Emerging markets: is risk aversion dead?

David Lubin

November 2002

Risk appetite collapsed in 2002

Total issuance of bonds, loans and equity by emerging markets (US$bn)

0

50

100

150

200

250

300

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

1997 1998 1999 2000 2001 2002

ONSCREEN

...but risk appetite seems to have re-appeared

90

95

100

105

1102-

Sep

9-Se

p

16-S

ep

23-S

ep

30-S

ep

7-O

ct

14-O

ct

21-O

ct

28-O

ct

4-N

ov

11-N

ov

18-N

ov

25-N

ov

7000

8000

9000

VEB ARS CLP

ILS KRW THB

Dow Jones, right scale

ONSCREEN

On what does risk appetite depend? Real US rates?

-6-4-202468

1012

Jan-

70

Jan-

72

Jan-

74

Jan-

76

Jan-

78

Jan-

80

Jan-

82

Jan-

84

Jan-

86

Jan-

88

Jan-

90

Jan-

92

Jan-

94

Jan-

96

Jan-

98

Jan-

00

Jan-

02

Lending boom to Latin America

Latin American debt crisis

“Emerging markets” is born

October 2001 “mini-boom”

ONSCREEN

...or US asset prices?

700

800

900

1000

1100

1200

1300

1400

1500

1600Se

p-99

Dec

-99

Mar

-00

Jun-

00

Sep-

00

Dec

-00

Mar

-01

Jun-

01

Sep-

01

Dec

-01

Mar

-02

Jun-

02

Sep-

02

1.5

2

2.5

3

3.5

4

4.5

S&P Brazilian real/USD, right scale (inv erted)

ONSCREEN

The fall in net private capital flows is long-lasting

Net private direct investment Net private portfolio investment

Other net private capital flows Total flows

-200-150

-100-50

050

100150200

250300

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

US$bn

ONSCREEN

FDI flows are at risk

Privatisation as a share of total FDI flows, 1990-1999

36%

6%

42%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Latin America Asia Europe

ONSCREEN

FDI flows are at risk (cont’d)

Brazil 1.1 1.5 Down

Mexico 1.19 1.44 Down

India 1.05 1.35 Down

Poland 1.15 1.26 Down

Thailand 0.93 1.21 Down

Czech 1.09 1.2 Down

South Korea 0.91 1.12 Down

Hungary 1.02 1.02 Stable

Hong Kong 0.95 0.95 Stable

China 1.99 1.69 Up

Russia 0.99 0.78 Up

A T Kearney FDI Confidence Index Sep 02 Feb 01 Change since Feb 01

The index ranges from 0 (no confidence) to 3Survey horizon is one to three years

ONSCREEN

A measure of vulnerability

Current account and amortisations (2003) divided by fx reserves (2002)

-50%

0%

50%

100%

150%

200%

Leban

on

Brazil

Turkey

Colom

bia

Mex

ico

Venez

uela

South A

frica

Uruguay

Poland

Peru

Indones

ia

Philippin

es

South K

orea

Thaila

nd

China

Russia

ONSCREEN

Brazil’s basic problem

0%

10%

20%

30%

40%

50%

60%

Thaila

nd

Philippin

es

Indones

ia

South K

orea

Russia

South A

frica

Mex

ico

Turkey

China

Poland

Venez

uela

Colom

biaPer

u

Brazil

Argen

tina

Exports as a share of GDP

ONSCREEN

Brazil’s current account adjustment is great, but...

-30.5-33.4

-25.3 -24.2 -23.2

-10.0

-40.0

-35.0

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

1997 1998 1999 2000 2001 2002

$ bn

ONSCREEN

...it has depended on a collapse in domestic spending...

-40

-30

-20

-10

0

10

20

30

40

50

Feb-0

0

Apr-00

Jun-0

0

Aug-00

Oct-0

0

Dec-0

0

Feb-0

1

Apr-01

Jun-0

1

Aug-01

Oct-0

1

Dec-0

1

Feb-0

2

Apr-02

Jun-0

2

-6000

-5000

-4000

-3000

-2000

-1000

0

Current account balance (right scale, US$ mn)

Export growth (% y/y) Import growth (% y/y)

ONSCREEN

...and a weak exchange rate...

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02

Brazil's inflation-adjusted exchange rate

ONSCREEN

...which makes the domestic debt burden grow...

Brazil’s domestic debt

Floating rate

61%

US$-linked

30%

Fixed rate

9%

ONSCREEN

...creating a solvency risk

Domestic debt External debt

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

Jun-9

7

Oct-9

7

Feb-9

8

Jun-9

8

Oct-9

8

Feb-9

9

Jun-9

9

Oct-9

9

Feb-0

0

Jun-0

0

Oct-0

0

Feb-0

1

Jun-0

1

Oct-0

1

Feb-0

2

Jun-0

2

% GDP

ONSCREEN

Options for Brazil if things go wrong

Capital controls? To ring-fence domestic interest rates

Domestic debt restructuring? Probably not achievable without capital controls...

Debt monetisation? Probably not achievable without capital controls...

So: can capital controls work?

ONSCREEN

Is there ‘moral hazard’ in Turkey?

Can there be ‘creditor’ moral hazard without ‘debtor’ moral hazard?

IMF share of 2003-2006 external amortisations

Turkey 24%Brazil 17%

ONSCREEN

Contagion mechanisms have changed

0%

20%

40%60%

80%

100%

120%

140%160%

180%

200%

1993 1994 1995 1996 1997 1998 1999 2000 2001

Latin America Emerging Asia EMEA

Short term external debt divided by fx reserves

ONSCREEN

Common creditor problems?

Turkey 28% 10%

Russia 50% 6%

Ukraine 31% 15%

Romania 17% 24%

South Africa 21% 9%

Germany France

Brazil 17% 24%

Mexico 41% 35%

Colombia 29% 25%

Venezuela 37% 16%

Argentina 23% 27%

Spain USA

ONSCREEN

Russian creditworthiness has improved massively

100

120

140

160

180

200

220

240

260

1997 1998 1999 2000 2001 2002 2003

-2

0

24

6

8

10

1214

16

18

% Ex ports goods, serv ices & income Current account % of GDP, right scale

ONSCREEN

Mexican peso isn’t cheap, but ability to pay is strong

0

20

40

60

80

100

120

140

160

Jan-8

0

Jan-8

2

Jan-8

4

Jan-8

6

Jan-8

8

Jan-9

0

Jan-9

2

Jan-9

4

Jan-9

6

Jan-9

8

Jan-0

0

Jan-0

2

0

50

100

150

200

250

300

350

400

External debt/exports ratio, right scale Real exchange rate index, 1990=100, left scale

David Lubin

November 2002

Emerging markets: is risk aversion dead?