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Just a glance at a recent report from the World Bank is enough to clarify that, in terms of pandemic recovery, “advanced economies and emerging market and developing economies are on two different flight paths,” with advanced economies on track to return to pre-pandemic trends by next year while EMs find themselves “flying low” and vulnerable to further “headwinds”.

This huge economic disparity lends an extra degree of urgency to discussions surrounding economic inclusion, a process which – according to groups like the UN’s Sustainable Development Goals organisation – can help to create jobs, stimulate business activity, and improve growth for individuals, companies, and countries across the emerging world. However, while such discussions are important and necessary, we need to be careful about how we frame the subject of EM financial inclusion.

After all, though it does absolutely help to accelerate growth, EMs are not just helpless victims, and attempts to improve economic inclusion aren’t moral crusades or exercises in charity – if nothing else, there’s a robust business case for improving access to the credit and cross-border payments services that young, tech-savvy EM populations need to continue thriving without punitive restrictions.

What is economic inclusion?

In brief, economic or financial inclusion refers to ensuring that people and organisations have access to the financial services (or products) that meet their needs. These, according to the World Bank, can include “transactions, payments, savings, credit and insurance” – though I would place transaction accounts at the top of that list.

It might be tempting, on encountering economic inclusion, to assume that it’s an idea to be directed at unbanked people – that is, people who have no bank accounts whatsoever and who deal entirely in cash. And, to be clear, there are still a lot of unbanked people in the world today – to the tune of 1.7 billion, in fact, according to the latest Global Findex Report.

Equally, though, economic inclusion is about widening access to financial services – a slightly more pervasive issue that can wear different masks.

Unbanked or underbanked?

Let’s say, for example, that a person from an EM like Kenya wants to set up a business – they’re digitally literate; they understand the services and platform they need, and they’re completely capable of procuring those services.

That person may well encounter a problem, however: not because they’re technically unable to access a digital platform, but because the international nature of the platform means any subscriptions made by the Kenyan business owner will be subject to the often punitive, regulation-borne fees involved in cross-border payments to and from EMs.

This isn’t the same as being unbanked – the person in this scenario may well have a personal transaction account, for example – but the practical result is the same: an EM country is denied an economy-boosting new business, and an individual can’t pursue their livelihood without a huge amount of hassle.

The many motives for strong inclusion

For me, there is a clear moral dimension to ensuring that financial inclusion is as widespread as possible. Digital financial inclusion, especially, is capable of lifting people out of poverty and, as I’ve mentioned, improving the economic prospects of EM countries more broadly.

That doesn’t mean Western financial institutions should spend too much time patting themselves on the backs for any moves towards inclusion – after all, Western regulatory pressures play a huge role in the underbanked status of EM countries. Besides, it would be disingenuous to frame financial inclusion as some charitable act to be preached about when, in fact, there’s a robust business case to be made in its favour.

Commentators like McKinsey have noted that this market consists of around two billion people (and 200 million small businesses) who are currently underbanked and the benefit is clear for service providers prepared to embrace potentially lucrative new revenue streams in a secure compliance-driven environment– for example by inserting themselves into the innumerable micropayments that come hand-in-hand with the frictionless ease of digital transactions.

Inclusive futures

The motives and outcomes for financial inclusion are, to some extent, in the eye of the beholder. For EM countries facing post-pandemic economic deceleration, though, the former is perhaps less significant than the latter.

Whether such efforts are viewed in terms of a mechanism for reducing poverty; stimulating economic growth; correcting Western regulatory bias; or as a canny business move, the result is that once we focus on establishing financial innocence rather than looking for financial guilt we get to a point that individuals and the market generally will only benefit both emerging and more established markets, with the myriad opportunities that will result. 

About the author: Richard Shearer is the CEO of Tintra

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With a total valuation of more than $9 trillion, the European real estate market has caught the eye of new and seasoned investors alike. When you think of real estate investments in Europe, prominent cities, such as Berlin, London, and Paris, instantly come to mind. However, foreign investors have plenty of opportunities to reap the benefits of emerging markets in Central and East European countries. Despite the economic turmoil of 2020, the region recorded a total of €9.7 billion in real estate investment transactions. That figure is projected to skyrocket in the coming years.

