Out of the Eurozone frying pan: into the emerging markets fire

Will current account deficits across Asia, should we worry about contagion to weak peripheral Eurozone countries?

With the Indian Rupee, the Indonesian Rupiah, the Turkish Lira all selling off 10 per cent or thereabouts versus the USD since the beginning of August, July and May respectively, one is beginning to be reminded of the Asian Crisis of the late nineties, when current account deficit currencies lead the collapse to a full-blown disaster.

Then, as now, hot money had flooded in, as a desperate search for excess returns lead investors to boldy go where a few had never been before. After all, current account deficit countries need that flow of money to stay solvent and now, classically, the flow is suddenly drying up, as the returns on ‘risk-free’ investments, such as US Treasuries, have risen dramatically, (well, risk-free in the sense that you’ll get all your money back if you hold to maturity).

Lack of policy credibility and slowing growth don’t help. The former took a dent last week in India, when the  central bank introduced controls over the amount of money Indian residents and companies can send overseas. The trouble with partial capital controls is that then everyone fears the imminent implementation of full capital controls, and gets their money out as soon as possible, thus weakening the currency, etc, etc. This in addition to three gold import tax hikes this year.

Personally, I feel the chances of a full-blown repeat of the Asian crisis are quite slim-generally speaking, hard lessons were learned then and impressive FX reserves have been accumulated during the good years, also public debt levels are lower and savings rates higher, although Indonesia’s FX reserves are not as impressive as some, but even there the better performance of the economy should mean that a quick dose of higher interest rates will calm things down.

Should we worry about potential contagion to weak Eurozone peripheral countries? I don’t think so, as the current-account balances of Greece, Italy, Portugal, and Spain have all virtually improved to zero, compared to India’s 4.8 per cent deficit.

There’s no doubt that the rising tide of global QE experiments, and Chinese overseas investment, had floated many ships, and that some of them will be left marooned in the mud as the Fed begins to taper down its Quantitative Easing, but whilst a repeat of 1997/98 is probably not something to lose too much sleep over, severe stress in such massive economies as India and Indonesia may, however, have a deleterious effect on regional and even global growth.

At the moment I’d still classify this as a low probability, Black Swan event, given the obvious growth in strength of the recoveries in the US, UK, Eurozone and China. The latter evidenced by the latest The Markit/HSBC flash manufacturing PMI for August of 50.1, versus market expectation for 48.2, (last month 47.7).

Remember, however, the generally accepted definition of a Black Swan event; low probability, sure, but high impact if it comes to pass.

Indian sand artist Sudarsan Pattnaik puts the finishing touches to his sand sculpture of a rupee coin in front of the Hindu Goddess Lakshmi. Photograph: STRDEL/Getty Images.

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

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Scotland's vast deficit remains an obstacle to independence

Though the country's financial position has improved, independence would still risk severe austerity. 

For the SNP, the annual Scottish public spending figures bring good and bad news. The good news, such as it is, is that Scotland's deficit fell by £1.3bn in 2016/17. The bad news is that it remains £13.3bn or 8.3 per cent of GDP – three times the UK figure of 2.4 per cent (£46.2bn) and vastly higher than the white paper's worst case scenario of £5.5bn. 

These figures, it's important to note, include Scotland's geographic share of North Sea oil and gas revenue. The "oil bonus" that the SNP once boasted of has withered since the collapse in commodity prices. Though revenue rose from £56m the previous year to £208m, this remains a fraction of the £8bn recorded in 2011/12. Total public sector revenue was £312 per person below the UK average, while expenditure was £1,437 higher. Though the SNP is playing down the figures as "a snapshot", the white paper unambiguously stated: "GERS [Government Expenditure and Revenue Scotland] is the authoritative publication on Scotland’s public finances". 

As before, Nicola Sturgeon has warned of the threat posed by Brexit to the Scottish economy. But the country's black hole means the risks of independence remain immense. As a new state, Scotland would be forced to pay a premium on its debt, resulting in an even greater fiscal gap. Were it to use the pound without permission, with no independent central bank and no lender of last resort, borrowing costs would rise still further. To offset a Greek-style crisis, Scotland would be forced to impose dramatic austerity. 

Sturgeon is undoubtedly right to warn of the risks of Brexit (particularly of the "hard" variety). But for a large number of Scots, this is merely cause to avoid the added turmoil of independence. Though eventual EU membership would benefit Scotland, its UK trade is worth four times as much as that with Europe. 

Of course, for a true nationalist, economics is irrelevant. Independence is a good in itself and sovereignty always trumps prosperity (a point on which Scottish nationalists align with English Brexiteers). But if Scotland is to ever depart the UK, the SNP will need to win over pragmatists, too. In that quest, Scotland's deficit remains a vast obstacle. 

George Eaton is political editor of the New Statesman.