With a worldwide credit crunch possible, it is encouraging that most emerging countries are in better shape to withstand such an event than they were a decade ago, export credit agency EFIC reports.
EFIC chief economist Roger Donnelly says in the Australian Government agency’s latest World Risk Developments report that the emerging markets are suffering few effects from the credit tightening now underway.
In particular, little disruption to the project finance market that funds much of the Middle Eastern infrastructure and worldwide mining and petroleum boom is evident, he reports.
The countries that succumbed to the Asian credit crisis 10 years ago now have strong shock absorbers: undervalued exchange rates, better capitalised and regulated banking systems, large foreign reserve war-chests and current account surpluses.
“If the current credit crisis is going to ricochet to emerging markets, it will be to different ones,” he says.
“Watch countries in Eastern Europe and the former Soviet Union and places like Turkey with gaping current account deficits. At present, they are the darlings of the carry traders, but that could quickly change.”
“Watch also countries with richly-priced asset markets. This includes China. These countries won’t fall into balance of payments crisis, but they could suffer economic slowdowns and attendant systemic credit problems,” he adds.
Roger Donnelly says the fears flowing from the US sub-prime mortgage crisis need to be kept in perspective.
“Any credit crunch will be a one-off adjustment as lenders scale back their outstanding credit to match their now-reduced capital. Meanwhile, central banks will provide emergency liquidity so banks don’t have to make fire sales of distressed assets.
“Flows of new savings from around the world will continue to enter domestic and international banking and capital markets. And stocks of existing savings will probably be deployed to inject capital into banks and to buy distressed assets – once the price is right,” he says, noting that Middle Eastern and Asian investors and sovereign wealth funds have recently injected large amounts and become substantial investors in Citigroup and UBS after these banks suffered large sub-prime mortgage losses.
“Decisive management by authorities and market participants to recapitalise banks and restore confidence is needed. A current worldwide savings glut means there is no shortage of capital to be applied to the task,” he says.