08/11/1998 17:10:58 Emerging mkt decline seen braking worldwide growth
By Apu Sikri
NEW YORK, Aug 11 (Reuters) - From China to Chile to Croatia, a
question mark looms large over growth prospects of the economies
of Asia, Latin America and Eastern Europe amid a sustained global
selloff in debt and equity markets that started last Thursday.
Investors worldwide are retreating from emerging markets.
And economists are beginning to question whether developing
countries, dependent largely on external capital, will see
economic expansion snuffed out due to lack of financing.
"This is the most nervous markets have been since the end
of October during the Asia meltdown," said Peter Frey, head of
emerging market sales at J.P. Morgan Securities Inc.
But some money managers contend that the correction in the
markets this time around will be more sustained and long-term.
"The conditions in the markets are more akin to 1995," said
Michael Rosborough, who manages $4 billion in emerging market
bonds at the Pacific Investment Management Co. (PIMCO), among the
largest bond fund managers in the United States.
In 1995, a sharp devaluation of the Mexican peso triggered
a slide in asset prices across the developing markets.
"I don't buy the argument that this is a temporary
correction on low liquidity," Rosborough said. "The fact is
that there is no desire among investors to own several emerging
market assets. And there are several default candidates --
Russia, Indonesia, Pakistan. These countries don't have the
wherewithal to meet their contingent obligations."
Russia and Southeast Asia remain at the fulcrum of the crisis.
Russia has seen a 30 to 40 percent decline in the price of its
dollar bonds in the last four days, compared with a 10 to 15
percent correction in bonds of Mexico and Brazil. Overall, the
yield on the J.P. Morgan Emerging Market Bond Index was at 920
basis points early Tuesday, 77 basis points wider on the day and
the widest level since May 1996, according to the investment
"Countries that are heavy exporters of commodities --
Russia, Venezuela, Chile -- have suffered the most and will
continue to be punished," said Luis Luis, head of emerging
market bond research at Scudder Kemper Investments.
But the general aversion to risk among money managers is
already affecting several Latin American countries. Short-term
interest rates have inched up in all three major economies of the
region in the past week. Three-month interest rates on domestic
debt are up to 9.0 percent from 7.25 percent a week ago in
Argentina, up to 23.8 percent from 21.25 percent in Mexico and up
to 16 percent from 14.1 percent in Brazil.
The higher rate in Mexico has not stemmed a 3 percent
devaluation of the Mexican peso in the past week.
Prospects for emerging markets are unlikely to improve any
time soon, analysts said.
"The capital markets will remain shut to emerging market
issuers for the next few weeks at the least and possibly to the
end of the year," said Luis at Scudder.
This could shave off 0.5 to 1.0 percentage point in
fourth-quarter gross domestic product growth, according to some
But some analysts contend that comparisons to the crisis of
1995 are unwarranted. "Dealers were not picking up the phone in
1995. People just refused to make markets," said Paul Dickson,
senior sovereign bond analyst at Lehman Brothers. "Now bankers are
picking up the phone and they are making markets, even if it is on
a three-point bid-offer spread," he said.
Another major difference over the last three years is the
tremendous growth of the sector. In 1995, the face value of
outstanding emerging market dollar bonds was about $160 billion.
Currently it is about about $275 billion, according to figures
compiled by Lehman Brothers.
The repercussions of problems in emerging markets will
reverberate through the United States and Europe as well, said
PIMCO's Rosborough. If these countries face a sustained slowdown,
the United States may have to rethink monetary policy, including a
lowering of short-term interest rates, he said.
Over the next few weeks, analysts say, two factors hold the
key -- the possibility of a devaluation of China's currency and a
possible restructuring of Russia's debt.
"A lot is being driven by events in Asia -- the weak yen,
the perception that Japan has not gotten arms around banking
system problems, the threat of renminbi (Chinese currency)
devaluation, the problems in Russia. This raises the risk for
emerging markets, and even major markets are being hit very
hard. We may not have seen bottom yet," said Jeff Bahrenburg,
global strategist at Merrill Lynch & Co.
"We think rates could come down in the U.S. and we think we
could see joint intervention by the U.S. and Japan again to slow
down this decline," he said.
(( -- N.A. Treasury Desk; 212 859-1562 ))