emerging markets

Eurasia Group founder and emerging markets guru Ian Bremmer has come around to the view that the BRICS construct is nothing more than a bunch of countries “united by a catchy acronym” and little else. His op-ed piece in last Friday’s New York Times  notes that Brazil, Russia, India, and China “have formalized their club and extended their reach by inviting South Africa to join” – a development that occurred in December of 2010 and asks, “But do their meetings and joint statements really allow them to punch above their individual weight? What do these countries share beyond a common interest in bolstering their global clout?” Several hundred words later he concludes that these five countries “will sometimes use their collective weight to obstruct U.S. and European plans. But the BRICs have too little in common abroad and too much at stake at home to play a single coherent role on the global stage.” Has he been reading my blog? [click to continue…]



In these dark days of an ever-widening political divide, it is nice to know there is still something on which Republicans and Democrats can agree: foreign aid. Both sides are against it. John Sides, writing in his “The Monkey Cage”  blog, cites a YouGov poll conducted in early March of this year, in which a sample of Republican primary voters and a sample of all voters agreed that foreign aid is the budget item they would most like to cut. Okay, it was 90% of the Republicans and only 73% of all voters, but in the sample of all voters no other item came even close to 50%, while among Republicans, the environment, housing, and unemployment benefits – no surprise there – were the only other items that got more than a 50% share.







These numbers are unsurprising in light of another poll  conducted last November, in which respondents, asked “Just based on what you know, please tell me your hunch about what percentage of the federal budget goesto foreign aid,” gave an average response of 27%. When asked what they thought an appropriate percentage would be, the mean answer was 13%. When told that we spend much, much less than this on foreign aid, most people said it still should be cut.

Not that cutting foreign aid would have the slightest effect on the deficit. In an excellent analysis of the cuts the Romney-Ryan budget – which would cap Federal spending at 20% of GDP and maintain defense spending at 4% of GDP – would require, Richard Kogan and Paul Ven de Water of the Center on Budget and Policy Priorities demonstrate that “if policymakers repealed [Obamacare] and exempted Social Security from cuts, as Romney has suggested, and cut Medicare, Medicaid, and all other entitlement and discretionary programs by the same percentage to meet Romney’s overall spending cap and defense spending target, then they would have to cut nondefense programs other than Social Security by 22 percent in 2016 and 34 percent in 2022 If they exempted Medicare from cuts for this period, the cuts in other programs would have to be even more dramatic — 32 percent in 2016 and 53 percent in 2022.”

It’s not easy to make sense of the Federal budget for foreign assistance (try it yourself and see what numbers you come up with http://www.state.gov/documents/organization/183755.pdf ) but 2012 commitments amount to about $35 billion, less than one percent of the total budget of $3.8 trillion, and barely a third of that amount consists of the kind of humanitarian, public health, and economic development assistance most people think of when they think of foreign aid. The big-ticket items include:

  • Roughly $10.4 billion in foreign military and security assistance – things like fighting terrorism abroad, military training, underwriting foreign arms purchases, the war on drugs, and the annual payments of $3 billion to Israel and $1.3 billion to Egypt (the price we continue to pay for the Camp David accords);
  • $8.1 billion on global health and child survival programs;
  • The $5.8 billion Economic Support Fund, which gives direct grants to foreign governments for them to spend on infrastructure and development projects (thus freeing up funds to buy U.S. arms); and,
  • About $4.1 billion on economic and agricultural development.

Except for Ron Paul supporters, most Republicans and not a few Democrats would resist cutting foreign military assistance and our annual subsidy to Israel. Indeed, to judge by his recent pronouncements on the subject, Mitt Romney would be more than happy to increase support to Israel, though it might come out of Egypt’s share.

A Romney-Ryan budget would probably keep all or most of the $10.4 billion for security-related foreign assistance and the $5.8 billion Economic Support Fund (at least those portions most directly linked to arms procurement) and take an axe to the aggregate $12.2 billion health, child survival, and economic and agricultural development budgets, which in the context of the overall budget are hardly more than a rounding error.

Dana Millbank, writing in The Washington Post, tells us that Rep. Darrell Issa, Republican chairman of the House Oversight and Government Reform Committee, called a hearing earlier this week to probe the security lapses that led to the recent deaths of Ambassador Christopher Stevens and three other Americans in Benghazi, Libya.

