Pulled back in. The world is entering a third stage of a rolling debt crisis, this time centred on emerging markets
The article “Pulled back in. The world is entering a third stage of a rolling debt crisis, this time centred on emerging markets” was published on the 14th of November 2015 in The Economist. The main idea of the article is devoted to the possible debt crisis in the emerging economies. Increasing unstable situation in the emerging markets can be a next direction of the last financial. The “crises-trilogy” started in 2000s with the boom in the housing market in the United States. Later it led to the financial crises in 2007. Then it continued in Eurozone in 2010. The author compares the world’s debt crisis with a series of a film: the conclusion of a one crisis becomes a beginning of the other, and emerging countries now are the main characters. The content of the article can be divided into three main parts.
In the beginning the author supposes that the credit boom in emerging markets was a response to the credit failure in developed countries. Money was running from America and Europe to Asia and Africa. As a result, emerging economies attracted large investments. The article shows that the rise in credit and in exchange rates are the two main signs of future problems with debt. The greater part of credit is concentrated in the corporate sector. The author argues, that corporate debt is less damaging than consumer debt (that was in America in 2000s). According to the article, it is more important to track the speed of rising debt, but not the share in the GDP, because rapid debt can lead to instability.
In the second part of the article Manoj Pradhan of Morgan Stanley divides three types of emerging countries. The division is organized due to their ability to resist the debt crises. The main criteria are current-account balance, private debt share and the inflation rate.
The first type is a classic one. It includes countries with a current-account deficit. Their exchange rate is changeable and can cause inflation, on the one hand, and reduce export, on the other hand. According to the article, countries of this classic type are highly dependant on foreign capital. They try to maintain the GDP growth, but higher interest rates make it more expensive. The countries of the first type are Brazil, Turkey and Malaysia (though the last one has a surplus).
The second group includes emerging economies with a current-account surplus and large foreign-exchange reserves. These countries have a private debt and an excess of goods. This situation creates deflation. The countries of the second group are China, Singapore, Thailand and South Korea. Their economies are prepared to the balance of payments crisis, according to the estimation of the author. He also notices that private debt in those countries can cause long-term problems with businesses and industries that do not perform well at present but accumulate a lot of capital.
In the last part of the article the author says that the period after 2007 was a competition between the emerging and the developed economies. They tried to achieve the highest world economic growth. After that, the private debt appeared a reason of deep problems for one emerging economies and strong crisis protection for others.
In conclusion, there is a comparison of two experiences - The United States and Europe. The author supposes that the European recovery is more vulnerable than the American. However, the liberalization in Europe can lead to a stronger dollar and postpone the rise of interest rates by the Federal service in the USA. The author concludes, that there is no one stable system in the world, and at present every single change in one country leads to the next changes and circumstances in the other one.
I agree with the author, that emerging countries have now a risk to face difficulties. The reasons are debt increase and high dependence on foreign currency and import-export relations. The problems started when the capital crossed borders and linked the economies all together. Thus, the globalization created the interdependency of economic systems and caused the domino effect later in 2007. The result was low interest rates and rising debts. The capital moved to emerging economies. While a slowdown in growth takes place, in my opinion, a new crisis is less possible. Most developing countries feel much better than they appear if to estimate only the debt-to-GDP rate. As it was mentioned in the article, the first sign of a coming crisis is not a rate of the debt-to-GDP, but the speed it rises. According to the International debt statistics, presented by the World Bank, some countries that have higher risk like Brazil and India saw government debt fall by over 2% in 2012-2013. Also in 2012 Turkey had managed to keep its debt-to-GDP ratio at the same level as in 2012 (International debt statistics, 16-17).
Besides, developing countries today are better prepared for the crisis. It is proved by less debt share in foreign currency and large foreign exchange reserves. According to the World Bank statistics, by the end of 2014 Indonesia accumulated more than $100 billion in foreign reserves, Thailand had $157 billion, that is six and four times higher than 10 years ago. In India, reserves had grown to $325 billion after only $5.6 billion in 1990. (The World Bank data). This statistic proves the ability of emerging countries to resist the debt crises.
On the contrary, the problem is that China has exceeded the debt-to-GDP rate over 200%. The Chinese economy is tied with other developing and developed countries. There is a threat that the slowdown in the Chinese economy can cause problems in other emerging markets. The first economies to suffer are Indonesia, Malaysia, Brasilia and South Korea, because they are most dependant on Chinese trade. The import of these economies from China varies from 10 to 25%.
Meanwhile, I would like to agree with the idea that India is going to become a new global driver in the annual growth even faster than China had in 2015. The main reason for the rapid growth is decreased oil prices. India imports 80% of its energy resources and cheap oil helps to regulate inflation and fiscal balances. Economists of the World Bank expect future rapid growth of India at an average 7,5%. It allows to predict a new leading actor in the global economy. They say also that India can possibly be at the same level of growth in China. The rapid growth is not the only reason for the promising forecast. During the last decade the Indian government attracted a lot of foreign direct investments in innovative sectors like telecommunications, defence and retail. As a result, Indian economy has recovered fast. At present it has skilled and qualified labour market, improved manufacturing sector and more than 25 prospective areas for leadership (India’s attractiveness Survey, 5). Nevertheless, to become one of the world’s leaders India still needs to improve its infrastructure and investment climate, to simplify taxation and labour laws along with other economic reforms.
Work Cited
Pulled back in. The world is entering a third stage of a rolling debt crisis, this time centred on emerging markets (2016). The Economist. Web. 23 Feb 2016. <http://www.economist.com/news/briefing/21678215-world-entering-third-stage-rolling-debt-crisis-time-centred-emerging?zid=309&ah=80dcf288b8561b012f603b9fd9577f0e>
International debt statistics 2015. The World Bank, 2015. Web. 24.02.2016. <http://data.worldbank.org/sites/default/files/ids2015.pdf>
World Bank Data. The World Bank. Web. 24 Feb 2016. <http://data.worldbank.org/indicator/FI.RES.TOTL.CD?page=3>
India’s attractiveness survey 2015, ready, set, grow. Earnest & Young, 2015. Web. 24 Feb. 2016. <http://www.ey.com/Publication/vwLUAssets/ey-attractiveness-survey-india-2015/$FILE/ey-attractiveness-survey-india-2015.pdf>
