The Economist - UK (2022-04-30)

66 Finance&economics TheEconomistApril30th 2022

surgesinfoodandenergycosts.Wheatand

oilare bothabout50%more expensive

thantheywerea yearago.Forimporting

countriesthisincreasesthefiscalcostsof

foodandenergysubsidies, drainshard­

currencyreservesandweighsoneconomic

growth.Risingpricesalsointensifypres­

sureoncentralbanksintherichworldto

tightenmonetarypolicy.Investorsexpect

theFedtoraiseitsbenchmarkinterestrate

bynearlythreepercentagepointsin2022;

thatwouldbethelargestrateriseina sin­

gleyearsincetheearly1990s.Addintheef­

fectofa shrinkingFedbalance­sheet,and

thetighteningthisyearcouldbethemost

dramaticsincethe1980s.

Marketsarealreadyheapingpressure

on vulnerable emerging economies. As

capitalflowstoAmericatotakeadvantage

ofhigherrates,thedollarisstrengthening:

it isupbymorethan10%overthepastyear.

Fundingcostsintheemergingworldare

risingwithit.Theyieldonthehard­cur­

rencydebtofthemedianemergingecon­

omyhasrisenbymorethana thirdsince

the summer. The share of issuerswith

bondstradingatdistressedlevelshasmore

thandoubled,tojustovera fifth,according

totheimf. ThatincludesUkraineaswellas

EgyptandGhana.

Morecountrieswillprobablyfollowthe

leadofSriLanka,whichonApril12thde­

faultedonitshard­currencygovernment

debt.Nonetheless,thesystemiccrisesthat

werea featureofthepreviouslostdecades

may be avoided. Many middle­income

economieshavebolsteredtheirfinancial

defencessincethe1980s,bybeefingupfor­

eign­exchange reserves,forinstance.In­

vestorshavebecomemorediscerning, re­

ducingtheriskofwidercontagion.The

biggerworryinsteadisthatdebtloadswill

hitgrowth,bylimitinggovernments’room

tocuttaxesandinvestineducationandin­

frastructure. Local banks that have lent

heavilytogovernmentsmayfindtheirca­

pacity to lend to private borrowers im­

pairedifthebondstheyholdlosevalue.

Home­country government debt now

makesupabout17%ofbankassetsacross

emergingeconomies,upfrom13%inthe

early2010sandwellabovethe7.5%average

inrichcountries.

Anotherheadwindcomesfromglobal

trade. Developing economies’ fortunes

havelongrisenandfalleninlinewithit.

From 1960 to1980,goodstradeasa shareof

worldgdpdoubledfrom9%to18%;during

thelostdecades,bycontrast,itstagnated.

Tradethensoaredagainasglobalsupply

chains expandedacrossEastandSouth­

EastAsiainparticular.Butthatintercon­

nectednessisoncemoreatrisk.Geopoliti­

caltensions,nationalcampaignsforself­

sufficiency and concerns about supply­

chainreliabilitymayweighontrade,re­

ducingpooreconomies’opportunitiesto

borrow technology andknow­howfrom

foreignfirms,andselltotherichworld.

The global economy will also suffer

fromthesputteringofthelargestemerging

marketofthemall,andtheworld’sprimary

growthengine:China.Between 1970 and

2000 AmericaandEuropeaccountedfor

nearlyhalfofglobalgdpgrowth.Thesharp

and sustained slowdown in rich­world

growth that began in the 1970s thus

weighed heavilyonthe globaleconomy

andtheprospectsfortheemergingworld.

Fortunesturnedinthe2000s,however,as

anexplosiveexpansioninChinaleditto

contribute more to global growth than

AmericaandEuropecombined.Amodest

decelerationinChina,togdpgrowthrates

ofaround5%,wouldnotdoomtheglobal

economytostagnation. Draconiancovid

lockdowns,aprotractedproperty­market

bustandthepotentialcostsofgeopolitical

misadventures, however, could do great

damage(seenextstory).

Someemergingmarketsstandtobene­

fitfromaneraofstagnation.Firmswaryof

dependenceonChinacouldmoveproduc­

tiontootherlow­costplaces.Richcoun­

trieshopingtopreventpooreronesfrom

drawingclosertoRussiaandChinacould

lowertradebarriers andincreaseinvest­

mentabroad,boostinggrowthprospectsin

theprocess.Highcommodityprices,while

theylast,willbuoythefortunesoffood,

energyandmetalsexporters.

Overall,however,thehigherdebtsand

forgoneinvestmentinhumanandphysi­

calcapitalofthepastfewyearswilltakea

heavy toll. The imf forecasts that gdp

across the emerging world will remain

some5%belowitspre­pandemictrendat

theendof2024.(Bycomparison,gdpin

mostoftherichworldisexpectedtobeless

than1%belowtrend.)Withoutboldinitia­

tivestolowerdebtburdens,investinpub­

licgoodsandexpandtrade,suchmediocre

performancemightbejusta tasteofwhat

istocome.n

Catching up is hard to do

Sources:IMF;WorldBank;TheEconomist

*Medianchange †April 2022 forecastcomparedwith

January 2020 forecast ‡Excl.China §Excl.UnitedStates

3

2

1

0

-1

2110200090801970

GDP per person, average annual % change

Ten-year moving average

United States

Emerging markets*

UnitedStates

Advanced

economies§

China

inEurope

inAsia‡

Emergingmarkets

-8-10 -6 -4 -2 20

GDP,202forecast,%changefrom

pre-pandemicforecast†

Theyuan

Fearoffloundering

I

t iseasytoforgetthattheworld’ssec­

ond­biggesteconomyisstillanemerg­

ingmarket.China’sglobalclout,itstech­

nological prowessin certain fields, and

evenitslowbondyieldsalldistinguishit

fromthetypicalmemberofitsassetclass.

ButinatleastonerespectChinaresembles

a classicemergingmarket: itretainsa pal­

pablefearoffloating itscurrency.Instead

Chinakeepsa closeeyeontheyuan’svalue

againstthedollaranda basketofitstrad­

ing partners’ currencies, limiting any

sharpmovements.

Formostofthepastyear,it worriedthat

the yuan would float too high. China’s

largelysuccessfuleffortstostampoutthe

earlyvariantsofcovid­19keptitsfactories

openanditsbordersclosed.Thatallowed

itsexportstoboom,puttingupwardpres­

sureontheyuan,evenasoutboundtou­

rismandotherservicesimportssuffered,

removinga sourceofdownwardpressure.

Theyuanrosesharplyagainstthebasketof

trading partners’ currencies and gently

H ONGKONG

Chinashouldworrylessaboutits

currencyandmoreaboutitseconomy

Covid contagion

China

Sources:RefinitivDatastream;

ChinaForeignExchangeTradeSystem *CFETS RMB index

7.25

7.00

6.75

6.50

6.25

22212020

Yuanper$

Invertedscale

110

105

100

95

90

22212020

Yuan, trade-weighted

exchange rate*

Dec 31st 201=100