Emerging Markets Find They Aren’t Insulated From the Tumult

The New York Times
By ALEXEI BARRIONUEVO
Published: October 6, 2008
RIO DE JANEIRO — Emerging markets took one of their biggest collective tumbles in a decade Monday as stock markets from Mexico to Indonesia to Russia were gripped by fears of a collapse of Europe’s banking system and concern that a global recession could drag down the price of commodities, forcing a steep slowdown in emerging-market growth.
Many of the world’s fastest-growing economies thought they had insulated themselves from problems in the developed world. But economists said that simultaneous turmoil in Europe and the United States was too much to bear. “The potential of a global recession is awakening emerging markets that they will be hit stronger than we thought before,” said Alfredo Coutiño, a senior economist at Moody’s, the credit rating agency.
At the beginning of the global trading day, Asian markets were hit by fears that weakening economies in the United States and Europe would increase the chances of a downturn in Asian exports. The Standard & Poor’s/Australian Stock Exchange 200 index in Sydney declined 3.3 percent, the Nikkei 225 index dropped 4 percent in Tokyo, and the Hang Seng in Hong Kong fell 5 percent.
But Indonesian markets fell 10 percent — as did some of the largest European markets later. Unlike many emerging markets, Indonesia has been running a trade deficit, which means that it needs a constant flow of foreign capital. But capital has been seeking safe havens, and the emerging markets with large current-account deficits are being penalized.
That includes India, and many of the Baltic states, as well as Turkey and Kazakhstan.
Nicholas Bibby, an economist in the Singapore office of Barclays Capital, said that falling share prices across the region showed that many investors were still worried that banking difficulties might spread even after Congress passed a $700 billion economic bailout plan in Washington.
“It’s a fear of contagion,” Mr. Bibby said, while adding that Asian banks were better positioned than most to withstand the current problems because the region’s high savings rates tends to mean that Asian banks are net lenders in international money markets.
Similarly, many economists expect that the regulatory reforms Latin America took to shore up its banking sector in the wake of previous crises will make them more resistant to failure than their American or European banks. But that relative health is inspiring little faith in the markets.
Brazil’s stock market, the Ibovespa, closed down 5.4 percent, after trading was suspended twice, at one point when the market plunged 15 percent. Argentina’s Bolsa de Buenos Aires fell 6 percent. Even Chile, the region’s most stable economy, had one of its largest one-day drops in years. The country’s IPSA exchange dropped 6.02 percent; its IGPA exchange fell 4.89 percent.
For Latin America, nightmarish memories of previous financial crises are still fresh. Mexico struggled at the end of 1994 and was saved from default only by a $50 billion bailout by the United States in concert with international organizations. After the Southeast Asian crisis, Brazil watched its currency, the real, tumble 43 percent in early 1999 after the government abandoned its policy of defending it.
This time, the region was thought to be more resilient. This decade, Brazil, Mexico and Chile, in particular, have saved wisely during a broad-based commodity boom. They have reformed their financial institutions with stronger regulations and, in the case of Brazil especially, diversified their trade to be less reliant on the United States economy and more on Asia’s.
“Latin America is in a much better macroeconomic position now,” Mr. Coutiño said. “But in the past few weeks the movie has changed, and now Europe is involved. Two of the three main global locomotives for growth are now suffering. If we face a global recession nobody can escape.”
To varying degrees, Latin American countries have said they will tap reserves and stabilization funds to try to ensure that the higher cost of borrowing does not affect exporters. The governments of Brazil and Chile have said in recent days that they will free funds for key industries this year.
Other countries — such as Venezuela, Ecuador and Argentina — which saved less, will not have as much flexibility. In Argentina, the global credit tightening could make it more difficult for the country to renegotiate billions of dollars in outstanding debt and stave off a fiscal crisis next year, Mr. Coutiño said. But because it has been shunned by international investors, capital flight is less of a concern.
“Capital is not leaving Argentina because it never entered Argentina,” said Dante Sica, an economist at Abeceb, an economic consulting firm in Buenos Aires.
Russia: A 19% Drop
Russia led the global sell-off Monday, its stock market falling 19.1 percent, its worst day since the end of the Soviet Union and the return of capitalism. Russia’s RTS index dropped about a tenth of a percent farther than during the previous worst day — Oct. 28, 1997, during the emerging-market financial crisis of the late 1990s.
Three halts in trading through the day failed to slow the drop. The other main stock exchange, the Micex, was down 18.6 percent. And some big companies fared even worse.
Gazprom, Russia’s largest company, fell 24.4 percent, and Norilsk Nickel, a blue-chip mining enterprise, lost 37.7 percent. Brokers once giddy about the rapid rise of the oil-fueled market said they expect worse to come.
“Nobody has to own the market,” Kingsmill Bond, the chief strategist at Troika Dialog brokerage, said of Russia stocks. And nobody, apparently, wants to, as investors closed positions to move to treasury securities.
The problem is, even against a backdrop of global uncertainty, the Russian stock market looks especially vulnerable.
Falling commodity prices is one reason: as the threat of global recession looms, oil and other resources that fueled Russia’s boom are retreating. The Russian market was also weakened by investors divesting in the wake of the war in Georgia, which raised the specter of a return to cold war hostilities with the West. As stocks fell, other investors were forced to sell on margin calls, in a spiral that revealed the Russian stock market was more leveraged than most analysts had believed. A Kremlin bailout plan, meanwhile, has not had much effect.
On Monday alone, the stock market drop represented a paper loss of $102 billion for Russian companies.
Gazprom executives once boasted, Khrushchev-like, that their company would bury its biggest competitor, Exxon Mobil, on the strength of their seemingly limitless reserves of natural gas in the Siberian wilderness. But Gazprom has fallen 66 percent since its peak in May; the company’s market capitalization was $123 billion Monday.
