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Monday, 23 October 2017

IMF Report 2012: Looking for growth

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How times have changed. In the past, talk of bailouts, IMF loans, and fiscal mismanagement usually meant one thing: yet another emerging market country had run into trouble and needed saving. Now this type of language is being applied to the eurozone. In contrast, the so-called emerging markets are in much better health. Indeed the term “emerging markets” is becoming a misnomer. “Growth markets” seems a more appropriate appellation.

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Of course, growth markets are not immune to the problems faced by the eurozone and the US. Countries such as China, Brazil and India face substantial challenges, not least in reforming and modernising their economies to take advantage of the considerable resources at their disposal.

Still, it’s undeniable that at a time when the western world is undergoing its biggest economic trough since the 1930s, the regions of Asia, Africa, Central and Eastern Europe, Latin America and the Middle East have proven remarkably resilient. There hasn’t been the spate of bankruptcies and bank runs that has typified past crises when countries from these regions were at the centre of the storm.

This turnround in their fortunes is being reflected in the bond markets. While Spain, Italy and other floundering eurozone economies struggle to keep their borrowing costs at sustainable levels, the yield for certain growth market sovereigns are near historical lows.

Turkey, for example, has a benchmark 10-year 2022 bond that is yielding just 3.75%. A decade ago Turkey faced its own banking crisis and many observers wondered whether it could ever get out of its rut. Today, Turkey has one of the most liquid and best capitalised banking systems in the world, while its economy is growing much faster than elsewhere in western Europe. Little wonder that investors have such confidence in the sovereign.

While low borrowing costs are one example of the shifting axis in the financial world another is the growth of certain products, such as the sukuk or the Islamic bond. The sukuk market has enjoyed its highest issuance since the 2008 credit crunch, a surge in the wake of the Arab Spring driven by the ambition of new governments to establish a robust Sharia-compliant finance industry.

And while the market remains dominated by issuers in the Gulf and Malaysia, the fact that the likes of Turkey, South Africa and even western entities such as Goldman Sachs have shown interest in sukuk demonstrates its increasingly widening appeal.

The new-found confidence of growth countries can also be illustrated by the strides they are taking in becoming financial centres. For example, Russia’s determination to gain its credentials as a trading hub has sent a frisson of optimism through a country long saddled with a reputation for corruption and lack of transparency.

There’s still a long way to go before Moscow sits on a par with London, New York, Hong Kong, Tokyo or Singapore but the government is committed and Russia’s financial institutions have big ambitions. When troubled Franco-Belgian lender Dexia sold its Turkish subsidiary, Denizbank, it was Sberbank that stepped up in a US$3.5bn deal.

In Africa, economic activity overall is shrugging off difficult global conditions, and the IMF now believes the continuing growth in 2012 allows for fiscal consolidation in countries where deficits are above debt-stabilising levels and where growth is likely to remain robust, but warns against tightening where growth remains weak, output is below trend and there is a significant reliance on Europe.

Perhaps the biggest sign of the changing times, however, revolves around the IMF itself. With the Fund looking to boost resources to firefight problems in the eurozone it turned to the Bric countries of Brazil, Russia, India, China and South Africa for help. Earlier this year they pledged about US$75bn in exchange for a bigger say over how the IMF runs itself.

This report highlights the dramatic advances transforming growth markets – from Central and Eastern Europe to bond markets in China, Japan and Latin America to Africa’s myriad opportunities and challenges.

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