Stable shock absorbers

Emerging economies have advantages that will enable them to weather the ill winds blowing from the West

With growth slowing in the large emerging economies of Brazil, Russia, India and China, there is growing anxiety that the global financial crisis, which began in the United States and then spread to Europe, will finally end up in emerging economies.

To some extent, fears of this "crisis-shift" are increasing volatility in the global markets and casting another shadow over the world economy. Hence it is important for the emerging economies to take actions to alleviate the growth pressures emanating from the Western countries.

Without doubt, the emerging economies have dramatically increased their importance in the world economy. In purchasing power parity terms, they represent 50 percent of global GDP, up from 30 percent just 20 years ago. According to the latest projections of the International Monetary Fund, the 27 countries of developing Asia may contribute nearly 60 percent to global GDP growth this year.

Because of their rich human resources, relatively high saving rates, and rapid urbanization, emerging economies are better positioned to address the new challenges that lie ahead.

During the global crisis, deleveraging in developed countries forced governments, banking systems, corporations and individuals to reduce debt. This process depressed housing markets and slowed consumer spending; and the process is far from over. Meanwhile, jobs, funds and other economic opportunities are shifting to emerging economies.

In addition, many emerging countries, drawing on the lessons learned from the Asian financial crises and other debt crises that took place in the 1990s and early 2000s, have carried out various adjustments and reforms in fiscal consolidation and monetary policy management, and have improved their financial supervision and the development of local financial markets. These moves have played and will continue to play an important role in responding to shocks.

The banking business models in many emerging economies, particularly in Asia, are quite different from those of developed countries. Basically, banks have stuck much closer to the "traditional" banking model - and have not become so deeply involved in complicated financial products and transactions - making loans funded primarily by domestic deposits. In many emerging economies, the loan-to-deposit ratios are often below 100 percent, making them less susceptible to a funding squeeze in markets. This feature has obviously provided the banks with some unexpected advantages over their Western counterparts in weathering the 2008 crisis and its ongoing effects.

In addition, with the easing of inflationary pressures and the consolidating of fiscal positions in many emerging economies, they have greater room for adopting policies to stimulate growth than the US and European countries, where both fiscal and monetary policies are hitting or approaching their limits.

Despite 2011's dismal emerging markets equity performance, investors continue to believe that the emerging markets are largely immune to the developed markets, so they have pulled a lot of money out of the developed markets and put it into emerging market bonds. As a result, local emerging debt markets denominated in domestic currencies have flourished. In many countries in Asia, governments and corporations now enjoy lower borrowing costs, helping to shelter companies in those regions from the global market turmoil.

As the biggest economy in the developing world, China's economic fundamentals have not changed, although the effect of the global economic downturn has increasingly been felt.

In fact, China has already begun to transform its development model, a process driven by shrinking external demand and growing internal initiatives. China had already cut its trade surplus to 2.1 percent of GDP in 2011 from 7.5 percent in 2007. In the first two months of 2012, China's exports increased by only 7 percent year-on-year, with February's current account deficit the biggest monthly trade deficit since 1998.

China's economic growth will need to rely more on its domestic market, which is being boosted by surging disposable incomes, rapid urbanization, government efforts to improve social security and technological transformation.

A report released by global consulting firm McKinsey identifies private consumption as the primary driving force for the Chinese economy through 2020, accounting for 43 percent of GDP by that time compared with 26 percent at present. Meanwhile, investment is expected to shrink to 38 percent of GDP compared with 53 percent now.

Basically, banking systems in emerging economies have become a source of stability in the midst of the crisis. If the global economy deteriorates, it is essential for emerging economies to respond effectively and launch new measures. Moreover, given the uncertainties that lie ahead, careful monitoring of systemic risks and a prudential financial regulatory framework are badly needed.

The shift in economic power from the developed world to the emerging economies is inevitable, but the so-called "crisis-shift" must and can be avoided.

(China Daily 03/21/2012 page8)