Post by barrumundi on Jan 10, 2016 8:38:35 GMT -5
Once seen as the ‘decoupled’ vanguards of global financial change, emerging economies suddenly seem as vulnerable as ever to developments in the US
Brazil, which saw its credit rating downgraded to junk last week, is only the latest Brics economy to crumble in the face of a strong dollar, a global trade slowdown and the prospect of higher US interest rates.
Russia is already in recession; many economists believe China is heading towards a “hard landing”; and South Africa, which managed to append itself to the emerging-markets club in 2010, is on the brink of recession.
Of the group once identified as the shining economic beacons of the future, only India has so far remained relatively insulated from what World Bank chief economist Kaushik Basu described last week as the “troubled” state of the global economy.
It wasn’t supposed to be like this. In 2009, as the rich western countries were surveying the chaos wrought by the financial-market crisis, China was cranking up an immense fiscal stimulus programme to boost demand and kickstart growth. Beijing’s ability to muster financial firepower in the face of the crisis seemed to underline the shift of power towards the nimble emerging nations, with their rapidly growing middle classes, and away from the sclerotic Old World.
“Decoupling” became fashionable. Instead of being tethered to the fortunes of the mighty US (“When America sneezes, the world catches a cold,” went the old saw), emerging economies would break free, nurturing trade links across the developing world and fostering homegrown demand.
But seven years on from the collapse of Lehman Brothers, the chaos wrought across financial markets in emerging countries by the prospect of a rise in US interest rates – which could come as soon as the Federal Reserve’s meeting this week – is a reminder of how closely tied the Brics economies remain to the world’s biggest economy, and vice versa.
The term Brics was coined by former Goldman Sachs economist Jim (now Lord) O’Neill – George Osborne’s freshly ennobled Treasury minister. He never saw their rise as inevitable, but the acronym captured a widespread sense of optimism, and indeed China, India and Brazil in particular have made extraordinary strides in lifting their populations out of poverty.
Yet today, the twin threats of a strong dollar – driven by the prospect of central bankers lifting interest rates in the relatively strong US economy and a sharp slowdown in Chinese growth – have sent emerging-market currencies plunging. The fallout goes well beyond Brazil, which has pegged its fortunes closely to serving Chinese demand, and Russia, which has been hit by the oil price crash. It is being felt in a swath of other countries, from South Africa to Turkey.
Read more: www.theguardian.com/business/2015/sep/13/brics-collapse-south-staggers-dollar-almighty