With global economies slowing down and inflation set to spiral in the coming months, the prices of essential commodities are way beyond control. Adding fuel to the fire is the continuous increase in oil prices, which some are predicting could touch the US$250 mark.
Emerging markets face the imminent possibility and increasing specter of economic downturn. Rationalizing the economics of hunger is never easy. Political will buckles down under popular will and the economics of development take a beating. Against such a scenario, the question arises: In our quest to feed the hunger of development, how do we feed the hungry?
Rise of the dragon
Talk about Asia’s booming economy and the focus is instantly on two nations, China and India; and, to a certain extent, the Far East region. China and India have been riding the investment wave and emerging as the most “emerged” among the emerging markets. But global economic slowdown has cast its shadow on these two nations and India more than China is feeling the repercussions of the slowdown.
China’s spectacular economic growth, increasing trade and emergence on the world economic stage have attracted global attention. It is fast becoming the manufacturing center of the world, gradually moving its export base to more complicated and sophisticated products, most notably in the high-tech and industrial sectors, leading some analysts to report that this is exerting a downward pressure on the prices of competitive products.
Because of these factors and trends, China is emerging as a competitive threat to other Asian economies with its inexpensive range of products matching global quality standards, probably making external trade the country’s best-performing sector.
China’s economic role in Asia is clearly becoming more prominent. Based on projected trends, China will be Asia’s largest exporter by 2010, thereby stiffening export competition with other suppliers for an expanding range of products.
In order to sustain its rapid economic growth, China must import resources, technology, capital, products for which it does not have a competitive advantage, and intermediate and capital goods. Also, income growth will alter demand patterns, increasing the demand for imports, particularly for food, agricultural products and energy.
According to Fitch Ratings, despite the knock-on effects of global developments, the economic environment in Asia is unlikely to deteriorate to an extent that would materially affect bank credit quality. In China, while banks enjoyed a stellar 2007, they will face a more difficult environment ahead as borrowers begin to feel the strain from the government’s tightened monetary stance, the weakening of the global economy, and rising input and operating costs from 12-year high domestic inflation.
Indian banks, ,for instance, would find themselves in a more challenging operating environment this year, with non-performing loan ratios likely to rise from their historic lows. At the same time, most banks have seen an improvement in their loss absorption capabilities; thus on balance the outlook on their ratings remains mostly stable.
India shows plenty of potential
In the case of India, a vibrant nation has rapidly emerged onto the global economic platform. For the first time, a democratic country with a population of over one billion is actively participating in growth, trade and investment. This has significant implications for the world economy and the process of globalization.
In the global context, the emergence of a large consuming and producing nation has the potential to alter the terms of trade and investment. India needs to work multilateral trade talks to its benefit, stressing its natural and comparative advantages.
Economic partnership has the potential to alleviate the scourge of poverty and raise standards of living rapidly. It can enhance productivity, transfer technology, and raise exports and employment.
Yet, the sub-continent continues to present a tentative scenario. Policymakers are glued to the looking glass, analyzing the extent of the slowdown and searching for clues on how to keep the inflation figures down, while ensuring that the forecasted slowdown in economic growth can be arrested.
Indian inflation exceeded 8% in late May and is expected to reach an all-time 13-year high. Energy costs account for more than 14.2% of the inflation index as diesel and petrol are the key inputs through the economy and this will definitely have a cascading impact on overall prices.
In its latest world economic outlook, the International Monetary Fund (IMF) points out that unlike China, whose fiscal position is relatively robust, the scope for a fiscal stimulus in India to counter a possible economic slowdown is slim.
For a start, Indian consumers pay much less than they should for fuel and imported food. India imports three-quarters of the crude oil it consumes, but as at the time of writing, the government had not passed on to consumers the full burden of the global spike in prices (Note: India raised fuel prices by 10% on the 4th June). Moreover, the IMF points out that India’s growing demand for food imports is itself putting pressure on global prices.
In March, as countries began setting barricades on their stockpiles of food, India too placed restrictions on the export of rice, edible oil, steel and cement, cut import duties on edible oil and building up domestic stocks of food for distribution. But most importantly, it is election year in India and economic prudence will have to make way for populist measures. But what is unclear is how this will affect investor confidence in the immediate future.