We’ll dive deeper into the hottest new European markets for foreign real estate investments in the following sections. Let’s get started.

1. Georgia (Tbilisi)

Georgia’s real estate sector has witnessed significant growth over the last few years. The development of state-of-the-art projects, such as David Kezerashvili’s Vake Plaza in Tbilisi, propels the industry further.

Situated close to the city centre, Vake is an upscale neighbourhood in Tbilisi known for its fine dining restaurants and tranquil ambience. It’s also the area with the highest density of ex-pats, making it ideal for investors from foreign countries.

The university district of Saburtalo is another neighbourhood that’s grabbing the attention of investors. It’s a more affordable alternative to the sky-high real estate prices in Vake. However, it is essential to pay attention to investment advice by David Kezerashvili. According to the real estate developer, investor, and former Defence Minister of Georgia, the country’s real estate sector is prone to government interference.

The absence of a proper legal framework makes it difficult for developers to gain complete control of their projects. Also, that leads to an abundance of conflicting information at local, state, and federal governments.

Kezerashvili believes that the market presents an ocean of opportunities to foreign investors despite these limitations. But he advises investors to be prepared to navigate through a bureaucratic system plagued with remnants of Soviet policies.

2. Poland (Warsaw)

Poland is one of the top contenders as a relatively stable and safe market for real estate investments. In 2020, the country dominated the CEE real estate investment market with total recorded transactions worth €5.6 billion. It’s the third-best result in Poland’s history. However, it’s worth noting that buyers and investors are prioritizing the industrial sector over other markets, such as housing. The retail industry has seen a surge of alternative assets, such as open-air shopping centres and retail parks. It’s understandable considering the changing shopping preferences of consumers due to the pandemic.

There’s also been a rise in the demand for high-rises and luxury residential properties in Warsaw. Warsaw's thriving business sector and relative political stability have turned it into a lucrative market for investors.

According to a recent report by PwC, there’s also an increased interest in acquiring assets that can be repurposed and repositioned. It’ll help investors pivot when market forces change due to economic downturns, political conflicts, etc.

3. Hungary (Budapest)

Sustained economic growth and low unemployment rates have led Hungary’s capital to become the fastest-growing housing market globally. The city has particularly benefited from foreign companies opening new offices and luring potential investors.

According to Adam Ilkovits, CEO of a leading brokerage firm in Budapest, seasoned investors choose to buy properties on the outskirts of the business district. These areas offer more potential for appreciation, thus resulting in higher resale values. If you’re looking to invest in the housing market right now, Hungary is one of the most rewarding markets.

4. Czech Republic (Prague)

Economic growth in Czech Republic’s capital has created a class of thriving high-net-worth individuals with an eye for high-end properties. The so-called ‘nouveau riche’ focus on buying luxury properties that enhance their social status. If you’re looking to venture into the luxury housing market, Prague would be a great place to start. Experts believe that the growth of the premium housing segment will continue in the coming years.

The Way Forward

While the CEE real estate market is showing signs of growth, it’s expected to suffer minor blows due to the Russian invasion of Ukraine. The increased cost of construction materials combined with supply chain disruptions will escalate property prices.

Irrespective of the market you choose, you must have a clear idea of the underlying risks of foreign real estate investments. Also, you should have a deep understanding of government policies and legal regulations in that specific market.

Dr Neumann, you have served as an Ambassador to the UK and campaigned for the restoration of democracy and free markets in your homeland. Many people will be surprised to learn that the West’s financial system has an implicit bias towards companies and individuals from emerging markets.

Please can you explain how this bias manifested itself?

I think what people need to understand is that emerging markets are generally punished in several ways by compliance systems that are inherently biased. The goal of AML is to increase the systems of checks and balances to spot the illicit financial flows, but also to allow development. So far, poorly applied or biased AML compliance systems are imposed on countries that either don’t have the training or have the capacity to conduct that monitoring, but do their own compliance in a manner that is culturally relevant to them, with their own understanding of local market players and relevant documentation. 

