What happened in the last thirteen months is unbelievable: almost one and a half billion dollar capital left the emerging markets. This is the double of what we saw in 2007 and 2008 – as the NN Investment Partners’ leading strategist warns Hungary and other emerging markets. Of course, according to the Dutch investor and portfolio manager, Maarten-Jan Bakkum, the China-Asia-South America problem becoming more severe will affect our area less than for example Turkey, Korea, or Russia; though, we cannot avoid the eventual extreme decline of capital markets. However, primarily this is not because of China, but Poland. The interviewee thinks that the expected success of the Polish nationalist-conservative party (at the end of October) will initiate a separate chain reaction: there could be a significant withdrawal of capital from Central Europe; local currencies – including the Hungarian forint – could start declining.
Péter Zentai: You believe that the rate of the capital flight from the emerging markets is rather imposing; however, none of your publications support this regarding Central Europe. If western portfolio managers keep suggesting that Eastern European EU members, and Asian and South American countries that have to deal with more substantial problems can be lumped together, then it can lead to withdrawal of capital from this area. Isn’t it unfair for us?
Marteen-Jan Bakkum: Poland, Hungary, and the Czech Republic are less exposed to the storms originating from China. After all, your national economies are linked to the European Union, and its most powerful countries, and your currencies are pegged to the euro. Investors see this clearly.
For example, Poland and India, South Africa and Russia, or Turkey and the Czech Republic cannot be lumped together indeed. And still… Most Eastern and Central European countries show very similar if not identical characteristics to Latin American, or Asian countries.
What characteristics are we talking about?
There is still a significant developmental gap between Western Europe and emerging Central Europe. For example, Hungary raised concerns by turning towards the East, and taking steps which are disadvantageous for certain foreign investors. Recently Poland – for other reasons – has become politically less predictable, than any other Western European EU member. Even though, that uncertainty has always lurked in Eastern Europe, in the current situation, this factor will now bear with greater significance for investors.
Does it mean that there is going to be a significant withdrawal of capital from this region?
Of course, those storms which primarily originate from growth rate of China being unsustainable, the internal debt crisis, the alarming governmental market-interventions of Peking, and the upcoming American interest-rate increase cycle will not affect Hungary so severely than any other Latin American or Asian emerging market.
However, it is still possible that what happened in the last thirteen years will happen again: capital of almost one and a half billion dollars were withdrawn from the emerging markets. This is the double of what we saw in 2007-2008!
This might inevitably have an effect – even a serious one – on Central Europe, mostly because the deepening of the ‘China-syndrome’ could significantly slow down the German economy, and through that it can affect the whole European economy. According the calculations regarding Central Europe, new incoming capitals are not expected. In the case of Poland, it is a clear fact today.
Will it affect our currency too?
Of course, but only to a certain level. The Hungarian, Polish, and Czech currencies are not as exposed to the pressure caused by the depreciation of the yuan – since they are pegged to the euro – as South Africa, Taiwan, Thailand, South Korea, Malaysia and other emerging markets. However, in the next period, they will certainly feel these ‘disturbances’. Of course, not as severely as the currencies of the aforementioned non-European countries. There might be a significant withdrawal of capital from those countries, and their currencies may have to face depreciation. However, it is important to see that the Chinese problem might be the major, but not the single source of capital flights and turbulence in the capital markets.
When analyzing the current situation, we have to take into account that not only China is the problem. In the countries of emerging markets – especially in Asia and South America – government policies have become more and more irresponsible, reforms were abandoned, and with the spreading corruption, internal developments are less transparent, while social unrest keeps growing as a result. In regards of Central Europe, currently Poland poses as the ‘most relevant question mark’.
In what ways exactly?
It is highly possible that the Polish election will result in a change of power. We are concerned about the Law and Justice party (Kaczynski) gaining power, because their nationalist policy would directly or indirectly lead to the revision of the currently consistent free market attitude. The domino effect is unpredictable. However, we can expect such a change in Poland would radiate through the region, and its market perception. Indeed, there may be a significant capital flight from the region – and the currencies of relevant countries would fall victim to it.
But you just said, how important our attachment to the euro-zone…
This is a mitigating factor, indeed. It still is, and remains one in the future.
Despite the fact, that the euro-zone has its own problems? For example, Greece and the other South European EU member countries…
We think the euro-zone will recover. Western Europe can deal with its problems, and we can already see its proof. We think that the ‘Greek story’, and the uncertainty around the euro in general are far less significant challenges in terms of market and global economy, than the critical rate of capital flight from the emerging markets, and its causative factor: China cannot grow, indebtedness is increasing in the certain countries of Asia and South America, Brazil is on the verge of a financial-political crisis, that the collapse of raw material prices only makes worse.
The majority of the countries that trade with China, including its Asian competitors, are in a forced depreciation pressure. It is closely connected to the fact China is on the verge of entering recession. This state could have a substantial and negative effect on the European – mainly German – growth prospects. In America, Fed cannot avoid increasing interest-rates. This factor is a primary source of the recent storms.
Meanwhile, geopolitical tensions are rising in the Korean Peninsula, and Russia’s economic decline is continuing. The neighboring East-Central European region cannot ‘come through with a whole skin’ in the future.