Credit crisis benefits emerging markets

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Credit crisis benefits emerging markets
November 21, 2007

By Tonny Mafu

Johannesburg - The US subprime mortgage crisis has been a boon for emerging markets, with fresh statistics showing that equity fund flows to Asian economies rose to $79 billion (R532 billion) from $43 billion in the second quarter, while the US experienced the reverse.

This is the evidence of data compiled by the Association of Collective Investments (ACI) and Old Mutual Investment Group South Africa (Omigsa).

The ACI said fund inflows into developed-market equities in the second quarter fell from $118 billion to $104 billion, with US shares suffering the most. Europe experienced outflows of $6 billion during the quarter. However, investments in Asian shares increased from $43 billion to almost $80 billion.

Omigsa said the ability of emerging economies to weather the global credit crunch, which arose from individuals with poor credit histories defaulting on home loans in the US, had increased investors' appetite for assets from these markets. This is a shift from past trends, in which downturns in the US economy would lead to fallout in developing countries.

Emerging markets have outperformed their developed peers since 2001, according to Omigsa. The Morgan Stanley Capital International index has increased fivefold, compared with growth of 70 percent in the industrialised economies.

Steve Minnaar, the head of equity research at Omigsa, said research by Citigroup showed that investment managers planned to raise their exposure to emerging markets from 5.7 percent of their portfolios to 15.1 percent over the next three years, while reducing investments in the US.

Inflows into "other" emerging markets such as Africa would increase from 0.4 percent to 3.5 percent. This implies that almost $100 billion will flow into emerging markets between now and 2010.

African markets are expected to attract investors due to strong economic growth, improved liquidity and better regulation. Economies in sub-Saharan Africa, including South Africa, grew by 5.4 percent a year in the past decade, well above the global average of 3.2 percent. The region's economy is forecast to expand by 5.3 percent this year and 5.4 percent next year.

South African firms with an emerging market presence could be on the radar screens of international investors.

Minnaar said: "We have numerous South African-listed companies with well-established presences in emerging markets, like BHP Billiton, Anglo American, MTN, Dimension Data, Standard Bank and beer maker SABMiller."

Cash-flush Chinese investors have already swooped on some targets.

Last month the Industrial and Commercial Bank of China offered R37 billion for 20 percent of Standard Bank. The South African-based bank has an increasing presence in Africa, including the continent's most populous nation, Nigeria. It also has operations in Argentina and Russia.

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Limited Exposure

Asia has been largely shielded from the turbulence in global financial markets as its lenders have limited exposure to the subprime crisis, the ADB said. Most of the region's economies have employed ``prudent policies'' which helped reduce the impact of credit crunch, the report said.

``Generally sound macroeconomic fundamentals and growth prospects helped limit the initial losses in emerging East Asian equities, bonds and currencies,'' the ADB said. Still, ``the contagion effects could become more serious if tightening credit conditions and financial instability dampen broad economic activities both at global and regional levels.''

The following is a table of the Asia Development Bank's Office of Regional Economic Integration estimates for annual gross domestic product for this year and next.

====================================================
2008 2008 2007 2007
New Prior New Prior
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Annual GDP Growth
Emerging East Asia 8.0% 7.9% 8.5% 8.1%
ASEAN 6.1% 6.0% 6.3% 5.6%
Brunei 2.3% n/a 1.9% n/a
Cambodia 8.0% 9.0% 9.2% 9.5%
Indonesia 6.4% 6.3% 6.2% 6.0%
Lao PDR 7.9% 6.5% 6.8% 6.8%
Malaysia 5.9% 5.7% 5.9% 5.4%
Myanmar n/a n/a n/a n/a
Philippines 6.4% 5.7% 7.0% 5.8%
Thailand 4.8% 5.0% 4.3% 4.0%
Vietnam 8.5% 8.5% 8.3% 8.3%
Newly Industrialized
Economies 5.1% 4.8% 5.3% 4.7%
Hong Kong 5.4% 5.2% 6.1% 5.4%
South Korea 5.0% 4.8% 4.8% 4.5%
Singapore 6.3% 5.5% 8.1% 6.0%
Taipei, China 4.8% 4.5% 5.0% 4.3%
China 10.5% 10.5% 11.4% 11.0%
Japan 1.7% 2.3% 1.9% 2.5%
U.S. 1.9% 3.0% 2.2% 2.3%
Euro Area 2.1% 2.1% 2.6% 2.6%

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Hong Kong's sub-urban property prices shot up in November 2007 while housing market melt down in the US.