It also disadvantages licit financial flows, for business and trade finance, that fund economic development and economic inclusion, which are SDGs of the UN and are also in the stated goals of the World Bank and the IMF. Yet if the country systems don’t have the capacity or protocols to meet these particularly Western protocols and the country gets ‘grey listed’ by the FATF regional body, the country gets punished in several ways. First, good financial flows are disadvantaged, by being delayed or outright blocked. Second, if you are grey-listed by the FATF, the cost of servicing your sovereign debt goes way up and, considering that emerging markets already have higher debt burdens and higher interest rates, it’s a real double burden.

You were recently appointed to the board of Tintra PLC. Why did you decide to join the company and how do you see your role developing?

I decided to join the Tintra Board because I’m excited about its mission. I think it applies innovative technologies that remove bias, improve economic inclusion and economic development which are all values that I have clearly stated and fought for during my career. This is a bank that is building its systems from the ground up, rather than trying to impose new technology on a legacy system, with which there is friction. Tintra’s approach is completely innovative. Its frictionless technology will increase the opportunity for entrepreneurs and economic development: both are things I care about. 

How do I see my role developing? Hopefully, my credentials in financial integrity and my relationships with multinational organisations like the OECD, FATF, OAS, UNODC will be helpful to bring forth a productive dialogue between Tintra and those organisations. I hope also to bridge nuanced and effective relationships between Tintra and the Western Hemisphere, particularly Latin America.

What are the regional differences and challenges that Tintra faces in the markets it operates in and how does it seek to overcome them?

It seeks to overcome them by having, on the one hand, regional knowledge, and nuance of how those countries work, together with genuine insight on what “good” or proper documentation and identity identification look like, and what are normal and acceptable behavioural patterns of these people doing these transactions. And then, on the other hand, you are also building the technology that will access that knowledge and analyse those factors in a way that is unbiased. I think that’s a very worthy challenge.

Do you believe that advanced technology and Is AI the key to overcoming compliance red tape?

Yes, I think so. I think it will be fantastic. As I said several times, the current Western-style system of anti-money laundering causes more than 90% of false positives, flagging people that are not doing anything wrong. It’s very burdensome; it’s very expensive, and yet you still have financing of terrorism and transnational organised crime, while more good and honest businesses and individuals are unjustly punished. This is not only unjust but counterproductive. What we want is to capture more of the illicit financial flows, while enabling (and indeed facilitating and expediting) good financial flows, linked to trade, finance, and development. 

AI properly built and applied is key to that. I think that Tintra’s approach is good because they are starting with that, rather than trying to backwards induce an AI system on an older legacy system. This is something I think most banks are finding very challenging. The way Tintra is building its framework ensures that its systems will not only be more efficient now but continue to innovate well into the future. Tintra will be the world’s first bank purpose-built for Web 3.0.

What does International Women's Day mean to you?

On International Women’s Day 2022 (March 8th), my work with Tintra is particularly satisfying. First, as a woman, who is also Latin American, it's both a great honour and responsibility to bring those twin identities and voices to the board of directors of a financial institution at the forefront of both banking and technology. Second, women are always the ones who struggle the most when there is a downturn, and the pandemic put that into stark relief. As entrepreneurs, particularly in emerging markets, women are severely disadvantaged in their access to capital and financial services. Tintra’s unbiased and always on AI-driven compliance system should level the playing field for female entrepreneurs everywhere – and that is something I will be proud to support.

Richard Shearer, CEO of Tintra, explores the importance of frictionless banking technology for cross-border transactions.

At the height of the pandemic’s first wave, the BBC ran an article on the struggle for migrants to move money from one country to another in lockdown conditions. The story of Liberian national Arthur Beare was striking. He said that it was almost impossible to receive remittances from other countries because he couldn’t access banks or transfer shops: either the banks “ask you to leave” or else it takes five hours to get inside. Many people in emerging markets depend heavily on cross-border payments to survive, so Arthur’s lack of access was a life-or-death situation. This kind of financial exclusion needs to change. 

On the other side of the coin, there are stories like those of Chandra Ceeka, an IT consultant living in Britain who sends money home to India. Although he can make payments online, he “doesn’t get the deals he used to” from local transfer shops, costing his family vital funds at a dangerous time. Of course, if Chandra only wanted to make a domestic payment within the UK, there would have been no such issue. There has been a real drive towards ‘frictionless’ banking – ways of making transactions as quickly, easily, and cheaply as possible – in Western countries. And, with the arrival of the pandemic and its social restrictions, this drive has been sped up considerably. This gives rise to the question: why aren’t cross-border payments equally frictionless? Especially for those in emerging markets, who have everything to lose and much to contribute. 

