakness in the Chinese economy emerged in the form of a survey that showed manufacturing activity in July contracting at its quickest pace since last summer. The survey, compiled by the research firm Markit and released by HSBC, produced a reading of 47.7 points for this month, down from 48.2 in June. A figure below 50 signals contraction.

As Mr. Neumann put it: “The air is getting thinner.”

This is also bad news for the rest of the world, which had been hoping that booming expansion in Asia could inject some much-needed oxygen into a global economy that is weighed down by anemic growth in the West.

The problem for developing Asia is that two of its main drivers of growth — China’s once red-hot economy and an inflow of money prompted largely by the Federal Reserve’s efforts to revive American growth — have fizzled.

Since May, when the Federal Reserve chairman, Ben S. Bernanke, signaled that the United States economy might soon be ready to be weaned off the huge purchases of Treasury securities it has been enjoying since the global financial crisis, emerging markets around the world have watched investors pull their money out of assets they deemed more risky.

While the Dow Jones industrial average and the Standard Poor’s 500-stock index in the United States have soared to record highs, stocks in most Asian markets have sagged, with key market indexes in Indonesia, the Philippines and Thailand down about 9 percent since mid-May.

Currencies like the Malaysian ringgit, the Philippine peso and the Thai baht have all dropped about 5 percent against the dollar. In Indonesia, the rupiah fell earlier this month to 10,000 per dollar for the first time since September 2009.

In India, the rupee is hovering near its weakest-ever level against the dollar, prompting the central bank to announce a number of steps this month aimed at arresting the currency’s slide. And Indonesia and Thailand recently lowered their growth forecasts for 2013.

To a large extent, the declines are not unexpected after a period of strong gains, as investors in search of high returns poured into Asian markets over the past few years. Analysts had long warned that the inflows could reverse if conditions changed.

Now that that has happened, economists at Australia New Zealand Banking Group wrote in a recent report, the region is “facing the consequences of having drunk too readily from an abundance of virtually free credit.”

For the most part, companies are well financed, analysts say, and the recent turmoil does not herald imminent collapses or a flood of defaults. But it has, at least for now, turned off the faucet on the cash that had helped fuel Asia’s recent growth spurt.

“The region’s leverage-driven growth model has come to an end,” said Mr. Neumann of HSBC.

What is more, the jitters about the Federal Reserve’s bond-purchase plans have coincided with rising nervousness about China’s cooling economy.

After years of powering ahead at growth rates of more than 10 percent a year, China is now in the throes of a major economic overhaul aimed at raising productivity and domestic demand.

But that revamp comes with slower growth. The economy — the second-largest in the world after that of the United States — could struggle to grow at a rate of 7.5 percent this year.

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Asian Markets Rise on Fiscal Deal

HONG KONG — Stock markets in the Asia-Pacific region began the year with gains on Wednesday, as investors took some relief from the last-minute fiscal deal reached in Washington, but wrestled with the lingering uncertainties that surround many other aspects of the U.S. budget.

Two key markets — Japan and China — remained closed for holidays on Wednesday, but elsewhere in the region, markets gained modestly during the morning, and climbed further as a key vote in Washington passed a compromise deal that staves off tax increases for most Americans.

By midafternoon, the Hang Seng Index in Hong Kong was 1.9 percent higher, while the benchmark stock indices in Singapore and Australia climbed 1.3 percent.

In South Korea, the Kospi rose 1.6 percent, and in Taiwan, the Taiex rallied 1.1 percent.

With the Chinese economy regaining some momentum in recent months, Asia’s economic prospects are relatively positive, and growth in most of the region’s developing economies is expected to outpace expansion in the beleaguered West. Fresh purchasing managers’ index reports from Taiwan, South Korea and India, which gauge the health of manufacturing, underlined the improving picture on Wednesday: The readings for all three countries climbed in December. The reading for Indonesia slipped, but remained above the key level of 50, which separates expansion from contraction.

Still, analysts have long cautioned that the economic and budget travails in both the U.S. and Europe are likely to overshadow global market sentiment, and could cast a pall over Asia this year— especially highly trade-dependent countries like Taiwan and South Korea and small, open economies such as Singapore and Hong Kong.

The deal reached in Washington on Tuesday averted looming tax increases for most Americans. Combined with significant spending cuts, these would have dealt a major blow to an economy that has in any case only been growing anemically since the global financial crisis.

Market relief, however, was likely to be short-lived, analysts said, as other key issues have not been tackled.

In particular, spending cuts of $110 billion were delayed for two months, and politicians have not come up with a long-term solution that would allow the U.S. government to get past the borrowing limits reached at the end of the year — known as the debt ceiling.

