For emerging markets, a Fed stall works fine
September 15, 2016, 3:28 pm

Emerging markets from Dubai to Mexico suffered drawbacks this week but in the long-term, the longer the Fed delays a rate hike the better the prospects for growth in these economies [Xinhua]

Asian, European and US stocks have fallen and risen as the prospects for a rate hike rose and then fell during the same period.

This week, US markets opened up lower as it seemed chances of a rate increase were beginning to peak. But by the end of trade, there was a considerable rebound after an influential fiscal policy and member of the Federal Open Market Committee (FOMC) said it was prudent to wait on an interest rate increase.

The longer the Federal Reserve holds raising interest rates at bay the better for emerging economies. Although lower oil prices this week meant that emerging market stocks fell for three consecutive days, in the long term it will be the impact of a Federal Reserve rate hike – or lack thereof – that will strongly influence their outlook.

The reason is because lower interest rates mean borrowing US dollars – and repaying them – is now cheaper.

During the sub-prime mortgage crisis in the US – which sparked the global financial crisis – the Federal Reserve slashed interest rates to zero and bought back bonds to the tune of $85 billion a month. This quantitative easing meant there was ‘cheaper’ money for investment firms and corporations to use in infrastructure projects.

They took this money and headed to emerging markets such as Turkey, Nigeria, Mexico, Brazil, China, India and others. As the US and Europe fell into fiscal doldrums, these emerging markets enjoyed nearly unprecedented growth, often in double digits.

When the Federal Reserve tapered off its stimulus program, money poured into emerging economies began to reverse course. This peaked when the Federal Reserve raised interest rates last year.

But while the FOMC debated the US labor market, productivity, and domestic investment, countries in the BRICS as well as Mexico and Colombia began to stabilize their economies.

This is true as well of China, which has unnerved investors in the past year and been a source of caution for such policymakers as Leal Brainard, who earlier this week said that “China is undergoing a challenging transition from a growth model based on investment, exports, and debt-fueled state-owned enterprises to one driven by consumption, services, and dynamic private businesses”.

She expected that growth in the Chinese economy will continue to slow down.

China may have slowed down – its GDP is no longer double-digit but expected to hover around 6.7 per cent this year and next.

But its economy is stabilizing.

The Hang Seng had closed at its highest point in a year on Friday after China’s National Bureau of Statistics (NBS) released a slew of data, which coupled with reports earlier in the week, showed that the economy is heading toward sustainable growth.

According to the NBS, the main gauge of inflation – the consumer price index (CPI) grew 1.3 percent year on year in August, down from July’s 1.8 per cent.

At the same time, China’s producer price index (PPI), which gauges the costs of goods at the manufacturing origin, dropped 0.8 per cent year on year in August.

Additionally, data showed that throughout August 2016, China’s non-manufacturing purchasing manager index was 53.5 per cent, a decrease of 0.4 percentage points over the previous month.

Despite the small drop, the non-manufacturing PMI was solid for much of the year and indicated sustained stability and sound growth.

On September 1, the NBS also showed that the the manufacturing Purchasing Managers’ Index (PMI) came in at 50.4 in August, a slight jump up from 49.9 in July.

A reading below 50 represents contraction; above is expansion.

In Brazil, with increasing capital leaving Europe toward emerging markets and the Brazilian currency gaining significant ground against the dollar this year, some economists believe that the country will start to turn the corner in 2017.

Now, the IMF says that confidence in the Brazilian economy is slowly reawakening. It said that Brazil’s contraction (3.8 per cent) in 2016 would moderately subside to (3.3 per cent) in 2017. It forecast positive growth for Brazil in 2017 but voiced concern over ongoing corruption and political scandals which have rocked Brazil.

The question right now is whether the political environment will stabilize following the impeachment of Dilma Rousseff.

For Russia, a price of a barrel of oil above $40 is welcome news.

Based on a level price of $40 a barrel, Russia’s Ministry of Economic Development forecasts that the GDP will contract by 0.2 per cent this year, improving to zero per cent in the third quarter, and jumping back to growth territory at 1.2 per cent by the end of 2016.

An IMF report released in mid-July reiterated the positive momentum:

“Higher oil prices are providing some relief to the Russian economy, where the decline in GDP this year is now projected to be milder, but prospects of a strong recovery are subdued given long-standing structural bottlenecks and the impact of sanctions on productivity and investment,” the IMF report said.

The BRICS Post with inputs from Agencies