November 28, 2020

Breathing Room for Emerging Markets Watching Money Flee

JAKARTA, Indonesia — When the Asian financial crisis hit in 1997, sales plummeted 95 percent and stayed down for six months at the IGP Group, Indonesia’s dominant manufacturer of car and truck axles. Four-fifths of the company’s workers lost their jobs.

When the global financial crisis began in 2008, IGP’s sales briefly dropped nearly one-third, and a quarter of the employees were put out of work.

The latest downturn, which began in early August, has been much more modest. IGP’s axle shipments are down 10 percent in the last 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 IGP 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.

From Indonesia and India to Turkey and Brazil, capital flight from developing economies to the United States is already causing hardship for millions of businesses and workers. More was expected if the Federal Reserve decided to retreat from its economic stimulus campaign of buying billions of dollars in bonds each month.

That it decided on Wednesday not to stop may relieve some companies, government leaders and economists who worried that rising interest rates in the United States would draw tens of billions of dollars out of emerging markets and cause local currencies to fall further against the dollar.

Investors have been moving money into dollar-based investments that offer higher yields.

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. On Thursday, currencies in Thailand, Indonesia, the Philippines and Malaysia, which have fallen sharply in recent months, headed higher, with the Indonesian rupiah gaining about 1.5 percent against the dollar by late morning in Asia.

The economic slowdowns in the developing economies seem less severe so far than in other recent downturns. 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 scale back its bond purchases very gradually, business leaders and economists around the world said in interviews this week. The effects have also been limited partly because banks, companies and their regulators in many emerging markets have become much more careful about borrowing in dollars over the last 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 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.

“While the Fed hasn’t started the tapering process as yet, there has been a considerable withdrawal of money in the emerging markets and especially in India since May. In my opinion, the major effect has already taken place,” said Sujan Hajra, the chief economist at AnandRathi, an investment bank based in Mumbai.

One lingering question is how much inflation will accelerate in emerging markets. Many of their industries depend heavily on commodities like oil that are priced in dollars.

Keith Bradsher reported from Jakarta, Simon Romero from Rio de Janeiro and Ceylan Yeginsu from Istanbul. Neha Thirani Bagri contributed reporting from Mumbai.

Article source: http://www.nytimes.com/2013/09/19/business/global/emerging-markets-bracing-as-fed-meets.html?partner=rss&emc=rss

Global Sell-off Shows Fed Reach Beyond the U.S.

In the weeks since the Fed’s chairman, Ben S. Bernanke, first indicated that the central bank might start to pare back its support for the economy, markets in Asia, Europe and Latin America have fallen even more sharply than those in the United States, threatening economic growth in many countries.

While leading market measures in the United States have declined 4 percent over the last month, an index of the world’s stock markets has slumped more than 6 percent.

“The Fed isn’t just the U.S.’s central bank. It’s the world’s central bank,” said Mark Frey, the chief strategist at the Cambridge Mercantile Group.

The selling picked up in markets around the world on Thursday, a day after Mr. Bernanke’s latest comments on the Fed’s plan to wind down the stimulus. While the reason for the shift by the Fed is good — a strengthening of the recovery in the United States — investors are nervous that the global economy may not be ready.

The prospect of slowing economic growth and rising interest rates set off waves of volatile selling on markets around the world. In the United States, the benchmark Standard Poor’s 500-stock index fell 2.5 percent on Thursday, its steepest one-day decline since November 2011. Treasury prices also slumped, driving yields, which move in the opposite direction, to touch their highest levels in nearly two years.

The yield on the 10-year Treasury — a benchmark for mortgages and other consumer rates — rose as high as 2.47 percent before settling at 2.42 percent. Gold, once a favorite of investors, slid to two-and-a-half-year lows.

The damage was more pronounced in a wide array of markets outside the United States, like Philippine government bonds and the Norwegian currency. Stock indexes in China, Europe and Mexico fell more than 3 percent.

