JAKARTA — Higher long-term interest rates in the United States as the Federal Reserve signaled it might change its policies were already causing hardship for millions of businesses and workers in emerging markets from Indonesia and India to Turkey and Brazil.
But the economic slowdowns and falling currencies precipitated by capital flight back to the United States seem less severe so far than other recent downturns.
The impact may be further dampened because the Federal Reserve’s monetary policy-making committee concluded its meeting Wednesday saying it would not retreat from its long-running stimulus campaign of buying $85 billion a month in bonds.
Emerging markets around the globe had been feeling the effects of investors’ expectations that the American central bank would begin tightening monetary policy as the American economy improves. As long-term interest rates have risen this summer in the United States on bets that the Fed will begin tapering its bond purchases, institutions and rich individuals have shifted tens of billions of dollars out of emerging markets. They have been moving them into dollar-based investments that offer higher yields. The flight of dollars caused currencies to fall against the dollar.
But the Fed’s announcement Wednesday afternoon took currency traders by surprise and the dollar plunged against major currencies. The dollar fell a little more than 1 percent against the euro and the yen after the announcement giving companies in the developing economies a little more breathing room.At the IGP Group, Indonesia’s dominant manufacturer of car and truck axles, sales plummeted 95 percent and stayed down for six months when the Asian financial crisis hit in 1997. Four-fifths of the company’s workers lost their jobs.
When the global financial crisis began in 2008, IGP’s sales briefly dropped by nearly a third, and a quarter of the employees were put out of work as temporary workers’ contracts were not renewed.
The latest downturn, which began in early August, has been much more modest. IGP’s axle shipments are down 10 percent in the past month from a year ago. The company’s work force has barely shrunk, to 2,000 from 2,077 at the end of July, though it plans to reach 1,900 by the end of this year.
“These are challenging times, but I don’t think they will be the same as in 2008 or 1998,” Kusharijono, IGP’s operations director, who uses only one name, yelled over a clanking, cream-colored assembly line here for minivan rear axles.
Business leaders and economists across the developing world expect emerging markets to face tougher times in the months and maybe even years ahead. Emre Deliveli, a Turkish economic consultant and columnist, said, “Even if all goes well and emerging markets end up rallying, the era of easy money and abundant capital flows will officially be over on Sept. 18,” when the two-day Fed meeting ends.
But while previous exoduses by investors from volatile emerging markets have caused waves of bank failures, corporate bankruptcies and mass layoffs, the latest retrenchment has been much milder so far.
That partly reflects the belief that when the Fed does move, it will very gradually scale back its bond purchases, business leaders and economists around the world said in interviews this week. The effects have also been limited partly because banks and companies and their regulators in many emerging markets have become much more careful about borrowing in dollars over the past two decades, except when they expect dollar revenue with which to repay these debts.In 1997 and 1998, “the whole problem began with the banking sector. Now I think the banking sector is much better,” said Sofjan Wanandi, a tycoon who is the chairman of the Indonesian Employers’ Association and part owner of IGP.
Trading in currency and stock markets seems to suggest that some of the worst fears over the summer are starting to recede. The Brazilian real has recovered about 8 percent of its value against the dollar since Aug. 21 and a little over a third of its losses since the start of May, when worries began to spread in financial markets about the vulnerability of emerging markets to a tightening of monetary policy. Stock markets from India to South Africa have rallied from lows in late August, with Johannesburg’s market up 14.7 percent since late June after a swoon earlier than most emerging markets.
“While the Fed hasn’t started the tapering process as yet, there has been a considerable withdrawal of money in the emerging markets and especially in India since May. In my opinion, the major effect has already taken place,” said Sujan Hajra, the chief economist at AnandRathi, a Mumbai-based investment bank.
One lingering question is how much inflation will accelerate in emerging markets. Many of their industries depend heavily on commodities like oil that are priced in dollars.
Weakening exchange rates this year for almost every emerging market’s currency have made these dollar-denominated commodities more expensive. . That is starting to drive up inflation in a few countries that do not subsidize fuel prices and is adding to government deficits in many countries, like India and Indonesia, that do.
In Brazil, a hike in transportation fares triggered street protests in June, leading to broad demonstrations over corruption and lamentable public services. Salomão Quadros, an economist at Fundação Getulio Vargas, a top Brazilian university, said that inflation was expected to reach about 6 percent this year as imported goods become more expensive.
While that level exceeds the central bank’s inflation target of 4.5 percent, inflation in Brazil still remains far lower than in other stretches of market turbulence, like in 2003, when inflation climbed to about 15 percent. “Brazil is facing some difficulties, but we’re not in crisis territory,” Mr. Quadros said.
The most vulnerable companies are those that mostly sell domestically in their local currency but have debts or costs denominated heavily in dollars. One example is the plastics sector, which often relies on imported resins made to a large extent from high-priced oil.
Ahmet Nalincioglu, the managing director of Elektroplasmin, a plastic packaging company based in Istanbul, said that many plastics producers will have to try to raise prices. Yet Elektroplasmin has yearlong contracts with clients that are hard to change.
“Our price hikes will automatically have a negative impact on their profit margins, which means they will be reluctant to negotiate,” Mr. Nalincioglu said. “If I can’t agree on a price, I get stuck with the stock for a year and suffer huge losses.”
The most vulnerable countries are those running large trade deficits that they have been financing with dollars from overseas investors’ purchases of local real estate, stocks, bonds and other assets. India is conspicuous on that list, as its poor roads and stifling bureaucracy have discouraged exports and resulted in its luring few of the factories now moving out of China in response to surging wages there.
“If there is an announcement on Wednesday tapering quantitative easing, global investment will dry up and that is going to create a problem for India in funding our” broadly measured trade deficit, said Rahul Arora, the chief executive for institutional equities at Nirmal Bang Securities, a Mumbai-based brokerage.
A few emerging markets, still traumatized by the extent of their economic downturns during previous periods of capital flight, are taking drastic action now to stabilize their currencies. Indonesia had one of the few emerging market currencies that was still falling through last week, but the central bank stopped the drop last Thursday when it unexpectedly raised its two benchmark interest rates by a quarter percent.
The interest rate increase made it more attractive for international investors to lend money to Indonesia, but at the risk of further weakening a domestic economy that is already decelerating.
Didik Rachbini, one of the 21 members of the presidential National Economic Council here, said that the Indonesian government was also discussing delays in big investment projects by state-owned enterprises, so as to conserve foreign exchange. Road construction and similar work that requires few imports of equipment are likely to proceed, while capital-intensive projects that rely on foreign technology should face extra scrutiny and are starting to be reviewed, he said.
Most affected by the economic slowdown are workers in developing countries who were already scrimping. Hasan Qodri, a 22-year-old axle quality inspector at Indonesia’s IGP, said that he regretted the disappearance of overtime — and the extra pay that went with it.
“Of course I would like more overtime,” he said, “so I’d have more money for my daily life.”
Keith Bradsher reported from Jakarta, Simon Romero reported from Rio de Janeiro and Ceylan Yeginsu from Istanbul. Neha Thirani Bagri contributed reporting from Mumbai.
Source: http://www.nytimes.com/2013/09/19/business/global/emerging-markets-bracing-as-fed-meets.html?n=Top/Reference/Times%20Topics/People/B/Bradsher,%20Keith?ref=keithbradsher&pagewanted=print