“The purpose of the pre-election hearing, presumably, is to embarrass the administration for inadequate diplomatic security. But Issa seems unaware of the irony that diplomatic security is inadequate partly because of budget cuts forced by his fellow Republicans in Congress…House Republicans cut the [Obama] administration’s request for embassy security funding by $128 million in fiscal 2011 and $331 million in fiscal 2012. Ryan, Issa and other House Republicans voted for an amendment in 2009 to cut $1.2 billion from State operations, including funds for 300 more diplomatic security positions. Under Ryan’s budget, non-defense discretionary spending, which includes State Department funding, would be slashed nearly 20 percent in 2014, which would translate to more than $400 million in additional cuts to embassy security.”

Romney has criticized the Obama Administration for trying to “lead from behind” in situations like Libya and Syria, and says he wants the United States to lead from the front, “using the full spectrum of our soft power to encourage liberty and opportunity for those who have for too long known only corruption and oppression,” in the words of his September 30 op-ed piece in The Wall Street Journal. What is soft power, if not effective diplomacy and assistance in – to use Mr. Romney’s own words again – “promoting human rights, free markets and the rule of law?” Much of the development assistance provided by he U.S. Government and U.S. Government-supported institutions such as the World Bank promotes precisely these values.

Cutting foreign assistance and State Department budgets sends a very different message. Since the proposed diplomacy and foreign aid budget cuts are so insignificant in fiscal terms they must have been chosen for their symbolic value, effectively consigning emerging and transition countries to the international equivalent of Mr. Romney’s famous 47 percent: food stamp and welfare recipients and miscellaneous moochers he is not going to worry about.

There are certainly ways to improve foreign assistance, which could involve reducing or eliminating aid to some current beneficiary countries, but which would equally involve innovative new approaches to the problems of poverty, disease, climate, and growth, which could end up costing less, more, or about the same amount as we currently spend.

Lord Leverhulme, the founder of Lever Brothers – now Unilever –  is reputed to have said, “I know half my advertising isn’t working, I just don’t know which half.” Foreign aid is a bit like that. As much as half, but not all, of it is wasted, and if we could figure out which half to chuck out and which to keep we, together with the recipients, would be all the better for it. But just as Lever Brothers kept on advertising and, presumably, wasting half of what it spent, eliminating the foreign aid budget or cutting it in half is a lousy idea.



This is from the Diverging Markets blog, written by Ulysses de la Torre.

According to the Financial Times, in perversion of all perversions, we’re now supposed to believe that Switzerland is the new China. Got that?

“Switzerland is the new incipient China,” said Steven Englander, Citigroup’s head of foreign exchange strategy.

Apparently, Switzerland’s attempts to keep the franc artificially weak while building up its central bank reserves make it so.

Well gee. Not too long ago, Brazil was supposed to be the new China…Continue



It must be fun to spark a world financial panic and then go on a five-day vacation. By now everyone knows that on Wednesday of last week, right before the Muslim world shut down for the Eid-al-Adha festival, Dubai World, the flagship investment company owned by the Government of Dubai and/or Dubai’s ruler Sheikh Mohammed bin Rashid al-Makhtoum, announced a standstill on its debt repayments, with specific reference to a $4 billion bond payment that Nakheel, a Dubai World property development subsidiary, is due to pay in December. The world has now, finally, woken up to realize that the Dubai miracle is built on sand, both literally and figuratively.

I hate to say I told you so (why do people always say that? I’m usually delighted to say I told you so), but in a blog post that appeared on this site last July “Can Dubai Come Back?” I advised investors to steer clear of Dubai, pointing out that “rampant intermingling of public and private funds and little transparency over who owns and owes what,” it was hard to know exactly what is going on inside any company.  By all indications Nakheel and also Emaar, another state-owned property developer, were perilously close to insolvency if they hadn’t already crossed the line. Nakheel had shelved development of the second and third Palm Island projects and Emaar, developer of the world’s tallest building Burj Dubai, was trying to get itself acquired by Dubai Holdings. Arguments about whether or not all these companies were then or are now insolvent are pretty much beside the point. I likened the Dubai property and investment markets to a game of three-card monte, where losses and liabilities could be moved about and hidden from view.  Given the interlocking nature of UAE companies, when you buy a share of one  it’s hard to know who else’s hidden risks and liabilities you’re buying too.

Today, the first day of trading in the UAE since last Wednesday’s market close, the Dubai Stock Exchange closed down 7 per cent and Abu Dhabi’s 8 per cent. DP World, a profitable Dubai World ports operating subsidiary, saw its price drop 15 per cent. Some analysts now predict that the Dubai property market, already down around 50% from its peak, could drop a further 40% for a total 70% peak-to-trough decline.

