October 08, 2007	Monday	Ramazan 25, 1428

The emerging markets including Pakistan are likely to escape the ongoing financial turmoil in the developed markets. In fact, these emerging markets led by China and India are said to be contributing a good measure of stability to world economy. Pakistan and most of the emerging markets have over the medium term successfully mobilised significant foreign exchange reserves —the first defence against foreign shocks.

And like most of the emerging markets which have shown better than average annual GDP growth rates, Pakistan’s economic growth too has come to depend much less on borrowed foreign capital.

Pakistan, however, would find the going not so good if the largest importer of its goods—the US—which is now in trouble is gripped by a round of recession and becomes overly protectionist adversely impacting on imports from emerging markets. But the measures being taken at the moment in the developed markets by their central banks to avert recession and at the same time not let inflation go out of control are expected to bear fruit. So, here too there is a window of escape for the emerging markets.Most economists of repute thank China for bringing the desired stability in the world economy. Until about early 1980s, the world economy had been cruising on just one engine—the US. Any turmoil that would affect the US economy would cause the entire world economy to go into a tailspin. Or for that matter, any crisis that would affect the emerging markets like the one that caught the Asian tigers in 1996-97 would play the spoiler for the world economy.

Now while the US economy appears to be emerging out of the traditional economic cycles and acquiring the capacity to absorb even the most serious shocks, the Chinese economy seems to have kept itself out of the way of the traditional shocks that upset economic progress.

China is said to be contributing more to the world GDP than the US. That is why as the US economy is experiencing a downturn, the Chinese economy is filling the gap and saving the world economy from going into a debilitating depression. China’s phenomenal growth which has so far not heated up the economy beyond a reasonable limit, the very insignificant role that its stock markets play in its economy, the remarkable restraint being shown by the Chinese banks on lending, its very high rate of savings and investment, its stable currency exchange rate, stable housing market, a very large local market of over billion population which makes it less dependent on exports than other countries, its relatively cheaper labour force and of course balanced budgeting over a longish period are all said to have made the Chinese economy less prone to external and internal shocks than other major economies.

Besides China, there are said to be three other factors which have made the world economy largely less prone to volatile cycles which had in the past created enormous problems for emerging markets like Pakistan.There was a time in the immediate past when industrial units, wholesalers and retailers had to build up huge inventories which more often than not would become dead stocks and dead capital once demand subsided causing bankruptcies and economic downturns in even highly developed economies impacting adversely on their GDP growth. This factor has now been controlled significantly because of technological developments.

Now both the upstream and downstream trading chains know before hand the demand and supply position to a decimal point. So a lot of financial fat is said to have been cut off from this chain making it possible for all the players in chain to hold only that much supply which is in demand.

The second factor is said to be the same which has created today’s financial turmoil — deregulated credit market. Now you can spend more than you earn and for example with as little as $50,000 buy a huge company worth more $50 million through leveraging.

The private equity firms, the hedge funds, the complex derivatives like collateralised debt obligations (CDOS), credit scoring and securitisation, the repackaging of loans into marketable securities suitable for savers have all is said to have made it possible for people to borrow at a very low rate and with almost no collateral at all except their notional lifetime earning stream. The banks which make all these resources available do not show them on their books which let them lend much more than the banking regulations allow them.

No doubt, this very lax credit market has caused the current financial turmoil, but no policy maker in the developed economies is thinking of bringing in new regulations to curb this what appears to be a free-for-all credit market because, in the opinion of these policy makers, the markets themselves would take care of those who would step out of the limits and they believe any imposed regulatory curb on the credit market would send the world economy into a deep depression worst than the Great Depression of the 1930s.

And thirdly, the monetary policies being managed by most of the central banks of the developed economies are said to have been highly effective in controlling inflation. And the experts believe that it was because of the saner monetary policies of the central banks in the developed world that had kept the rate of inflation from going out of control as the financial markets became jittery in the last four months.

Low rates of interest accompanied by low rates of inflation, it is believed would see the international financial markets through the next couple of months without significantly undermining the GDP growth rates in the developed economies. And they believe housing market would once again return to normal in a matter of six months.

In the case of Pakistan one must also take into consideration the fact that the stock exchanges do not actually play any important role in the growth of the economy. Only about five or six companies which perhaps cover 80 per cent of the market make all the difference to the fluctuations of the stock prices which again have been effectively cornered by three or four brokers. So, our market would hardly be sensitive to the international financial crisis.

The other thing is, in Pakistan there is actually no housing market. There is a plot market though but since about three years banks have stopped lending on plot files as well. Finally, the State Bank has been so far handling the monetary policy rather efficiently. Therefore, on the face of it there seems to be no serious threat to Pakistan’s economy from the current international financial market crisis.