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How America poisoned the economies and future of Indonesia, South Africa, Brazil, Turkey and India

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US Fed’s taper to impact ‘Fragile Five’ currencies

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WILLIAM GAMBLE | 30/12/2013 11:20 AM |

Free money from the US Fed allowed Turkey, South Africa, India, Brazil, and Indonesia and others to run deficits as their higher interest rates created a demand for their bonds and currencies. Now that has reversed

So far the markets seem to have taken the US Federal Reserve’s (Fed) ‘taper’ of its quantitative easing program in its stride. Markets in developed countries are hitting new highs. Growth in the US looks strong. Europe seems to have recovered. The Japanese money tsunami appears to have done some good. But there might be a fly in the ointment. The emerging markets, which for the past five years did so much to pull the world back from the brink, are beginning to weaken. China is experiencing uncomfortable tremors in its financial system an omen of something very serious. The most obvious problems are in a group of countries called ‘Fragile Five’ countries. They include Turkey, South Africa, India, Brazil, and Indonesia.



This week the ten year US treasury bonds hit 3% for the first time in over two years. The end of one credit cycle and the beginning of rising interest rates will bring many changes. For emerging markets and especially the Fragile Five, one of the main impacts will be with their currencies.



While the Indian Rupee has strengthened a bit from its September bottom, the Brazilian Real has not. The Indonesian Rupiah and the South African Rand are declining and the Turkish Lira has hit a record low. The fall in currencies is especially a problem for the Fragile Five because one of the many things they have in common are deficits. The free money from the Fed allowed these countries and others to run deficits as their higher interest rates created a demand for their bonds and currencies. Now that has reversed. So far, the decline has not been as dramatic as it was earlier in the year, but the trend is in motion.



Partially to protect their currencies Brazil, India and Indonesia have all raised interest rates. South Africa’s are flat. In contrast Turkey’s interest rate has declined, one of the reasons for the Lira’s tumble. (Although confusingly, the central bank has allowed interbank rates to rise) Turkey’s failure to raise interest rates illustrates the dilemma for these countries. Falling currencies resulting in rising inflation and then rising interest rates potentially means slower growth. Slower growth means a political impact.



The embattled Prime Minister, Recep Tayyip Erdogan, is in the middle of a corruption scandal, which has already resulted in the firing of more than half of his cabinet and may even reach his family. Erdogan has blamed others for his problems including foreigners, the media and even the central bank The result is that The central bank’s recent decision to defend the currency with reserves, rather than via higher interest rates, may have been affected by Erdogan’s accusations that the bank’s decisions are the work of an ill-defined “interest rate lobby” that he says is trying to hold Turkey’s growth back.



Turkey is not alone. Political risk is another aspect that the Fragile Five have in common. All five countries will hold elections in 2014. In elections years the ruling parties are happy to spend their way to maintaining power. In Brazil the budget deficit is growing. To limit inflation the government has resorted to price controls on essentials such as fuel. Any unpopular but essential reform necessary to convince markets of the strength of the economy is likely to be ignored until after the election. But with rising interest rates and falling currencies, markets will not be either sympathetic or patient with the problems of entrenched politicians.



It is not just the markets that are unlikely to be impressed. Credit rating agencies have at least four of the Fragile Five in their sights for a potential downgrade in 2014. High on the list is India. Standard & Poor’s considers the chances for a credit rating down grade higher for India than Indonesia. For Brazil a credit downgrade in 2014 is a distinct possibility while two agencies have given South Africa a negative outlook. Oddly, only Turkey has escaped, so far.



Like their emerging market piers, the Fragile Five have grown rapidly over the past five years. Although they have all slowed since 2011, with the exception of South Africa, their growth rates are still far in excess of developed countries. But the years of easy money has had a cost. The amount of debt has increased substantially. In Brazil the credit to the private sector has doubled in the past five years to 50% of GDP. Like Brazil, Indonesia has issues with consumer credit. Its non-mortgage consumer credit has tripled since 2009.



Companies in all of these countries have been able to borrow cheaply and many will not be able to pay the loans back. Nonperforming loans especially state banks have risen substantially although many are not recognized. India’s state banks have nonperforming assets estimated to be about 10% concentrated in infrastructure and construction companies. Last summer Moody’s sharply downgraded the ratings of two Brazilian banks BNDES, the nation’s main source of long-term lending, and Caixa Econômica Federal, the state-run mortgage lender. In Turkey the police reportedly found that the chief executive of state controlled Halkbank, Suleyman Aslan, had $4.5 million hidden in shoeboxes in his home. Mr Aslan claimed the money was for charitable donations.



The Fragile Five have another problem not necessarily related to their economic situation. Their financial markets are relatively large compared to other emerging markets. So when US interest rates rise and investors move capital back to the US, they sell developing countries with large liquid markets where exiting without large losses is easier.



Financial headlines focus on the US, China, Japan and the EU. Smaller countries are not supposed to have much impact on the world economy. But the Fragile Five are not small. Together they make up 14% of the world’s GDP, larger than France and China combined. The global impact of problems in these countries cannot be ignored and most likely cannot be avoided.