For those of us not resident or invested in Dubai, the question is whether Dubai’s woes will spread to other markets.  This possibility of contagion, especially to other emerging markets, is foremost in many people’s minds, especially since statements by the government of Abu Dhabi and by the UAE federal government have put paid to the assumption that Dubai World as a state-owned enterprise enjoyed some implicit government guarantee against insolvency.  The famed Mark Mobius of Templeton Asset Management has warned that a default by Dubai World could trigger defaults – especially of state-owned companies – in other markets and could lead to a 20 per cent drop in emerging markets overall. This could easily happen, since many investors seem unable to distinguish one emerging market from another, but is the risk based on anything more substantial than the madness of crowds?

I think not. Dubai’s slump may be deeper and more protracted than anyone expected, but Dubai’s rulers have never ceased to astound with their imagination and audacity. I wouldn’t write them off just yet, though investors and Dubai’s richer cousins in Abu Dhabi may use the occasion to force Dubai’s companies and government to operate with greater transparency. This would be a good thing.

As for other markets, their exposure to Dubai is minimal. It’s important to remember that total foreign claims on UAE debtors amount to only $123 billion: a lot of money to be sure, but not really that much in the global scheme of things. Over 40% of that debt, or $50 billion, is held by British banks, but that is almost pocket change compared to the size of the losses and rescue packages earlier this year.  The British government has already put over $120 billion into the rescue of three big banks since the start of the financial crisis last year, and has just pledged another $43 billion for the Royal Bank of Scotland (RBS) alone.

As for other emerging markets, most of them are built on a real – as opposed to a financial – economy.  It is hard to imagine the Dubai crisis registering as more than a blip on markets in Brazil, India, Indonesia, South Africa, Egypt, or China, since these markets consist largely of companies that grow, extract or manufacture physical products or that supply essential services like telecoms. Even most of the banks in these countries are likely to be less exposed to Dubai than their counterparts in Britain. Any short-term sell-offs in otherwise sound emerging markets represent good buying opportunities rather than a call for a retreat to safety. Besides, in today’s world can anyone tell me what is safe?

Some emerging markets funds have been hit by the crisis. The Market Vectors Africa ETF (AFK) closed down just over 3 per cent today and is down more than 6 per cent over the past five days, but it is up more than 60% since its February 2009 low. Even T. Rowe Price’s Africa and Middle East Fund (TRAMX), which has over 12% of its holdings in UAE property and financial investments, lost 3.4 per cent today but is still up more than 60 per cent over its March 2008 trough. The ING Russia Fund (LETRX) fell more than 4.2%today, though whether that has anything to do with Dubai is unclear. Maybe Russia, whose economy is increasingly dominated by state-owned companies known for a lack of transparency but which some investors may think are implicitly backed by the Russian government, is suffering some contagion. Even so, it is up more than 175% since its low in February 2009.

Most of my other emerging markets holdings, including  the MSCI Brazil Index ETF (EZW), the Market Vectors Indonesia ETF (IDX), the MSCI Thailand Index ETF (THD), Cemex (CX), and Brasil Foods (PDA), closed up today.  It’s impossible to know whether Dubai has any more nasty surprises to reveal, but on the evidence so far the fallout from Dubai’s crisis is going to be limited to the Emirates and their fellow GCC (Gulf Cooperation Council) members.



Several months ago I posted an article contending that decoupling – the notion that movements in emerging markets correlate minimally, if at all, with those in mature markets – was dead. The vertiginous rise in most emerging market indices over the previous seven or eight years stood in stark contrast to the anemic performance of the S&P 500 over the same period. As the financial meltdown and subsequent recession hit, there was a brief moment when it seemed that many of the emerging markets, especially in Asia and Latin America, might emerge unscathed. Subsequent events indicated that emerging markets, especially in Africa but also Southeast Asia, were suffering as much as the OECD countries, but with much less of a cushion against humanitarian catastrophe. In some parts of Africa, a five per cent drop in GDP can push millions of people into starvation. Decoupling, as I wrote, was dead. Even the miserable Congolese worker scrabbling in the dirt for diamonds or gold or the columbium-tantalite used in cell phones, was hit by the collapse in consumer and industrial demand in America, Europe, Japan, and China.

I may have been wrong. [click to continue…]