Navigating “a devil’s obstacle course”

The inefficient state of cross-border banking is certainly not due to a lack of enthusiasm. Let’s put aside the 800 million migrants who send money home (according to the UN): even then, we are left with emerging markets who are very happy to embrace the digitisation and technological advances that fuel frictionless banking. These regions have young populations who are digital natives, hungry for speed and convenience. 

The fact remains, however, that people in these countries - from the 800 million who rely on cross-border remittances to large multinationals who drive emerging markets’ growth - still have to deal with what research analyst Sam Klebanov calls the “devil’s obstacle course” when transferring money. This is reinforced by the fact the fees alone for cross-border payments cost a frankly exploitative 11%, and they can take several days to clear.

This is an unacceptable state of affairs, and it is those from emerging markets who suffer the most from such exorbitant costs – individuals and large corporates alike.

This kind of practice has no place in the modern world. If domestic bank transfers can happen with no payment barriers and at the tap of a smartphone, then we need similar technology for cross-border payments too.

Cross-Border Technological Innovations

What kinds of technological solutions are on the horizon for frictionless cross-border transactions? Naturally, given the digital nature of such solutions, cryptocurrency may well have a part to play. According to Stan Cole, Head of Financial Institutions at Inpay, there is promise in using blockchain to offer customers “cheap, real-time international money transfers that are more reliable and secure.” Crucially, this system avoids the “devil’s obstacle course” and high prices that cause problems for people like Arthur and Chandra.

Alternatively, recent white papers published by technology integration specialists Banking Circle point to the use of “decoupled architecture” – a system in which “commoditised services – like payments and cross-border transactions – can be delivered by specialist providers.” This kind of system allows banks to streamline international transactions by outsourcing them to cloud-based service companies. As Banking Circle notes, this may be an appealing move for banks who need the latest technological advances but don’t want to invest directly in infrastructure which may become swiftly outdated. It’s encouraging to see these kinds of developments for established banks since their fees are far higher than those of third parties in cross-border transactions.

Cross-border futures for the global economy

Obviously, the stakes for this kind of financial inclusion are high: for many individuals in emerging markets, easier cross-border payments reduce poverty and, according to the Centre For Global Development, enable investment in sanitation, education, and healthcare. But there’s another side to this story: it is a mistake to generalise emerging markets as merely ‘victims.’

Emerging markets and the powerful multinationals based within them need to be considered in terms of their substantial and vital contribution to international trade.

Emerging markets have huge potential as drivers of the global economy: cross-border trade from parts of Africa, Latin America, and Asia is expected to grow by as much as 11% between 2018 and 2022 according to EY. By contrast, developed markets with protectionist policies are marked by slow and uninspiring growth and do not come close to hitting the lucrative heights of emerging markets’ outward-looking engagement with international trade. 

From a national to an individual level, then, the need for frictionless cross-border banking is a tale of two halves. For individuals like Arthur and Chandra, ensuring that they or their families in emerging markets receive as much remittance as possible with as little fuss as possible allows for investment in a personal future. For large multinationals and financial institutions based in emerging markets, there is clearly much to gain from lowering exclusionary barriers within the cross-border payments sector, as such markets lead the way in cross-border transactions. A mixture of tech innovation and inclusive sentiments will allow emerging markets to usher in new levels of growth, development, and prosperity on the global stage.

Trump vs. China

Back in 1930, the US introduced the Smoot-Hawley Tariff Act, which raised their already high tariffs, triggering a currency war and, as economists argue, exacerbating the Great Depression. With President Donald Trump’s threat to put 10% tariffs on the remaining $300 billion of Chinese imports that aren’t subject to his existing levies, sending markets tumbling from Asia to Europe, the question on everyone’s lips is: Is history about to repeat itself?

In August, in a bid to hit back against Trump’s administration, Beijing allowed the Chinese yuan to plummet past the symbolically important $7 mark. Economists suggest that this currency manipulation is China’s attempt to display dominance and gain the upper hand in the trade war between the two countries as devaluating its currency could help counteract the effects of US’s long list of tariffs on Chinese goods.