SHANGHAI - A HOUSING-MARKET meltdown may be wracking the United States economy and shaking the financial markets, but in Asia, the question is how to cool things down.

From China and South Korea to India and Singapore, housing prices are soaring amid strong economic growth and surging demand from developers and upwardly mobile families who want to upgrade their homes.

Of all Asia's markets, China's is the hottest - although the boom is creating problems there, too. Housing inflation is pricing some people out of the market, and authorities worried about excessive development are raising interest rates and taking other steps to curb lending.

Experts also warn that many mortgages are risky and suggest the country could face a property crisis of its own someday.

For now, demand is being driven by people like Ms Li Ruoning, a single, 22-year-old public relations company employee in Shanghai - just one of millions across Asia whose hearts are set on fulfilling the dream of owning their own home.

She borrowed about 300,000 yuan (S$58,000) from her parents in central China for the down payment on a 60-square-metre apartment just five minutes from her job.

What's more, Ms Li says she would buy another apartment as an investment, if she had the money.

'I'm pretty sure that housing prices will not drop, especially with the best locations,' she said.

Bubble forming?
Many Chinese families are already deep into speculating on property, a main driver of the surging prices that have Chinese authorities worried a bubble may be forming. New apartments north of Shanghai's famous Bund waterfront are selling for a record 128,000 yuan per square metre.

Mr Yi Xianrong, a prominent economist at the China Academy of Social Sciences, a government think-tank, is one of those sounding the alarm.

He contends that China's housing loans are riskier than those in the US because most loan applicants give false information about their assets and income.

Since China lacks a comprehensive credit data system, borrowers often manage to qualify for loans using false information, Mr Yi says.

He believes the overall quality of property loans in China may be even worse than the risky mortgages that are causing so much trouble in the US.

'I estimate that the large majority of mortgage holders would not meet the standards for even subprime loans,' Mr Yi said in an interview with the state-run magazine Oriental Outlook.

A collapse of China's property market would reverberate throughout the world financial system - although few experts believe it would happen anytime soon.

The lack of reliable credit information obscures the level of risk, especially in China.

'It's hard to tell what the total exposure to real estate lending is. It's very difficult to judge until you have a price correction,' said Mr Nick Lardy of the Peterson Institute, a Washington think tank.

Correction unlikely
Still, given the enormous demand for new housing across the region, a sudden correction in Asian property markets appears unlikely.

In India, where housing prices have been rising 30 to 40 per cent annually the last couple years and have remained firm so far this year, experts see fewer risks.

Families tend to rely more on personal resources and banks have been steadily raising interest rates and cutting back on lending, which is modestly restraining development. A newly introduced credit score system is expected to help banks do a better job of managing risks.

'The Reserve Bank of India has been keeping a tight lid on banks' exposure to real estate,' said Ms Ritesh Maheswari, a credit analyst with Standard & Poor's in Singapore. 'We don't foresee large-scale defaults.'

Hong Kong is still regaining ground lost during the Asian financial crisis of the late 1990s and provisional government statistics show steady growth through September. Singapore's high-tech boom helped boost private home prices by 8.3 per cent in the second quarter from the first, the second-fastest pace on record.

In both cities, the talk is of how to cool, not revive the market.

Meanwhile, property prices in Japan have just begun to rebound after 16 years of declines amid a surge in buying by investment funds, according to the Ministry of Land Infrastructure and Transport. Recently, though, housing investment has fallen amid a tightening of building standards.

Across much of Asia, property lending differs markedly from that in the US Lending standards vary from country to country, but in many markets including China, lenders tend to demand down payments of at least 30 per cent and often much higher.

The big down payments mean 'there's still quite a big cushion' against losses, said Mr Sam Crispin, founder of Shanghai-based real estate firm Crispin Property Consultants.

In Hong Kong and Singapore, government support through low-cost rentals or low-interest home loans to poor families helps to minimise the risk of foreclosures. In South Korea, an earlier crackdown on risky mortgages has reduced the risks.

In China, the residential market may be sounder than the commercial property market. The frenzied construction of shopping malls and office towers has authorities worried over the potential for a debt crisis if the new projects fail to attract buyers and developers default on bank loans.

Rising prices
So far, Beijing's efforts to rein in soaring prices and investment have had little impact: Housing price inflation in China hit a new monthly high of 9.5 per cent in October, with prices in Beijing rising by nearly 18 per cent.

'I found prices rose too fast and I didn't know why,' said Mr Sun Chunming, a technician at an online gaming company in Shanghai who bought an apartment in August. 'But I was worried if I didn't buy it now, I might not be able to afford one later.'

