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Send  Share  RSS  Twitter  17 Apr 2013

ECONOMY: Risks Are Back on the Radar in Emerging Countries


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Despite resilient growth, estimated at 5,1% in 2013 and improved sovereign and external fundamentals, emerging country risks have not disappeared altogether, but have changed form.

Three major risks now weigh on emerging markets. Politically, tensions have sharpened, illustrated by protests in North Africa and the Middle East, and now also in Russia and India.

Economically, we are seeing a rise in protectionist measures. Financially, excessive growth in bank loans to the private sector in a number of emerging economies are stoking fears of a credit bubble, in particular in Asia.

The wave of revolutions in the Arab world revealed new political, cultural and institutional demands in emerging societies. To analyse a society’s capacity for political fracture, Coface has created two types of indicators: pressures for change, inflation, unemployment and control of corruption. This measures the intensity of socio-political frustration in a given country.

The second indicator are the instruments for realising change: education, social networks, percentage of young people in the population and the role of women, all of which capture a society’s capacity to transform these frustrations into political action.

Of the 30 emerging countries examined, North Africa and the Middle East regionsstand out clearly by the presence of both strong pressure and instruments for change. Analysis points to the persistent nature of the risk of instability in the region, especially where post-revolutionary regimes have proven incapable of meeting the demands of their populations, which put them in power in the first place.

Nigeria, Russia, Kazakhstan and China all show frustration levels above or equal to the situation in Tunisia and Egypt, but with fewer instruments for change, which limits their capacity to transform frustration into radical political change.

Since 2008, capital controls and protectionism have become weapons of protection against forces outside the control of emerging economies. They also represent a risk for business. Russia, Argentina, andto a lesser extent India, have by far the highest levels of protectionism, while Mexico, South Africa and Turkey remain relatively open to international trade.

Massive recourse to restrictive measures can result in longer payment delays for importers and more barriers to entry for companies exporting to these protectionist countries.

Expansionist monetary policies in place in emerging economies since the 2008-2009 crisis and failures in prudent controls have generated sustained growth in bank credit, to the point of forming credit bubbles.

Based on a summary indicator of credit bubbles comparing credit stock levels and credit growth, Coface estimates that emerging Asiais the region most at risk (Malaysia, Thailand, and to a lesser extent, Korea, China and Taiwan). While credit stock to the private sector in other countries is not as high, it is rising rapidly.

Chile, Turkey, Russia and Venezuelaare also experiencing, or close to experiencing, a credit boom.

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