As protectionist actions escalate and US-China relations continue deteriorating, investors and markets have been growing increasingly concerned even though Trump has delayed the imposition of his new tariffs until December. A full-blown trade war wouldn’t be good news to anyone and could seriously weaken the global economy, as the IMF has warned, making the world “poorer and more dangerous place”. Both sides are expected to experience losses in economic welfare, while countries on the sidelines could experience collateral damage. Furthermore, if tariffs remain in place, losses in economic output would be permanent, as distorted price signals would prevent the specialisation that maximises global productivity. The one thing that’s certain, no matter how things pan out, is that there will be no winners in this war.

Economists suggest that this currency manipulation is China’s attempt to display dominance and gain the upper hand in the trade war between the two countries as devaluating its currency could help counteract the effects of US’s long list of tariffs on Chinese goods.

Cyberattacks & data fraud

Millions, if not billions, of people’s data has been affected by numerous data breaches in the past couple of years, whilst cyberattacks on both public and private businesses and institutions are becoming a more and more frequent occurrence. With the deepening integration of digital technologies into every aspect of our lives and the dependency we have on them, cybercrime is one of the greatest threats to every company in the world.

Cyberattacks are rapidly increasing in size, sophistication and cost, as cybercrime and data breaches can trigger extensive losses. In 2016, Cybersecurity Ventures predicted that cybercrime will cost the world $6 trillion annually by 2021, up from $3 trillion in 2015. According to them, ”this represents the greatest transfer of economic wealth in history, risks the incentives for innovation and investment, and will be more profitable than the global trade of all major illegal drugs combined”.

 Emerging Markets crisis

Since the early 1990s, emerging markets have been a key part of investors’ portfolios, as they have been offering strong returns and faster growth. However, global trade tensions, a stronger US dollar and rising interest rates have hit emerging markets hard. Still far from catching up with the developed world, many supposedly emerging markets are developing at a slower pace, which combined with the threat of a global trade war and higher borrowing costs on the rise, has made investors pull in their horns. Emerging markets are the ones feeling the strain and financial panic has been gripping some of the world’s developing economies.

With political instability, external imbalances and poor policymaking which has led to full-blown currency crises in the two nations, Turkey and Argentina have been at the centre of an emerging market sell-off last year. But they are not the only emerging economies faced with a currency crisis – according to the EIU, some economies which are already in the danger zone and could suffer from the same currency volatility include Brazil, Mexico and South Africa.

Still far from catching up with the developed world, many supposedly emerging markets are developing at a slower pace, which combined with the threat of a global trade war and higher borrowing costs on the rise, has made investors pull in their horns.

If the currency crises in Turkey and Argentina continue and develop into banking crises, analysts predict that investors could abandon emerging markets across the globe. “Market sentiment remains fragile, and pressure on emerging markets as a group could re-emerge if market risk appetite deteriorates further than we currently expect”, the EIU explains.

 Climate crisis

In recent months, the media is constantly flooded with reports on the horrifying environmental risks that the climate crisis the Earth is in the midst of poses, but we’re also only starting to come to grips with the potential economic effects that may come with it.

Despite the significant degrees of uncertainty, results of numerous analyses and research vary widely. A US government report from November 2018 raised the prospect that a warmer planet could mean a big hit to GDP. The Stern Review, presented to the British Government in 2006, suggests that this could happen because of climate-related costs such as dealing with increased extreme weather events and stresses to low-lying areas due to sea level rises. These could include the following scenarios:

Due to climate change, low-lying, flood-prone areas are currently at a high risk of becoming uninhabitable, or at least uninsurable. Numerous industries across numerous locations could cease to exist and the map of global agriculture is expected to shift. In an attempt to adapt, people might begin moving to areas which will be affected by a warmer climate in a more favourable way.

A US government report from November 2018 raised the prospect that a warmer planet could mean a big hit to GDP.

All in all, the economic implications of the greatest environmental threat humanity has ever faced range from massive shifts in geography, demographics and technology – with each one affecting the other.