The biggest property lender, China Construction Bank, recently issued a report warning that China's banks are entering a high-risk period for personal housing loans.

The report urged banks to beware of falsified credit data and to tighten loan terms for families buying more than one property. The central bank recently raised down payment requirements for second mortgages to 40 per cent, but analysts say more needs to be done to rein in the market - without triggering a collapse.

Chinese Premier Wen Jiabao warned earlier this month that the government needs to tighten controls to keep real estate speculation from 'causing market disorder'.

'The government does need to do something fundamental to improve the situation. Tightening mortgage operations is crucial for avoiding a financial crisis,' said Mr Zhang Yu, a real estate analyst from Guotai Jun'an Securities. -- AP

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Asia Largely Escapes Sub-Prime Turmoil

For the most part, the sub-prime crisis has escaped Asian companies because private-equity deals in the region aren't typically financed by leverage. And leverage makes or breaks a deal.

Growth capital, which represents most investment structures, doesn't use leverage and thus has little or no direct exposure to changing market conditions. Asia has also been safeguarded because Asian lenders must ensure at least 75% of the current fund or deal to be funded before embarking on any new ventures.

That's not the case with private-equity deals in the United States and Europe. Their companies can initiate new projects and raise capital before the original deals are funded. With credit incredibly cheap in the post-2003 period, private-equity funds raised more than US$650 billion, mostly funded with leverage and high-yield securities.

Amazingly, despite the mayhem in credit markets since July, Asian companies are on course to finance a record year. Asian companies have raised US$24.6 billion thus far - almost the entire sum raised in 2006, according to the Centre for Asia Private Equity Research.

Of course, not all companies in Asia have remained completely unscathed by the sub-prime meltdown. On the contrary, Japan, Singapore and Australia have been hit by conduit failures this summer. Singapore-based DBS Group Holdings, a major Singapore bank, was forced to liquidate a conduit in August. In Australia, several banks have already injected billions of dollars to bailout conduits in mortgage-backed securities.

But overall, Asian banks have been relatively immune to the crisis because conduits are not a primary funding vehicle for parent companies, unlike European and American entities. That's good news for regional investors and capital markets.
Been There, Done That

On the macroeconomic level, Asia is also far healthier today compared to 10 years ago and especially compared to major market economies. Indeed, the economic tables have literally turned in a span of just 10 years.

In 1998, Asia was on the brink of the economic abyss as banks failed, governments faltered and capital markets collapsed. But that's not the case in late 2007.
Asia's Current Account Balances and Reserves Have Soared Since 1995!
Balance of Payments in Emerging Markets
Asia sports a small debt-to-GDP ratio while countries like the United States harbor a debt-to-GDP ratio approaching 6.5%. Other countries, like France and England, also have bulging deficits.

Current-account deficits and budget deficits are also negligible, if at all, in Asia. This compares to huge fiscal and budget imbalances in the United States and parts of Europe.

Some countries, including those in Eastern Europe and the Baltics are home to enormous budget deficits following years of booming economic growth. That's exactly what occurred in Asia in the 1990s as markets rapidly expanded and trade deficits accumulated, combined with overvalued currencies. Ultimately, high-speed growth smashed the economies in the region after years of rampant borrowing.

Don't forget: Asia is now the richest source of combined U.S. dollar foreign-exchange reserves at US$2.5 trillion. That's a testament to thriving international and regional trade.

There's no doubt about it: Asian currencies and investments denominated in those units will greatly reward long-term investors.

ERIC ROSEMAN, Investment Director
RosemanBlog.SovereignSociety.com

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John Jessen, the Singapore-based group CEO of headhunter Smith & Jessen, also doubts that Asian bankers will have to subsidise colleagues in the US and Europe.

Jessen says banks want to protect assets where they make the most money: Asia is in such a build-out mode that no one wants to let their competition leave them behind. He expects most hiring investments to flow eastwards in 2008, with trading floors in India set to double or even quadruple in size over the next two to three years.

The sentiments of bankers in other emerging Asian economies such as Indonesia, Thailand and Malaysia also remain positive, says Lai: The general consensus seems to suggest that their bonuses will be healthier than previous years, as many of these economies started off from a low base and are experiencing strong domestic growth.

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The serious impact of the subprime mortgage.

http://www.msnbc.msn.com/id/22246203/

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ECB lends $500bn to lower rates

Euro notes

Bank of England lends £10bn
The European Central Bank has allocated 348.7bn euros ($502bn; £249bn) to banks at a below-market rate in a refinancing move to ease tightened credit markets.

