Europe’s economic woes are already having negative knock-on impacts on emerging markets even as fears grow that the worst of the eurozone crisis might still be to come, banking groups and multilaterals have warned.
“The sovereign debt crisis in the euro area, together with slowing growth in Europe and the US, have affected emerging market countries in two ways, through trade and financial flows,” Hung Tran, deputy managing director of the Institute of International Finance (IIF), told Emerging Markets.
“The global volume of trade has declined for two quarters in a row and China’s exports have decelerated visibly, slowing from 26% annual growth in the first quarter to 17% by September,” said Tran.
“Trade finance has also become more difficult to obtain. The fact that the creditworthiness of several European countries is now seen as lower than some emerging market countries has rendered export credit guarantees from those European countries less desirable.”
Meanwhile, in financial markets, “emerging market equities have under-performed mature market equities so far this year,” Tran noted. Emerging market equity mutual funds have experienced a net outflow of $28 billion so far this year, a reversal of the substantial net inflow in the previous two years. International bond spreads and credit default swap (CDS) spreads for many emerging market countries have also widened this year.
A recent IIF survey showed that bank-lending conditions across emerging markets had already begun to deteriorate. The bank industry group’s Emerging Bank Lending Conditions Index showed a contraction in activity to its weakest ever level during the third quarter of 2009, and warned of a “significant deterioration in emerging market bank lending conditions”.
“While local funding conditions are broadly unchanged over the past three months, funding conditions in international markets have deteriorated significantly and across all major regions,” the report said. “This is clear evidence of a spillover to emerging economies from the growing problems in mature economies – most notably the tensions resulting from the severe debt problems in the euro area.”
The report noted that conditions in international trade finance conditions had been most marked in Latin America and to lesser extent in Europe, with only Asia reporting a continued improvement in conditions.
“With mounting fears about a global economic slowdown, banks have become somewhat more pessimistic” about the outlook for non-performing loans,” the IIF added.
IMF managing director Christine Lagarde dismissed the idea that emerging markets had “decoupled” from advanced markets in a speech in Cannes earlier this week, and warned that growth had already begun to slow worldwide, including in emerging markets.
OECD secretary general Angel Gurría also sounded a warning in Cannes that another channel through which problems in European and other advanced economies could spread to emerging nations is through trade protection measures. “Low growth and high unemployment [in advanced countries] provides the perfect setting” for the growth of protectionism, Gurría said at a B20 meeting.