Brexit

Fears that the UK could be on the brink of its first recession in 10 years have been growing after figures showed a 0.2% contraction in the country’s economy between April and June 2019. A weakening global economy and high levels of uncertainty mean the UK’s economic activity was already lagging, but the potential of a no-deal Brexit and the general uncertainty surrounding the UK’s departure from the EU, running down on stock built up before the original 29th March departure date, falling foreign investment and car plant shutdowns have resulted in its GDP decreasing by 0.2% in Q2. This is the first fall in quarterly GDP the country has seen in six and a half years and as the new deadline (31st October) approaches, economists are concerned that it could lead to a second successive quarter of negative growth – which is the dictionary definition of recession.

And whilst the implications of Brexit are mainly expected to be felt in the country itself, the whole Brexit process displays the risks that can come from economic and political fragmentation, illustrating what awaits in an increasingly fractured global economy, e.g. less efficient economic interactions, complicated cross-border financial flows and less resilience and agility. As Mohamed El-Erian explains: “in this context, costly self-insurance will come to replace some of the current system’s pooled-insurance mechanisms. And it will be much harder to maintain global norms and standards, let alone pursue international policy harmonisation and coordination”. Additionally, he goes on to note that tax and regulatory arbitrage are likely to become more common, whilst economy policymaking could become a tool for addressing national security concerns.

“Lastly, there will also be a change in how countries seek to structure their economies”, El-Erian continues. “In the past, Britain and other countries prided themselves as “small open economies” that could leverage their domestic advantages through shrewd and efficient links with Europe and the rest of the world. But now, being a large and relatively closed economy might start to seem more attractive. And for countries that do not have that option – such as smaller economies in east Asia – tightly knit regional blocs might provide a serviceable alternative.”

Despite ongoing trade and political tensions being a primary contributor to Emerging Market weakness across 2019, there are still considerable opportunities for growth in markets that are currently being under-represented across the Emerging Market indices. Turkey, Argentina, Chile, Mexico, and Peru all have relatively low weights in EM indices but are increasingly gaining recognition for providing more diverse investment opportunities than they were a decade ago.

 Of course, there are risks involved with investing in these markets: political instability, domestic infrastructure problems and currency volatility can serve as a hindrance, but despite this, there are the prospects for high returns. These smaller emerging markets provide investors scope to diversify equity exposure.

Turkey

Although Turkey has been considered an emerging economy for decades, we have only seen the country’s true potential in recent years. Turkey’s status has been elevated due to its strong, though uneven, economic growth under some world-class companies, growing military, active diplomacy, as well as its increased autonomy, all of which have contributed towards its increased recognition as a potential power and nation of strong economic influence. However, in recent years, the country has faced some political changes that have brought in some turbulence into its financial markets.

Although the country was hard-pressed under the fall in the value of the Lira, it has demonstrated meaningful resilience and strength.

The Turkish Government has also worked hard to ‘maintain economic stability’ by continuing negotiations with European Union countries, consolidating its position within the Syrian crisis, creating a normalisation process with the United States and improving its co-operation with East Asian countries. Turkey has reaped the benefits of these efforts as the country carefully navigated its way to sustainable economic development.

Although the country was hard-pressed under the fall in the value of the Lira, it has demonstrated meaningful resilience and strength. The Turkish people are accustomed to instability and Turkey remains an emerging economic power.

The LATAM giants

The Latin American economies of Mexico, Brazil, Argentina and Colombia are expected to grow in power in 2020 as GDP improves. The GDP in Argentina is predicted to grow from recession to 2.2% growth next year though this may be affected by recent political instability. Mexico has continued growing despite a general slowdown and Brazil and Colombia have outperformed expectations. Against a challenging backdrop and series of considerable hurdles, LATAM countries are continuing to show strong growth prospects.

 Despite ongoing political instability in these markets and the risks posed by their increasing dependence on exports from China, these countries have strong business-friendly governments in place which can ensure sustainable growth and economic prosperity. These markets are expected to continue growing at a moderate pace, showing economic resilience and ultimately proving a viable option for long-term investment opportunities.

South Africa

South Africa has recently been identified as a major player in the Emerging Market space. Having previously been recognised as one of the ‘fragile five’ as recently as 2013, this may come as a surprise to seasoned investors who have witnessed the nation’s resulting struggle towards reformation and stable growth.