(William Gambleis president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first-hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)



always remember if your country ends in turmoil in the forthcoming future who you have to blame for it
 
I bet JEW USA made fukushima to punish japanese for leaving the dollar system, like they did for Gadafi

People going with JEW USA are either stupid, unconscious or have no choices

Korea & Japan are the only countries with JEW USA who succeed because they don't have natural ressources and because they are not needed in the wars in the ME

All others are totally vampirized by the JEW USA: latina America, Africa, Kosovo, Iraq, Libya...
 
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I bet JEW USA made fukushima to punish japanese for leaving the dollar system, like they did for Gadafi

People going with JEW USA are either stupid, unconscious or have no choices

Korea & Japan are the only countries with JEW USA who succeed because they don't have natural ressources and because they are not needed in the wars in the ME

All others are totally vampirized by the JEW USA: latina America, Africa, Kosovo, Iraq, Libya...
JewSA, this is zionist conspiracy from JewSA. Zionist, Free Palestine.
 
hmmm china owe its rapid economic development to west and usa in particular (because of their investments and size of their market), as a matter of fact usa single-handedly uplifted china's economy due to american companies investments in china, same goes for germany, after ww2 america and west helped germany to rebuild and now germany is one of the world's largest economies, same goes for japan, i think the successful u.s. interventions speak for themselves.

if it wasnt because of usa india wouldn't turn into world's largest and most powerful IT capable country which its benefiting from greatly, usa immigration law although flawed but has allowed many from china, india, etc... come, work, get educated and take their money and skills back to their countries and build their countries. all countries in the world have benefited from usa (one way for another). after china india, thailand and indo have all become destinations for american investments. have some gratitude.

#merica

it it just me, or has this forum gotten even more batshit insane lately :lol:

its not u, it always has been, but now more than ever!
 
hmmm china owe its rapid economic development to west and usa in particular (because of their investments and size of their market), as a matter of fact usa single-handedly uplifted china's economy due to american companies investments in china, same goes for germany, after ww2 america and west helped germany to rebuild and now germany is one of the world's largest economies, same goes for japan, i think the successful u.s. interventions speak for themselves.

if it wasnt because of usa india wouldn't turn into world's largest and most powerful IT capable country which its benefiting from greatly, usa immigration law although flawed but has allowed many from china, india, etc... come, work, get educated and take their money and skills back to their countries and build their countries. all countries in the world have benefited from usa (one way for another). after china india, thailand and indo have all become destinations for american investments. have some gratitude.

#merica

its not u, it always has been, but now more than ever!

Erm, not really. US investment is never really a dominant factor in China's growth. Historically, the earliest and, for quite a few decade, biggest foreign contributor to Chinese growth is USSR. France is another major partner for PRC in its early days. UK also helped quite a bit in the earlier days. After Deng's reform in 80s, Taiwan, Germany and Japan are the biggest partners with China. Nowadays it is Russia, Brazil as well as EU nations. US is a export destination for China, but really not much beyond that.

A common misconception is the scope of US and China economic ties. Yes, China and US do trade quite a bit, but both of them trade a lot more with EU than with each other. They also have way more technological exchange with other nations like EU, Germany, Japan and Russia than each other. The reason is pretty simple. Tension and conflict between US and China in East and Southeast Asia started right after the founding of PRC and haven't really stopped in the following six decades. Europe, on the hand, is thousands of miles from both nations, so there is less conflict of interest.

While US did contribute significantly to Japan's earlier growth, it also utterly gutted Japan economy with Plaza accord. Their relationship is like a herdsman and the sheep. Sure, the herdsman make sure the sheep is protected and well-fed, but the butcher knife will inevitably come.
 
All the 4 countries are horrible economies.

India being the worst. India is far too corrupt with red tape to ever be any challenge to China or America.
 
I think the writer had made some good points, today they may seem like conspiracy theories but after 50 years, someone from CIA will talk, it became a tradition after years National Clandestine Service's heads of Political Division, they do talk when they retire.


All the 4 countries are horrible economies.

India being the worst. India is far too corrupt with red tape to ever be any challenge to China or America.


ohh really, wanna talk about HDI in China?
 
I think the writer had made some good points, today they may seem like conspiracy theories but after 50 years, someone from CIA will talk, it became a tradition after years National Clandestine Service's heads of Political Division, they do talk when they retire.





ohh really, wanna talk about HDI in China?

This is about economies kid.
Turkey and India are a joke with collapsing currencies like banana republics.
 
I think the writer had made some good points, today they may seem like conspiracy theories but after 50 years, someone from CIA will talk, it became a tradition after years National Clandestine Service's heads of Political Division, they do talk when they retire.





ohh really, wanna talk about HDI in China?

Please ignore this keyboard warrior. Someone apparently requested at least one troll per nationality on this forum so we got another one... You got Atatwolf already.
 
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