Emerging markets need a lasting solution to cure their woes

Updated: Monday February 10, 2014 MYT 9:38:04 AM

Emerging markets need a lasting solution to cure their woes

BY YAP LENG KUEN

At the moment, it would appear that Asian central banks are picking up the bill to steel their economies in the face of capital outflows.

Indonesian and Indian authorities have improved their defences against rapid outflows, but their governments have failed to tackle supply bottlenecks and market rigidities that fuel inflation and limit room for policy manoeuvre, said Reuters, quoting economists.

In Thailand, months of political turmoil have paralysed the government, leaving the central bank as the mainstay of economic support.

In Japan, a blast of central bank money has boosted the economy and markets, but Prime Minister Shinzo Abe’s economic reforms have disappointed, according toReuters.

China’s central bank is trying to rein in an explosion of off-balance sheet and risky lending, as cautious government regulators resist speedier financial reform that would force markets to price risk more realistically, added Reuters.

As long as these Asian Governments fail to address the structural problems, they would be vulnerable to the rockings of emerging markets.

It is anybody’s guess how long their central banks can detour from their price and financial stability mandates to deal with their weak economies.

The next few months is going to be a test of the resilience of emerging markets, as the Fed continues to reduce its monthly bond purchases that had flooded the markets with cheap cash.

At Barclays, chief executive Antony Jenkins has turned down his 2013 bonus, saying it would be inappropriate, given the bank’s hefty bill to pay for past problems and its need to call on investors for cash, reported Reuters.

He pointed to the very significant costs which have been required to address legacy litigation and conduct issues, and the cost of getting out of areas the bank does not want to stay in, such as tax advisory.

Barclays raised £6bil from a rights issue after being told by its regulator to shore up capital.

While we admire Jenkins for his decision, his action of rejecting his bonus indicates that the road ahead for Barclays is still bumpy.

Despite the fact that it has been six years since the financial crisis, Barclays is still nursing its wounds, and it would take some more time for the bank to be on a steady path.

And who knows if Jenkins might accept a result-based bonus at the end of his successful restructuring of Barclays.

Meanwhile the rapid expansion of foreign currency borrowing in China is causing concern among analysts, wrote The Telegraph.

This means that a crisis in China’s financial system was becoming a bigger risk for international banks, added The Telegraph, quoting Charlene Chu, a former senior analyst at Fitch Ratings in Beijing and now the head of Asian research atAutonomous Research.

“One of the reasons why the situation in China has been so stable up to this point is that, unlike many emerging markets, there is very, very little reliance on foreign funding.

“As that changes, it obviously increases their vulnerability to swings in foreign investor appetite,” said Chu in an interview with The Telegraph.

Figures published by the Bank for International Settlements in October showed foreign currency loans booked in China, as well as cross-border borrowing by Chinese companies, had reached US$880bil as of March 2013, from US$270bil in 2009.

It is not a very big amount compared with the massive size of the financial system, but the problem can grow with a rising dollar.

As China opens its economy, this is an area of potential concern that needs to be managed.

Columnist Yap Leng Kuen is concerned whether China can hold up well as an emerging market.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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