In nuclear physics, China Syndrome refers to a hypothetical
loss of coolant accident that causes a severe meltdown of the core of the
reactor – a reaction so hot and self-sustaining that this core would
hypothetically burn through all containment, sinking and burning through to the
‘other end of the planet,’ i.e. to China, colloquially.
Emerging markets recently have seen a different kind of
‘China Syndrome,’ one that works in a different direction. Because the Chinese
economic meltdown is now burning a financial hole in the world, and the
emerging market is feeling the heat on the other side of the world. After the
2008 financial crisis, China was the bulwark of the world economy, leading an
unprecedented surge in investment that dragged the world economy from the
doldrums. But as the saying goes, all good things…
The Chinese economy is perhaps struggling – compared to its
quarter century of 7% growth it has had. When Chinese growth dipped below that
7% benchmark, chaos soon followed. Their stock market has since reversed all
gains made during the year, with the Shanghai Composite down to 60% of its peak
during June this year.
Needless to say, the Chinese slowdown necessitated the
devaluation of the Yuan several times during the last few months, but that was
not the end of it. When the Great Engine of Growth slows down, its fuel needs
drop as well. Commodities needed for infrastructure suddenly found themselves
without a buyer, and commodity prices worldwide dropped as supply exceeded
demand.
Of course, all these commodities had to be mined somehow,
and the resource-rich emerging markets were all too ready to supply when demand
was booming. Cheap, low-interest rate US Dollar loans were easy to come by in
the boom, and funded operational expansions that are now in excess of what is
needed. And here is where the penny has dropped.
Emerging markets remain export-dominated economies, and when
dollar-denominated exports drop, the supply of dollars to a country’s foreign
exchange drops as well. But those dollar-denominated loans still need to be repaid
– the demand for dollars remain high. Inevitably, market forces in a floating
exchange rate regime take over, and emerging markets have seen sharp
devaluations of their local currencies.
In an economic boom, it is easy to forget to price in the
foreign currency risk when taking out a low interest rate loan in US Dollars. A
loan taken out at 5% in US dollars at N$ 10 per USD suddenly becomes a loan at
effectively 6% when the NAD/USD exchange rate rises to N$ 12 per USD. And as a
currency devalues, more and more local currency is required to service foreign
loans, exacerbating the issues an emerging economy faces.
And so the emerging market burns in the contagion. The once
mighty BRICS that were widely hailed as a potential new economic power has been
brought to its knees by the China syndrome. Brazil’s sovereign bonds were
downgraded to junk bond status just last month. Russia’s economy is contracting
in the face of low oil prices, and South Africa, as we are so keenly aware, is
struggling with the issues mentioned above. Only India, thus far, has been
holding up.
And perhaps it is the Indian lesson emerging markets should
take to heart. For too long, emerging markets have been export-dominated,
selling precious resources. India has developed their own, internal
middle-class market that can keep its economy going even during turbulent
times. It is this challenge that China is currently struggling with, and that
Africa in particular is working towards.
It is thus quite commendable that the Namibian Ministry of
Trade and Industry is actively promoting the development of local industries
via licensing Export Processing Zone enterprises, and stimulating the
development of local industries that ultimately will become the backbone of the
Namibian economy going forward.
After all, just because emerging markets are struggling,
does not mean they always will. A billion people in the developing world have
managed to make the transition into a service and manufacturing economy. With
good governance we can all craft an economy to ensure our own well-being. This
crisis has merely shown in relief, where we can do better.
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