- Satyajit Das
To paraphrase writer Robert Louis Stevenson, financial markets have "a grand memory for forgetting".
Multiple Latin debt crises and the 1997/1998 Asian emerging market crisis have been forgotten. Now, the risk of an emerging market crisis is very real.
BRICs on credit...
Investors have been romancing emerging markets, exemplified by the dalliance with the BRIC economies (Brazil, Russia, India and China), a term coined by Goldman Sachs' Jim O'Neill in 2001.
Slowing economic growth in developed economies following the 2007/ 2008 global financial crisis resulted in a sharp slowdown in emerging economies. To restore growth, emerging markets switched to development models more reliant on credit.
Double-digit annual credit growth drove economic activity in China, Brazil, India, Turkey and many economies in Asia, Latin America and Eastern Europe.
Loose monetary policies in developing countries - low or zero interest rates, quantitative easing and currency devaluation- encouraged capital inflows into emerging markets, in search of higher returns and currency appreciation. Banks, awash with liquidity, sought lending opportunities in emerging markets. International investors, such as pension funds, investment managers, central banks and sovereign wealth funds, increased allocations to emerging markets.
Foreign ownership of emerging market debt increased sharply. In Asia, 30-50% of Indonesian rupiah government bonds, up from less than 20% at the end of 2008, are held by foreigners. Approximately 40% of government debt of Malaysia and the Philippines is held by foreigners.
Capital inflows drove sharp falls in emerging market borrowing costs. Brazilian dollar-denominated bond yields fell from above 25% in 2002 to a record low 2.5% in 2012. After averaging about 7% for the period 2003-2011, Turkish dollar-denominated bond yields sank to a record low 3.17% in November 2012. Indonesian dollar bond yields fell to a record low 2.84%. Local currency interest rates also fell.
Increased availability of funds and low rates encouraged rapid increases in borrowings and speculative investment. Asset prices, particularly real estate prices, increased sharply.
Image: BRICS leaders, from left, Indian Prime Minister Manmohan Singh , Chinese President Xi Jinping , South African President Jacob Zuma Brazil's President Dilma Rousseff and Russian President Vladimir Putin pose for a group picture during the BRICS 2013 Summit in Durban, South Africa on March 27, 2013.
Associated Press Images
Satyajit Das is a former banker and the author of Traders Guns & Money and Extreme Money. He was featured in Charles Ferguson's 2010 Oscar-winning documentary Inside Job.