The Real Deal
The G20 is coming to grips with what governments are and are not willing to do over the next year in terms of stimulus plans and regulations. Most agree that the bottom has been marked during this downturn, but that the recovery is going to be less than stellar in western eyes.
The language in London has been downright bellicose when it comes to bank bonuses and re-gigging remuneration packages -- and that is what has been coming from the regulators! Whether concrete proposals actually crystallize is another matter altogether. The reality is most leaders have one hand on the populist pulse (re-elections in the case of Britain and Germany) and the other on the wheel of a ship which has been through one heck of a storm.
Collective action, including more than a trillion dollars spent to prime the banking system, has provided us with more security, or at least the perception of more security than in September 2008. On the streets of London, we all witnessed a period of about a week when one did not know whether their financial institution would remain open. All of a sudden, depositors had to learn a great deal more about deposit insurance limits.
At the start of this year when the western led downturn started to really bite, one wave of economists boldly stated the decoupling theory widely touted the previous year had been proved to be wishful thinking. The so-called BRIC countries are export dependent and cannot excel without the support of European and U.S. demand, the collective logic concluded.
It is time for those doctors of emerging market doom to re-think their prognosis. Collectively, the U.S. and Europe will be lucky to grow between one and two percent over the next year. In contrast, China is already growing eight percent and India and Indonesia better than five and the broader Middle East around three and a half percent. This is not theory, but the real deal.
This week, I sat down with Egypt’s Trade and Industry Minister, Rachid Mohamed Rachid who continues to comb the east and west for growth opportunities on behalf of Egyptian companies. These days he is logging more long-haul trips to China and India in search of joint ventures or to recruit companies for special economic zones under development.
Rachid, as a former senior Unilever executive, is acutely aware of recessions and business cycles in general.
“Today we are not talking about theory but about facts. We are seeing numbers that are totally different than the U.S. and Europe. We are seeing prospects that are more bullish than the rest of the world.”
It is not easy to navigate larger economic tankers through these turbulent times, but that is exactly what some of these fast developing countries have done. When the export machine started to falter in China, it steered the economy to a domestic infrastructure build out -- not little league spending but some $9 trillion between now and 2017. The other billion person economy, India, was in the midst of a reconstruction plan that will see new railroads, airports and the rest built over the next two decades. Those who have travelled the roads or rails on India would not argue about the need to do more at this stage of development.
Some would contend this is good sound planning by the two future giants. The fact is that luck and good timing had a lot to do with it. The infrastructure plans were on the books and were rightly accelerated to respond to the downturn.
The storyline is not dissimilar in the Middle East. The Chief Executive of GE International Nani Beccalli-Falco points to the model of public-private partnerships in the region where there is a track record of growth.
“We are getting out [of the downturn] because the so-called emerging countries, which in my mind are not emerging anymore because they have already emerged, are really pulling the global economy,” said the finely-dressed Italian from Turin, “You think about China, you think about India, you think about the Middle East, you think about Brazil.”
So while government leaders try to develop a consensus for future action, those with capital reserves will keep their taps open on a large scale. That is, what they say in business, not theoretical but “the real deal.”
Beware of falling BRICS
The attacks on Mumbai underscored the frailty of the world today. It is complex enough with the financial crisis at hand, but unduly challenging if you throw terrorist attacks on top. Strike while the enemy is weak seems to be the rule of thumb here.
India, one of four BRIC countries -- Brazil, Russia, India and China -- has come a long way since the 9/11 terrorist attacks which shook the world. India’s main market index surged 390 percent since 2001 through September of this year and that is factoring in the sizable correction in 2008. Economic growth has averaged eight percent in that timeframe. Brazil, Russia and China posted equally impressive gains of 345 percent, 639 percent and 500 percent in the same period.
All four of these BRIC countries have been forced to take a big pause or as Florence Eid, Managing Director of Passport Capital noted during a speech with business executives this week, “The train may be stopped, but it is still steaming.”
This is not dissimilar to the story throughout the Middle East. Stock markets in the region are down between 30 and 70 percent in 2008. That is not insignificant because an estimated $1 trillion of market capitalization was wiped out in short order.
The concern through the first half was too much liquidity chasing too few products. The story almost put to bed in the second half of the year is all about a lack of liquidity to fund the $1 trillion of projects now on the books in the region.
It is in that spirit that Saudi Arabia’s central bank decided to move decisively with a cut of one percent to its main lending rate.
“This is no time for inching right? We have seen 100 basis point cuts right around the world,” said Eid, “The Saudi Central Bank is acting in the very same manner. There is no time to wait. There is no time to reflect what is going on. It is time to move and they moved fast.”
It is the same reason Abu Dhabi stepped up support for Dubai’s property sector. The federal government provided $13 billion to form the Emirates Development Bank and absorb the assets of lenders Amlak and Tamweel. This was quickly followed by the creation of a new national entity Abu Dhabi Finance. No one wanted to see this train parked in the station too long -- with or without steam. Some noted this might mark the beginning of the end to the property drops we have witnessed over the past two months. Let’s see if the risk premium of two percentage points above LIBOR will come down as a result.
While some may be writing clever headlines about “Crumbling BRICS” or “BRICS on shaky ground,” one should definitely rollout the master blueprint. The Paris-based think tank of the industrialized world, the OECD put it into context recently, projecting that the 30 member countries will contract by 0.3 percent next year. In sum, all, ALL of the growth for 2009 will come from the BRIC countries and their faster growing brethren. China, India and the Middle East may be lucky to eek out six percent economic growth next year, but that is six percent better than we are seeing elsewhere right now.
Earlier this year at the World Economic Forum annual meeting in Davos, there was a great deal of buzz around the concept of de-coupling, that the fast growing economies would break free from the shackles of their slower growing counterparts in the G7. That theory was given far too much airtime, since countries like Saudi Arabia, China and India are still very dependent on Western demand and Western investment. This co-dependency was enough to knock at least two percentage points of growth off for each country this year.
Tony Angel, Managing Director of EMEA for Standard & Poors, at the same gathering of business executives said the relationship between the G7 and the rest of the world is tighter than ever. One lesson we learned from this mammoth downturn is that emerging markets are “embedded in the world economy.” That too, said Angel, is a good thing since it is “time to move on from a uni-polar world.”
Companies of the emerging market countries have moved well down the track this decade. The names of SABIC (Saudi Arabia), Lenovo, Haier (Chinese), Tata, Ranbaxy (Indian) and Embraer (Brazil) should all sound familiar to those of us in the business. All six have emerged as major players either through their global growth or by acquisition of global counterparts.
With a bit of research, I found that the term “emerging markets” was coined in 1981 by World Bank economist Antoine van Agtmael. So, in less than three decades these economies have become not only magnets for foreign direct investment but as capital generators in their own right.
They have their own set of challenges; the risk of a harder economic landing is there and the train may be paused at the station, but demographics and growth are on their side.
ABOUT THIS BLOGJohn Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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