Emerging world struggles

Many a country labelled by the West as Third World in the past has since seen an economic boom. China, Russia and India, three countries plagued by widespread poverty and famine in the 20th century, are now among the 12 largest economic powers, according to Germany's Handelsblatt newspaper.

But even these emerging nations are susceptible to the turbulence in the international financial markets, according to Maria Lanzeni, head of emerging markets at Deutsche Bank Research.

"A crisis as fierce as the one following the implosion of the investment bank Lehman Brothers would be bad for emerging markets. It would be followed by a new recession," she told Deutsche Welle.

Should the debt crisis continue, they would have to expect a 'negative net effect.' Not only would there be less of a flow of fresh foreign capital to emerging markets, but there would be an outflow of capital, said Lanzeni. Funds would be needed elsewhere, for instance to plug holes from losses due to the crisis.

Dependent on foreign investments

The greatest danger for emerging markets lies where domestic markets are dominated by foreign investments, according to Lanzeni. "This is especially true for eastern European countries like Hungary and Poland, but also for Israel, Mexico, Russia, Brazil, Indonesia or South Africa," she said.

With growth rates of 8 to 10 percent per year, China and India are more robust, she said. "That leaves more room for stimulus packages."

Lanzeni predicted that emerging markets would remain attractive in the long run, with structural factors in their favor, especially "their population's age structure, a new middle class as consumers, better basic data than in Western nations - and finally, considerably improved economic policies."

Pillar of global economic growth

The emerging markets as a pillar of global economic growth - during the financial crisis following the collapse of Lehman Brothers, the trend fired the imagination of German businesses as China, India and Brazil ordered "made in Germany" machinery, plants and automobiles. On the other hand, high returns in the emerging markets lured investors.

But now, inflation is on the rise and an overhyped market threatens.

"I can only warn of Chinese stock," said Vincent Strauss, manager of the Magellan Fund. He told Germany's Frankfurter Allgemeine Sunday edition that he did not believe China would manage to get a grip on inflation. "The country is overinvested," he said.

Strauss said the expansion of railways and roads was happening too quickly, with huge excess capacities in the cement and steel industries. He said developing from an industrial to a service society would be difficult in a communist system where deficiencies are not addressed. "China is an accident waiting to happen," Strauss said.

Imported inflation

The consequences of the debt crisis have become noticeable in the emerging markets, too. Europe and the US are flooding the markets with capital that pushes inflation in the emerging markets. As a result, these nations are forced to raise interest rates, a move that puts the brakes on growth.

So-called "carry trades" are on the rise again: investors take out loans with low interest rates in the US and invest in Singapore dollars, Brazilian real or in rubles that offer better interest rates. "That strengthens those currencies and harms exporters from those countries," Strauss said.

A look at the stock indexes in select emerging nations shows how growth has declined as a result of its dependency on crisis-ridden global markets: in China, key stock has dropped 6.5 percent in value since the beginning of the year while Poland, Taiwan and Turkey recorded double-digit losses. With a loss of 15.6 percent, India ranks second behind Brazil with a minus of 23.6 percent.

"Growth is still relatively robust in emerging nations, although it is slowing down," said Thomas Mayer, chief economist at Deutsche Bank. "Weakening global growth combined with the European and US debt crises is what is blowing up in our faces on the financial markets."

Author: Klaus Ulrich / db
Editor: Martin Kuebler