Emerging market economies face hardships

Posted on Nov 11 2013 - 8:42pm by Guest Writer

By Peter Mueller, Guest Writer

Developing countries with vast amounts of natural resources have become paramount to the development of the two blossoming economic super powers in the world, China and India.

When the economic crisis hit, China implemented a $525 billion construction-crazy stimulus package to keep its domestic economy afloat. Investors rushed to take investments out of countries with flat interest rates, such as the U.S. and Japan, and push them into emerging markets that would supply the needed natural resources to China.

Indonesia was the unequivocal flagship of the emerging economies birthed from China’s rapid growth. Now, with all eyes fixed on Indonesia and Thailand, many investors have grown weary of the trade deficits and rapidly growing bubbles within these young markets.

Last year, Indonesia seemed to be the most stable and prolific emerging market in the world. Aiding China’s unquenchable thirst for natural resources, Indonesia posted record-growth numbers that left puddles of drool on trading floors across the globe.

In 2012, analysts predicted a GDP growth of 7 percent, based on a 5 percent gain the previous year. Since 2009, $4 trillion of speculative capital has been rushed into Indonesia and other emerging markets such as Malaysia and Thailand.

Foreign investment in bonds, infrastructure and commodities fueled incredible growth for Indonesia.

Thailand saw the oncoming flood of foreign investment and took advantage. In an effort to become more competitive and shine bright in the eyes of investors, Thailand began borrowing to spur growth.

Thailand started offering housing subsidies, tax cuts and also began flooding borrowed money into its education system. At first, the move was well played for Thailand and allowed the influx of foreign business to transition with ease. But, with a commodity driven economy facing an increasing trade deficit and continued government spending, Thailand began to show signs of possible economic pitfalls.

The policymakers of these prominent emerging market economies have failed to understand the volatility of the international commodity market and the effect of foreign monetary policy on their economies.

Earlier this year the Federal Reserve chairman, Ben Bernanke, announced a tapering of the Fed’s bond buying program from $85 billion to $65 billion dollars a month. This announcement sent shocks through the global commodity markets and rapidly slowed investment into emerging markets.

Indonesia now faces a $2.2 billion trade deficit and Thailand is now sitting on 17 million tons of rice that are beginning to rot, Forbes reports. Now corruption flourishes in all tiers of these governments, and China has shown signs of slowing down its construction-obsessed growth strategy.

If that wasn’t enough, Indonesia, Thailand and Malaysia are all seeing bubbles in each of the country’s domestic real estate markets grow with fervor.

Analysts are staying glued to Thailand and Indonesia, basing future investments in emerging markets on each country’s ability to hurdle economic obstacles, The Wall Street Journal reports.

The near future looks a bit disheartening for emerging market economies, but this isn’t the first time Thailand and Indonesia have faced economic hardship. Both countries came out of the 2008 global financial crisis nearly unscathed after all.

With improved infrastructure, education and international business relations, the resiliency of these two countries is something to watch for.