Investors were also rattled by reports that Chinese banks had become reluctant to lend to one another. And Europe’s debt woes came into focus again after the International Monetary Fund said it was considering suspending aid to Greece. But traders and investors cited the Fed’s changing policies as the main driver behind the big flows of money around the world.

“The trigger was clearly what is going on with the Fed,” said Ashish Goyal, the investment director at Eastspring Investments in Singapore.

The heavy selling is a sharp reversal after years when low interest rates in the United States encouraged investors to put their money into foreign countries. For investors in once-attractive foreign markets, the fear is that those markets may be on even less firm economic footing than the United States’, and consequently less able to absorb the decline in lending that comes along with rising interest rates.

“When the U.S. embarks upon policies that are appropriate for its own domestic circumstances, it can impose policies on the rest of the world that aren’t necessarily appropriate to them,” said Darren Williams, the senior European economist at AllianceBernstein in London.

Interest rates are a vital determinant and indicator of economic activity. To try to encourage borrowing and bolster the economy after the financial crisis, the Fed has pushed rates down by cutting the interest rates it offers banks and by buying more than $2 trillion of bonds. The extent of the intervention has put markets on a hair trigger for any hint of a change from the Fed.

Mr. Bernanke has indicated that the Fed will pare its bond purchases only very slowly and may increase them again if there are signs the economy is being hurt. That has some analysts calling this week’s market turmoil a panicked overreaction. For the year, the S. P. 500 index is still up 11.4 percent.

But there are significant concerns that the Fed may not be able to control the convulsions in the markets that Mr. Bernanke has already set off with his comments.

“It’s a very significant moment,” said Sebastian Galy, a foreign exchange strategist at Société Générale. “It’s the end of an extremely aggressive phase of monetary policy globally.”

Peter Eavis contributed reporting.

Article source: http://www.nytimes.com/2013/06/21/business/economy/global-sell-off-shows-fed-reach-beyond-the-us.html?partner=rss&emc=rss

India’s Economy Grew 7.8 Percent in January-March Quarter

NEW DELHI — India’s economy grew at a slower 7.8 percent in the January-March quarter from the same period a year earlier, as rising interest rates crimped consumption and investment.

The pace of growth eased from the 8.3 percent expansion in the previous quarter and fell below the median forecast for growth of 8.2 percent in a Reuters poll.

For the full 2010-11 fiscal year, which ended in March, the economy grew 8.5 percent, compared with the government’s forecast of 8.6 percent.

“Not a disaster, but adds to the idea that E.M. growth is cooling as tighter policy kicks in,” said Jonathan Cavenagh of Westpac Institutional Bank in Singapore, referring to emerging markets.

With inflation still elevated, he said, the Reserve Bank of India is likely to keep raising interest rates, “which will not be welcome by the equity market.”

Most economists expect the central bank to raise its main policy interest rate by 25 basis points at its review on June 16, after it raised its key rates by a bigger-than-expected 50 basis points in May.

India’s farm sector expanded at 7.5 percent during the January-March quarter from the year-earlier period.

Meanwhile, manufacturing grew 5.5 percent in the same period, less than the 6 percent annual growth seen in the previous quarter.

Agriculture is expected to perform well for the second straight year after the government forecast a normal monsoon in 2011. Prospects for the summer harvest got a boost after annual monsoon rains hit the southern state of Kerala two days ahead of schedule.

Still, rising borrowing costs and higher input prices have started to crimp consumer demand.

The Reserve Bank of India has raised its policy rate by a total of 250 basis points in nine moves since March 2010 as part of battle against stubbornly high inflation. Analysts have forecast an additional increase of 75 basis points by the end of December.

April car sales rose at their slowest pace in nearly two years, rising 13.2 percent from a year earlier, as higher interest rates, fuel prices and vehicle costs crimped demand in the world’s second-fastest growing auto market, after China.

Construction of big projects was delayed during the winter over environmental clearances as well as difficulty securing coal for new power plants.

Article source: http://feeds.nytimes.com/click.phdo?i=607345f4e5686d286235924e5f2758e0