A recent edition of Forbes magazine states that India’s economy has already emerged with Indian companies flexing their muscle, and turning to new international markets. Recent high-profile acquisitions by Indian companies include the Tata group’s acquisition of Corus Steel and the marquee brands of Jaguar and Land Rover in the UK; and with an annualized five-year total return of 42.2%, India comes second after Brazil in terms of the growth of the world’s largest public companies.
India’s monetary muscle is also strengthened by a cheap domestic labor market and its companies’ high price-to-earnings ratios. In comparison, the growth percentage in Britain and the US are 17.1% and 11.1%,respectively, indicating that the balance of economic power in the world is starting to shift to Asia — China and India in particular have emerged as economic powerhouses.
Sovereign wealth funds
Gulf sovereign wealth funds have dramatically evolved during the last two decades. While in the past, most investments were focused on the US and European markets, today these funds have their investment radar focused on investment opportunities in the emerging markets of Asia as well as Latin America. In fact, along with China and India, countries such as Brazil, Colombia, Mexico, Chile, Turkey, South Africa, Indonesia and South Korea are vying for investments,.
At the end of last year, the Qatar Investment Authority (QIA) announced that it had signed a memorandum of understanding (MoU) to establish a US$1 billion joint fund with the Indonesian government to target infrastructure investment in the Asian nation. In April 2008, QIA announced plans for a similar joint fund, this time with the Vietnamese government investment arm, State Capital Investment Corporation (SCIC).
SCIC and QIA hope to invest in oil, power, infrastructure and property projects in the Southeast Asian country. In May, QIA announced plans to invest in the property sectors of major cities across Asia, adding that such ventures would constitute about of 40% of its investment portfolio — a target that other fund officials have said could apply across all investment sectors.
The sovereign fund has also signed an MoU with Singapore’s Keppel Corporation, which will give it an equity stake in China’s Tianjin eco-city development. It is also an investor in the Industrial & Commercial Bank of China, which recently received its first license to operate from the Gulf, and will be based in the Qatar Financial Centre.
Bahrain’s sovereign wealth fund was recently voted the most transparent in the Gulf region. Mumtalakat Holding, Company which manages the kingdom’s assets, was ranked joint first for transparency alongside the Kuwait Investment Authority, in the US-based Sovereign Wealth Fund Institute’s (SWFI) Linaburg Maduell Transparency Index.
The transparency index is based on 10 essential principles that depict sovereign wealth fund transparency to investors. These include the provision of percentage ownership of company holdings, financial returns and geographic locations of holdings as well as the provision of clear strategies and objectives for the future.
Other Gulf sovereign wealth funds transparency index scores were the Investment Corporation of Dubai with five points; the Saudi Arabian Monetary Agency (four points); the Abu Dhabi Investment Council and the UAE’s RAK Investment Authority, each with three points; the Oman State General Reserve Fund (two points) and the QIA and the Emirates Investment Authority, each with one point.
SWFI’s endorsement of Mumtalakat is a strong reflection of Bahrain’s pre-eminent position as the financial hub of the region. Close on the heels of sovereign wealth funds, investment banks in the region, too, have zeroed in on the emerging markets.
Global Banking Corporation, the Bahrain-based global Islamic investment bank, recently launched an energy subsidiary company in strategic partnership with Taylor-DeJongh, focusing exclusively on providing energy advisory services across the hydrocarbon chain, from upstream exploration and production to refining, petrochemicals, power generation and the marketing of refined products, natural gas, and electricity.
Other banks in the region are actively engaged in the Asian markets in industry-specific and infrastructure development projects.
The centuries-old trade relations between the Middle East and the Gulf region are flourishing with the major beneficiaries being China and the Far East countries. Indonesia, for example, hopes to see some US$5 billion in investment from the Middle East this year in its financial services, natural resources, infrastructure, property and plantation segments.
The Kuwait Investment Authority recently acquired US$750 million worth of shares in the Industrial & Commercial Bank of China, and plans to double the Asian share of its portfolio to 20%.
According to estimates provided by the Dubai International Financial Centre and the Beijing-based consultancy JL McGregor, the amount of petrodollars flowing into Asia, particularly China, over the next five years could reach US$250 billion.