Exxon Mobil, which is also vulnerable to oil price declines, has fallen less, 21.1 percent since its May peak.
In another example of Russia’s woes, the price of Norilsk Nickel collapsed Monday after a big shareholder, the metals tycoon Oleg V. Deripaska, the nation’s richest man, was forced to hand over his shares in the Canadian auto parts maker Magna in a margin call by creditors.
That raised the question of whether his recently purchased Norilsk shares could also soon be seized by the consortium of Western banks that financed the deal. A spokesman for Mr. Deripaska’s conglomerate, Basic Element, said the company faced no liquidity crisis. Norilsk shares are down 78.2 percent from their peak this year.
Such losses in Russia’s mighty mining, oil and gas companies have now raised the specter of defaults by the wealthy but secretive coterie of Russian businessmen known as the oligarchs. Peering into their finances has always been a guessing game.
The Russian stock market is now about where it was on Aug. 17, when authorities halted trading for two days and announced a more than $150 billion stimulus package of loans to banks and tax cuts, which the market has largely shrugged off. On Monday, Vladimir V. Putin, the prime minister, said he would set up a committee to study new responses to the crisis. A deputy minister of economy said Russia plans additional, unspecified stimulus measures.
ANDREW E. KRAMER
Iceland: Seeking Capital
Iceland’s banks were celebrated not long ago for transforming an island of fishing villages into an economic dynamo by lending money to the world. But now the global credit squeeze is threatening to swamp those overleveraged banks, and the country with it.
The position of Iceland’s banks had deteriorated greatly over the last 24 hours, Prime Minister Geir H. Haarde said in a television address from Reykjavik on Monday. So much so that the country passed legislation Monday allowing the government to take wide-ranging powers over its banks.
Mr. Haarde said all bank deposits would be guaranteed by the country — following Ireland, France, Germany, Austria, the Netherlands and others.
The prime minister had already asked the country’s pension funds and its two biggest banks, Kaupthing Bank and Landsbanki Islands, to sell some foreign assets and repatriate the proceeds so the country would get an infusion of capital. With the new legislation, the government is now able to decide whether to merge pension funds and banks or declare some bankrupt.
The steps were also desperately needed to stop the tailspin of the country’s currency, which only destabilized the economy further. The Icelandic krona fell 43 percent against the euro this year mainly because investors feared the government will be forced to step in and support the banks — something it could not afford to do on its own.
Assets held by the country’s main banks are nine times the size of the entire economy.
Iceland’s problems are deeply rooted in the history of its financial services industry, which grew out of proportion to the country’s 319,355 population ever since the sector was privatized and deregulated about eight years ago. The banks tapped capital markets to finance their rapid expansion into Britain and as far as China and set off an investment boom that created a whole league of new billionaires.
But it also left the country with a large current-account deficit and its economy and financial market vulnerable to a credit markets squeeze. Iceland had its first warning in April when the krona fell 26 percent in four months as traders started to doubt the ability of the government to sustain the stability of its inflated banking sector.
The fear was that Iceland’s banks could default on their foreign loans. A month later, the central banks of Sweden, Denmark and Norway came to its rescue and offered an emergency loan. Back then, it helped to reinstate some trust in the country’s financial system and economy but other Europeans have their own problems this time.
JULIA WERDIGIER
Mexico: Watching the U.S.
Two weeks ago, President Felipe Calderón of Mexico, during a visit to the New York Times offices in Manhattan, noted that in previous decades when the United States would catch a cold Latin America would catch pneumonia. Nowadays, he said that day, when America catches pneumonia, Latin America catches only a cold.
That might have been wishful thinking. With some 85 percent of Mexican exports going to the United States, and half of its foreign investment flowing from there, Mexico is likely to be the Latin American country most affected by the financial woes on Wall Street when all is said and done. Remittances, the second-biggest source of foreign exchange for Mexico, are flat and falling, said Leonardo Martinez-Diaz, a Mexico expert and political fellow at the Brookings Institute. And Mexico’s peso fell 6.4 percent in September, its worst month since August of 1998.
Mexico’s banking sector could present a bigger challenge. Some 82 percent of Mexican banking assets are foreign-owned, of which about one-third are in American hands, about one-third owned by Spanish banks and the rest owned by other European banks, Mr. Martinez-Diaz said.
“The crisis could be transmitted to Mexico through those banking connections,” he said. “If there is a crisis in the Spanish market they may retrench and stop lending to Mexico for some time.”
As companies postpone big investments until at least next year, regular Mexicans will most likely tighten their belts, stay home more and perhaps put off large expenditures. “The whole economy will go into a wait-and-see mode, to see which way the U.S. economy goes,” he said.
ALEXEI BARRIONUEVO
Brazil: Markets Down 45%
With Monday’s drop, Brazil’s stock markets has plunged 45 percent this year. But the country continues to grow at more than 5 percent a year.
It has done more than any country in Latin America to set aside money during the commodity boom. The last two governments have accumulated more than $200 billion in foreign reserves and billions more in stabilization funds. Brazil has diversified its economy and lowered its exposure to the United States, which accounts for only 15 percent of Brazil’s exports now, down from about 50 percent at the beginning of the decade.
But while household spending has driven much of the recent growth in the economy, Brazil remains highly sensitive to commodity prices. On Monday, government officials sought to play down the effect of the market’s fall and broad concerns about emerging markets.
One silver lining in the sell-off may be the effect the crisis is having on the Brazilian real, which lost 17 percent of its value in September, its worst performance since September of 2002. While that will sap buying power for consumers, it provides welcome relief for industrialists in the country that were warning that Brazil’s exports were becoming too expensive.