Turkey, Oman vulnerable if central banks hike rates too steeply, says S&P

There is a risk of foreign investors withdrawing funds from emerging markets, said S&P. (Reuters)
Updated 15 December 2017
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Turkey, Oman vulnerable if central banks hike rates too steeply, says S&P

LONDON: Turkey, Oman, Pakistan and Ethiopia are among emerging markets that could be most hurt as central banks in developed countries raise interest rates, according to a report from S&P, the credit rating agency.
In its global sovereign rating outlook for 2018, S&P highlights the danger for emerging markets of accelerated interest rate rises in the years ahead, leading to capital outflows from emerging market securities and a reduction in direct foreign investment (FDI).
That could badly damage the economic model of some emerging economies, but to what extent remains to be seen, said the report.
According to S&P, the emerging market sovereigns most at risk from faster-than-expected monetary tightening are, in descending order: Venezuela, Bahamas, Mozambique, Montenegro, Turkey, Ethiopia, Pakistan, Kenya, Oman and Sri Lanka. Among the large emerging markets, Turkey appears the most exposed at No. 5, said S&P.
The agency said as the recovery of advanced economies gains breadth and depth, including in the euro zone, inflationary pressures could rise and trigger faster monetary normalization (higher rates) by the leading central banks than currently envisaged by the market.
The rub here, as S&P goes on to explain, is that foreign investors would then be sorely tempted to withdraw some invested funds from emerging markets to put back into advanced economies’ securities, which will provide higher real returns than they do currently.
S&P said: “Even relatively small shifts back to advanced economies’ securities relative to their outstanding volume can have a meaningful impact on emerging markets. This is because the capital market is simply so much larger in the advanced economies.”
In recent years, there have been unprecedented portfolio flows into emerging markets shares and other investment instruments that help those countries fund development and secure prosperity.
“But they also create a development model that is dependent on external financing conditions. This renders them vulnerable to sudden stops of capital inflows and possible reversals,” said S&P.
The Institute of International Finance (IIF) estimates that nonresident net portfolio inflows to emerging markets will reach a record $340 billion this year, followed by $435 billion in 2018. In comparison, the average for 2013-2016 was $200 billion.
Excluding flows into China, the average net inflows into emerging markets will still be ­
63 percent higher in 2017 than the average of 2013-2016, said IIF.
Added to these portfolio inflows are sizeable nonresident FDI inflows of close to $500 billion.
S&P said: “Portfolio inflows have grown particularly fast in recent years. And it is these portfolio flows that can be more volatile, potentially reversing direction very rapidly when confidence wanes or alternative investment opportunities open up.”
There is a strong correlation between vulnerability to monetary tightening and the sovereign rating.
According to S&P, the average rating of the 10 most vulnerable sovereigns is “B” and none of them carry an investment-grade rating. At the other end of the spectrum, the average rating of the 10 most resilient sovereigns is “BBB,” it said.
 


Pompeo says China is engaging in ‘predatory economics 101’

Would China have allowed America to do to it what China has done to America asked US Secretary of State Mike Pompeo. (AP)
Updated 18 June 2018
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Pompeo says China is engaging in ‘predatory economics 101’

  • He said China’s recent claims of “openness and globalization” are “a joke.”

DETROIT: China is engaging in “predatory economics 101” and an “unprecedented level of larceny” of intellectual property, Secretary of State Mike Pompeo told a business audience Monday.
Pompeo made the remarks at the Detroit Economic Club as global markets reacted to trade tensions between the US and China. Both nations started putting trade tariffs in motion that are set to take effect July 6.
He said China’s recent claims of “openness and globalization” are “a joke.” He added that China is a “predatory economic government” that is “long overdue in being tackled,” matters that include IP theft and Chinese steel and aluminum flooding the US market.
“Everyone knows ... China is the main perpetrator,” he said. “It’s an unprecedented level of larceny.”
“Just ask yourself: Would China have allowed America to do to it what China has done to America?” he said later. “This is predatory economics 101.”
The Chinese Embassy in Washington did not immediately respond to a request for comment.
Pompeo raised the trade issue directly with China last week, when he met in Beijing with President Xi Jinping and others.
“I reminded him that’s not fair competition,” Pompeo said.
President Donald Trump has announced a 25 percent tariff on up to $50 billion in Chinese imports. China is retaliating by raising import duties on $34 billion worth of American goods, including soybeans, electric cars and whiskey. Trump also has slapped tariffs on steel and aluminum imports from Canada, Mexico and European allies.
Wall Street has viewed the escalating trade tensions with wariness, fearful they could strangle the economic growth achieved during Trump’s watch. Gary Cohn, Trump’s former top economic adviser, said last week that a “tariff battle” could result in price inflation and consumer debt — “historic ingredients for an economic slowdown.”
Pompeo on Monday described US actions as “economic diplomacy,” which, when done right, strengthens national security and international alliances, he added.
“We use American power, economic might and influence as a tool of economic policy,” he said. “We do our best to call out unfair economic behaviors as well.”