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The Reserve Bank of India (RBI) seal is pictured on a gate outside the RBI headquarters in Mumbai October 29, 2013. India's central bank raised its policy interest rate for the second time in as many months on Tuesday, warning that inflation is likely to remain elevated for the rest of the fiscal year, and rolled back an emergency measure put in place in July to support the slumping rupee. REUTERS/Danish Siddiqui (INDIA - Tags: BUSINESS POLITICS LOGO) (DANISH SIDDIQUI/REUTERS)
The Reserve Bank of India (RBI) seal is pictured on a gate outside the RBI headquarters in Mumbai October 29, 2013. India's central bank raised its policy interest rate for the second time in as many months on Tuesday, warning that inflation is likely to remain elevated for the rest of the fiscal year, and rolled back an emergency measure put in place in July to support the slumping rupee. REUTERS/Danish Siddiqui (INDIA - Tags: BUSINESS POLITICS LOGO) (DANISH SIDDIQUI/REUTERS)

The painful rebalancing of emerging markets Add to ...

As emerging markets faltered, André Bourbonnais went shopping.

Despite the trouble ripping through fragile economies from Argentina to South Africa, Mr. Bourbonnais, who oversees private equity holdings for the Canada Pension Plan Investment Board, figured now was as good a time as any to place a specific bet on a particular region.

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On Friday, after a week in which other investors pulled nearly $10-billion (U.S.) from emerging economies, CPPIB announced that it paid $200-million for a new 10.4-per-cent stake in Peruvian natural gas transporter Transportadora de Gas del Peru SA (TGP). Mr. Bourbonnais said his investment represents the cornerstone of a long-term partnership to pursue infrastructure deals in select markets in Latin America, underscoring the group’s belief in the long-term potential of certain expanding economies, such as Brazil and China – despite the turmoil in a number of other developing countries.

“We’re long-term investors,” he says. “We understand there are going to be cycles, and we need to be a little more prudent in terms of uncertainty, but clearly we’ll continue in emerging markets.”

The upheaval is widespread. Currency is being devalued in Buenos Aires. Strong growth in Brazil has waned, and the Turkish lira has plummeted. In South Africa, an ailing economy is mired in miners’ unrest, and in China slowing growth is endangering commodity exporters that have been riding the cyclical boom.

Already, the chaos has wiped $1.7-trillion from global stocks, hurting investors and forcing a re-examination of emerging markets, now sputtering and deemed riskier, endangering global growth.

But these countries are not united by similar problems, such as the bad loans and deficits that led to the 1997 Asian financial crisis. What’s happening now is a decoupling of emerging markets from one another that economists suggest is long overdue.

As the tide of capital flows out from a credit boom fuelled by easy monetary policy in the developed world, emerging markets will be revealed either as longer-term winners whose fundamentals remain secure, or shaky, vulnerable economies whose leaders squandered the opportunity to implement meaningful reforms in boom times and will pay the price. And while there is still a risk of contagion, the crisis may also create opportunity for Canadian investors such as the CPPIB.

After years of growth fuelled by the BRICS countries – Brazil, Russia, India, China and South Africa – emerging markets are being battered. The U.S. Federal Reserve’s pullback on its massive stimulus spending – underscored with a further reduction, or “tapering,” of its bond-buying on Wednesday – and slowing growth in China has caused investors to pull out of riskier countries and seek safer returns in the United States.

“In and of itself, the Fed tapering should not have been such a big deal. But it was a big deal. It forced a re-examination of the world economy in general – and emerging markets in particular,” says Edwin Truman, who served as assistant secretary of the U.S. Treasury for international affairs and was on the G10-sponsored working party on stability in emerging-market economies during the Asian financial crisis. “The difference here, which is sort of good, is this is not Latin America alone, or Asia alone. It’s not regional. It’s sort of various emerging-market countries around the world. And they each have their own little story.”

As things turned sour, India’s central bank was the first to strike back. Then came Turkey, followed swiftly by South Africa. One by one, central banks of large but fragile emerging markets raised benchmark interest rates as capital outflows from emerging-market debt and equities reached $9.1-billion, according to Merrill Lynch – which estimates that roughly $15-billion more could be pulled out in coming weeks.

Turkey’s hike was as aggressive as they come. The central bank in Ankara gave a jolt of 4.25 percentage points, raising the overnight lending rate to 12 per cent from 7.75 per cent and leaving some worried that Turkey may have run out of firepower. In South Africa, which has been hurt by falling commodity prices and suffered from numerous mining strikes, the central bank unexpectedly raised its repurchase rate to 5.5 per cent from 5 per cent, the first increase since the depths of the global financial crisis in 2008. The magnitude of outflows from emerging-market debt and equity funds, as measured by Merrill Lynch, rival those during the collapse of Lehman Brothers.

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