It is one of five central banks that have injected billions in emergency cash into money markets.

The aim is to cut the cost of lending between retail and commercial banks, which has jumped in the past few weeks.

All banks with enough collateral, and which submitted bids of at least 4.21%, received funds from the ECB.

The ECB said 390 banks across the eurozone had sought the funding.

The move - making the extra cash available over the next two weeks -will ease fears of a credit meltdown over the Christmas period, when banks need extra cash.

Cutting interbank rates

The hope is that lower interbank rates will mean that banks will also be able to make more funds available at cheaper rates to companies and individuals.

The ECB's action succeeded in cutting short-term lending rates, with the two week euro Libor rate falling sharply to 4.4%.

However, the rate still remains above the 4% ECB refinancing rate.

The two-week ECB refinancing operation is the first time it has said it would offer banks unlimited funds, above a certain interest rate, since 9 August when the credit crisis started.

The size of the offer surprised some analysts.

"The sheer magnitude of the operation caught the market off guard," said Win Thin, a senior currency strategist at Brown Brothers Harriman.

Central bank coordination

The main reason banks have been unwilling to lend to each other is a downturn in the US property market.

A surge in mortgage defaults and bad debts has forced many banks to cut the value of their mortgage investments, costing them billions of dollars.

As a result, the banks fear that they might need any spare cash they have to cover their losses.

Central banks have also been boosting liquidity into the banking sector to ensure banks keep offering credit to businesses.

On Monday, the US Federal Reserve made $20bn available through auction, though it did not say how many banks took advantage of the extra money.

And on Tuesday the Bank of England is set to lend more than another £10bn in funds.

As well as the Bank of England, the Fed, and the European Central Bank, the national banks of Canada and Switzerland are also involved in the funding plan.

But some analysts say that until the banks reveal the true scale of their potential losses, the central banks will be unable to do much to ease the credit crunch.

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Fed to help US mortgage holders
Foreclosure sign outside a home in the US
The number of foreclosures has soared in the past year
The US Federal Reserve has approved measures to give mortgage holders far more protection to prevent the current housing crisis from worsening further.

Tough new regulations will ensure lenders take into account a borrower's ability to repay a loan and would not penalise those making early repayments.

The Fed is under pressure to help those with poorer credit histories amid a wave of defaults on sub-prime loans.

The housing downturn has triggered a slowdown in the US economy.

Tougher standards

The Bush administration acted earlier this month to help sub-prime borrowers amid fears the spiralling housing market could erode consumer confidence and push the US into recession.

It announced a five-year freeze on interest payments for certain sub-prime loans.

The Fed's board endorsed proposals to stiffen the regulation of mortgage lending practices which chairman Ben Bernanke said would "promote responsible lending".

Many Democrats believe the Fed's oversight of the mortgage market during the housing market boom between 2001 and 2005 was lax, and that irresponsible lending, allied to a tide of cheap credit, caused a dangerous property bubble.

The proposals, which will be subject to public consultation in the next few months, will come into force next year. They will include:

* Lenders could not agree loans without proof of income
* Borrowers must set aside money for taxes and insurance
* Lenders would have to make financial disclosures earlier
* Certain forms of advertising would be banned
* All loan rates must be displayed prominently, not just introductory or so-called "teaser rates"

Mr Bernanke said the tougher regulations would benefit individuals and the economy.

"We want consumers to make decisions about home mortgage options confidently, with assurance that unscrupulous home mortgage practices will not be tolerated," he said.

Since the new regulations will only apply to future loan applications, the Fed is likely to be criticised for acting too late to help existing homeowners in trouble.

According to research from the Mortgage Bankers Association, the number of foreclosures on sub-prime adjustable loans hit record levels between July and September.

"Had rules like this been in effect, the run-up in foreclosures might never have occurred," Allen Fishbein, director of housing and credit policy at the Consumer Federation of America, said of the Fed's proposals.

'Serious challenge'

The Bush administration has said it is facing up to the "serious challenge" posed by the sub-prime crisis and its knock-on effects on the economy.

Speaking on Tuesday, Treasury Secretary Henry Paulson insisted that its mortgage rescue plan did not constitute a bail-out for irresponsible borrowers.

"What we are doing in the government is acting to prevent a market failure, bringing the industry together to do something which is in their best interest," he said.

The Fed has cut interest rates by one percentage point in the past few months to try to ease the burden on borrowers.