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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 ))

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