However, in the first months of 2019 and like many other emerging markets, the country has faced its fair share of struggles. With unemployment reaching a 15-year high of 27%, and the economy contracted by 3.2%, the country marked the biggest quarterly slump in a decade and has made the uphill battle even steeper.

Amidst the current economic struggles and the fact that China, South Africa’s largest trading partner, is once again embroiled in trade conflicts with the United States, the country is working to manoeuvre away from slipping into a debt crisis.

Amidst the current economic struggles and the fact that China, South Africa’s largest trading partner, is once again embroiled in trade conflicts with the United States, the country is working to manoeuvre away from slipping into a debt crisis. While its implications are currently not seen as lasting, the country continues to suffer from a lack of capital depth which could ultimately lead to a state of increased economic volatility.

 

Despite the challenges that are currently looming over the world’s emerging economic markets, the hurdles that have been overcome and the presence they have managed to establish thus far have put them in much better standing than what could have been anticipated. Internationally speaking, the market’s current economic heavyweights need to consider the detrimental impact that their disputes have on emerging economies. Addressing trade disputes with a more measured, constructive and perhaps considerate approach could provide fledging economies with the stability they need to progress, find their footing and ultimately cultivate a presence on the world stage.

Written by Mihir Kapadia, CEO and Founder of Sun Global Investments

Over the last month, there has been strong optimism on US stocks due to Donald Trump’s infrastructure plans and spending proposals, or what is termed the “Trump trade” pushing up the prices in the markets and the financial sectors. To some extent, this is business as usual as Republican presidents are often greeted with a stock market rally. This generally lasts about 6 weeks before a re-assessment is usually made.

In purely economic terms, there are two broad strands to Donald Trump’s policies. On the domestic front, he is focused on government policies and regulations which pose as obstacles to business, including high taxes. His policies are to generally move towards a more deregulatory environment and remove certain rules which are considered impediments to business, according to his campaign. He is also expected to overhaul the tax system with motives to both simplify the system and overall reduce taxes. This is a positive development for business and for securities (both Debt and Equity) issued by companies. This is also a leading explanation for why the stock markets in the US have been cynically rising since November 8th when Trump’s victory was confirmed.

On the external front, the general economic policy stance has been nationalistic and protectionist. The new administration had advocated a lot of such policies during the campaign. These included promising action against countries such as Japan and China (and later Germany), which were accused of being currency manipulators and were allegedly using a deliberately low value of the currency to boost their exports. Trump promised higher tariffs and taxes against countries and companies which are found to be offending on these matters.

The President believes the only way the US can drive inward investments is by discouraging importers with higher tariffs, in an effort to tip the scales which are currently in favour of countries such as China. These comments also reflect the President’s aversion towards the cheap Chinese goods and services which are flooding the US consumer market, and largely undercutting US businesses – something he promised to tackle as part of his election manifesto.

It is no secret that the US is facing a trade deficit, but any protectionist measures could easily backfire and could initiate retaliatory actions against the US, especially from China. It would also adversely affect the US, sending its currency spiralling down, push up inflation and potentially destabilise global markets. This will also discourage foreign investors from investing in US assets which would be quite against US’s interests.

If Trump goes ahead with his electoral promises of creating infrastructure and investment boost, it should boost investor confidence; push the US treasury bonds and likely the dollar upwards, something he seems to be less wary of, especially since the currency value is too high for international comfort, while others such as the Yuan seem overvalued. These comments sparked concerns that the new President may engage against the long-standing US policies. To tackle trade deficit, he needs a weaker dollar; and if he can put flesh to the bones on his promised economic policies, he is going to make the dollar stronger. It’s a forked road, and if he will choose the path less trodden is a question yet to be addressed. Then again, for Trump, it’s always been the path less trodden which brought him to the White House in the first place.

For countries like Mexico and some others, he has threatened strict controls on immigration, and the movement of capital from the US into these countries. For example, he has criticised US companies which make investments in Mexico, which has already led to companies reconsidering strategy and reassessing their yearly business plans.