Tuesday’s scaled-down deal “addressed the fiscal cliff but did nothing to address longer term fiscal health of the nation,” Aneta Markowska, an analyst at Societe Generale in New York, wrote in a research note before the final vote in the House of Representatives late Tuesday night in Washington. “This puts the U.S. rating at risk for a downgrade.”

Broader tax reform also remains on the table for 2013, and there is still “significant uncertainty about future deficits and further work will be required to stabilize the fiscal situation,” Ms. Markowska added.

“Call it breathing room, call it kicking the can down the road, call it whatever you like — come mid-February, when the decision on the legal U.S. debt limit will be needed, the fight starts afresh,” analysts at DBS in Singapore wrote in a research note. “Two more months of shenanigans and waffling / seasick markets? It certainly looks that way.”

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DealBook: Julius Baer to Cut 1,000 Jobs After Deal for Bank of America Unit

The headquarters of Julius Baer in Zurich.Michael Buholzer/ReutersThe headquarters of Julius Baer in Zurich.

LONDON — The Swiss bank Julius Baer announced on Tuesday that it would eliminate about 1,000 jobs to reduce costs.

In August, Julius Baer reached a deal with Bank of America Merrill Lynch to buy its private banking operations outside the United States and Japan for around $880 million. As part of its plan to integrate the business, Julius Baer said it now expected to reduce the bank’s combined 5,700 work force by 15 to 18 percent.

The layoffs, which could total 1,026 staff members, are expected to begin after the deal closes early next year.

The deal for the Bank of America unit is part of Julius Baer’s expansion into new markets as it looks to keep pace with Swiss rivals including UBS and Credit Suisse.

The acquisition would give Julius Baer up to an additional $74 billion of assets, which primarily come from wealthy clients in developing economies.

Boris Collardi, chief of the Swiss bank Juluis Baer.Arnd Wiegmann/ReutersBoris Collardi, chief of the Swiss bank Juluis Baer.

“This acquisition brings us a major step forward in our growth strategy and will considerably strengthen Julius Baer’s leading position in global private banking by adding a new dimension not only to growth markets but also to Europe,” the company’s chief executive, Boris Collardi, said in August.

The expected job cuts are an effort to reduce costs at the new unit, which reported a $30 million net loss in the first half of the year, according to an investor presentation released on Tuesday.

Julius Baer also said on Tuesday that its total assets under management as of Aug. 31 had risen 8 percent, to 184 billion Swiss francs ($196 billion), since the end of 2011.

Shares in Julius Baer fell less than 1 percent in morning trading in Zurich on Tuesday.

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Off the Charts: A Jobs Recovery Faster for Some Than Others

While much of Europe has been struggling to recover — and countries in financial difficulty have been forced to adopt austerity programs that are likely to stifle economic growth, at least in the short term — German unemployment is at its lowest level since German unification nearly two decades ago.

The accompanying charts show the changes in unemployment in nine countries, as well as for the 34 countries in the Organization for Economic Cooperation and Development as a group. They show both the change in the unemployment rate since September 2008 and the change in the number of people out of work. The O.E.C.D. includes major industrialized countries and some leading developing economies.

In Germany, the number of unemployed workers rose 6 percent in the first year after the collapse of Lehman Brothers turned a relatively mild slowdown into what became know as the Great Recession. But the number now has fallen 15 percent below the level of September 2008.

Among the other countries in the O.E.C.D., Luxembourg is the only one to recover all its losses.

The relatively small rise in joblessness in Germany may have been partly because of government programs that encouraged companies to keep workers on reduced hours rather than let them go. The rapid recovery reflects the strength of the German export sector, which was enhanced by the fact that many European countries lost competitiveness because of rising labor costs.

When the downturn began, Germany had about 25 percent of the population in the euro zone and a similar share of the unemployed workers. Its population share is about the same now, but it has only 17 percent of the unemployed.

If the euro zone were a fiscal union rather than just a monetary one, there would have been automatic subsidies through unemployment benefits and other programs for the weaker areas. If there were easy labor mobility in the zone, more workers would have moved to Germany. If there were separate currencies, the German mark would have appreciated against the other European currencies.

As it is, none of that happened. Many Germans resent the need to bail out other countries, and many people in those countries resent being forced to cut wages and payrolls in the name of restoring competitiveness.

The unemployment figures show how much the labor situation has worsened in Ireland and Greece, the first two countries to seek bailouts. But it may be a surprise that unemployment in the Iberian peninsula is worse in Spain, which has not needed help, than in Portugal, which does need assistance. Similarly, France and Italy have seen joblessness rise at roughly the same pace, although Italy is widely thought to be in worse shape economically.

The other chart shows two major countries not in the euro zone. Unemployment grew faster in the United States than in Britain, but Britain has shown little improvement while the United States has begun to recover.

Floyd Norris comments on finance and the economy on his blog at

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