The Credit Crisis and Emerging Economies Professor Sunil Poshakwale SM Today we are looking at the emerging economies and the effect that the global depression is having on them. I am joined in the studio today by Professor Sunil Poshakwale. Now Sunil, I think one of the first things to say is, what is the impact of the recession on the global economies, because they collectively amount to an awful lot of impact, don’t they? SP Yes, Steve. Emerging economies have not really got as much publicity and highlight as one would have expected. There is a huge interdependency in the current economic scenario between countries, and one should not forget that emerging economies collectively are net lenders to the developed countries of the West. To just give you some numbers, Russia and OPEC countries together – and I am only talking about Russia and OPEC here – hold about $290bn of deposits in UK banks. Imagine if things do not go well in Russia, or in OPEC countries, and that there is a need for liquidity in their own markets, they may very well be forced to withdraw these huge deposits from UK banks and what will it do to the already strained credit situation that we face in the Western countries? And I am just picking on Russia and OPEC countries – I have not included other countries like India and China particularly, which holds $2 trillion of foreign exchange reserves with them. SM Let’s home in on China. What impact is the recession having on China? SP Well it is clear that the manufacturing activity in China has slowed down considerably because of the fall in demand. And I did mention to you last time when we spoke about this subject that China’s growth has been largely export led. Although the entire regional trade within the Asian block has increased over time, China’s export growth very much depends on the global demand and the slowdown of global demand has in turn led to the slowing down of manufacturing activity and therefore rising unemployment in China. However, the Chinese have a large amount of cushion available to them because of the huge levels of foreign exchange reserves they hold and what they are doing very cleverly now is that they are going on a shopping spree around the world and essentially the government has been trying to secure their energy needs for the future. For example, they are going to Brazil and they have given $10bn of loans to Brazil in exchange for a contract from Brazil to supply them with oil for the next five years. They have executed similar contracts with other oil Professor Sunil Poshakwale
exporting countries, including Venezuela. So China is utilising their huge foreign exchange reserves to secure their energy needs for the future. SM So in other words, whilst all the emphasis has been on the Western economies, the Chinese economy and a lot of the emerging economies have substantial clout? SP They do. It is well known that commodity prices and energy prices were largely determined by what is happening in China and India. China, as I said, has taken advantage of the low commodity prices at the moment because of the slowdown in global demand for commodities and energy expenditure. Similarly, don’t forget that China and India together have two thirds of the population of the world. Their middle class consumer market is huge, and after all, if you are manufacturing products and services their ultimate destinations will have to be in Asia. SM Let’s look to the future. How do you see things developing? SP I believe that the engine of global growth rests with emerging economies and especially with Asian economies. They will continue to grow because they have strong fundamentals, although their growth forecast has been revised downward, they will still continue to grow by more than 5 or 6% compared to most of the developed economies of the world. So the growth is going to come from the emerging countries, they will continue to grow with strong fundamentals, large markets. Their governments have taken steps to actually put their economies in order, their debt levels have reduced, their foreign exchange reserves have improved and therefore they are in a much better position now to continue to grow. SM Sunil, thank you. Page 2