As for the emerging markets, they may be enticed to look beyond the USA for investments under the current climate. China and Japan suffer from severe overcapacity where in existing investments are not generating sufficient returns. A trade war is not exactly the best of international developments that would make one invest in China. The uncertainty created by the Trump-machine has generated poor visibility and until this lifts off, it is hard to assess the way of flows. The trade policy outlook of Mr Trump is definitely a risk factor and in addition to the hawkish Federal Reserve and commodity prices, could be perilous for emerging market investments. However, it should be noted that investors are always seeking performance, even though non-economic drivers appear to be leading – at the end of the day the performance is what truly matters. Looking at emerging markets we can say that India, Brazil, Indonesia are stabilizing, growth-focused economies – this is a narrative investors can buy into.

It is also possible that Emerging Markets such as South Asia or Africa may benefit from investment inflows. Similarly, Russia and Iran may also see inflows but only if issues relating to sanctions are resolved. Nevertheless, the political actions such as travel bans and free movement restrictions will also tend to have some impact on the business front. Companies which face the brunt may lobby or protest to make amends. So far, the optimism in emerging markets has been immense, lest any of Trump’s emerging market-unfriendly campaign proposals make it onto the policy agenda, emerging markets would certainly suffer.

It remains to be seen how much of the protectionist and anti-mercantilist campaign promises will be translated into real policies. So far, the new President’s stance towards China and Japan has been more conciliatory than the campaign rhetoric might have led one to expect. In the case of Japan, Prime Minister Abe is reported to have emphasised the number of Japanese companies which have created manufacturing jobs in the USA. This could be the rationale for Trump’s policy – threaten countries and companies unless they can show a track record of investing and manufacturing in the USA. It can also be effective as Ford has boosted its manufacturing investment in the USA and moved against expanding in Mexico.

There is definitely some hard work ahead.

Capital flows to emerging markets should continue to improve gradually in 2017, according to the Institute of International Finance's (IIF) November Capital Flows Report.
"After some turbulence earlier this year, we expect the current revival to continue into 2017," said Charles Collyns, managing director and chief economist at the IIF. "Markets have been generally buoyant since the Brexit vote and greater stability in China and pickup in activity more broadly have also helped. Provided these trends continue, we expect 2017 to be better, but not great."

The IIF projects private non-resident inflows to reach $769 billion for its group of 25 emerging market economies in 2017, up from $640 billion in 2016. Taking account of resident outflows, the IIF forecasts a fourth consecutive year of net capital outflows of $206 billion, mainly from China, but the rate of outflows should continue to moderate.

"A strong shift in market expectations for the Fed's policy rate trajectory and a loss of confidence in RMB stability from China are among the biggest risks to our outlook," said Hung Tran, executive managing director at the IIF. "Global political risks are also potential clouds on the horizon as the backlash to globalization in mature economies increases."

For more information visit www.iif.com.

 

 

Bank -shutterstock_1#D8773FBank lending conditions in emerging economies tightened abruptly to their weakest level in three years in the first quarter of 2015, according to the latest Emerging Markets Bank Lending Conditions Survey from the Institute of International Finance (IIF).

"The sharp tightening of EM bank lending conditions is further evidence that emerging market economies are struggling," said Charles Collyns, Chief Economist at the IIF. "In addition to a demand slowdown, supply conditions continued to deteriorate. Banks reported a continued tightening in funding conditions, likely reflecting the cautious tone in EM financial markets, at least until the March FOMC (Federal Open Market Committee) meeting."

The composite index of the IIF's Bank Lending Survey dropped 1.7 points to 48.1 in Q1 2015, the lowest since Q4 2011. An index reading below 50 reflects a tightening in bank lending conditions. This tightening in lending conditions was driven by a sharp decline in loan demand, whose index fell to the lowest level in the series starting Q4 2009.

The index for domestic funding conditions edged up 1.5 points to reach 50.7 in the first quarter of 2015. This was primarily driven by a substantial improvement in funding conditions in EM Asia, even as funding conditions in other regions tightened.

By region, EM Asia and Latin America drove the overall tightening in bank lending conditions. Lending conditions in EM Europe also entered tightening territory after easing in 2014. The improvement in bank lending conditions in the MENA region continued to moderate, probably reflecting the impact of weaker commodity prices since the second half of 2014.

The survey covered 130 EM banks and was conducted between March 12 and April 23, 2015.

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