Special editorial on the global economic crisis

Citation

(2009), "Special editorial on the global economic crisis", International Journal of Emerging Markets, Vol. 4 No. 3. https://doi.org/10.1108/ijoem.2009.30104caa.001

Special editorial on the global economic crisis

Article Type: Editorial From: International Journal of Emerging Markets, Volume 4, Issue 3

Welcome to Volume 4 Issue 3 of the International Journal of Emerging Markets!

The global economic crisis is now dominating almost all discussions about international business and the world economy. We hope to be able to publish papers on this topic in future issues once scholars have had a chance to examine the impact of this rapidly evolving crisis.

Nevertheless, it is important for us as a journal to put some initial thoughts together about this economic slowdown. The following special editorial will examine the global economic crisis from perhaps the most vulnerable of the emerging market regions: Central and East Europe. How and in what form emerging markets will recover from the crisis is still unclear and in Central and East Europe, the effects of the financial sector collapse has brought several countries to the verge of bankruptcy including Ukraine, Hungary, and Latvia.

All of these countries have received emergency loans from the IMF and EU to provide much needed hard currency reserves. In Ukraine in particular, there is a serious shortage of foreign currency and with many Ukrainians holding loans and deposits in foreign currency, the banks are placing controls on how much money can be withdrawn on a daily basis. Close to 40 percent of Ukrainian exports are made up of metallurgic goods that have seen a significant fall in demand and prices further worsening the trade deficit.

Hungary has also received money from the IMF to shore up the national currency, the Forint, that has lost close to 25 percent against the Euro, Swiss Franc and US$. More than two-thirds of consumer credit is in Swiss Francs in Hungary[1] and the number of mortgage and unsecured loan defaults has increased dramatically since December 2008. The one positive of the depreciating currency is that Hungarian exports should become more attractive and there is some hope that tourism receipts should rise as cost conscious leisure travelers consider Budapest as a destination in the Spring and Summer this year.

To make matters worse, both Hungary and Ukraine are experiencing domestic political crises. In Hungary, the Prime Minister, Ferenc Gyurcsany resigned on March 23, 2009 citing a failure to complete domestic economic reforms while in Ukraine, continued disunity among the ruling coalition has led to political gridlock making responses to the crisis slow and haphazard.

The economic structures of the Central and East European countries (CEECs) have left these countries exposed to the economic crisis more than other emerging markets. Spurred on by EU accession requirements, rapid liberalization of goods and capital markets and a dependence on west Europe has meant that any slowdown in the original EU-15 has impacted the CEECs disproportionately. This is especially true for countries in the Baltic region such as Latvia, Lithuania, and Estonia who embraced capital market liberalization and privatized virtually all of their banks and sold them to foreign investors – especially Scandinavian banks.

For the CEEC region as a whole, in 2007, private-sector foreign currency holdings were 126 percent of central bank foreign-exchange reserves. In 2008, the region’s banking system borrowed an additional $100 billion (The Wall Street Journal, 2009a).

Less than three years ago, these countries were dubbed the “Baltic Tigers” for their aggressive growth patterns – in Latvia in 2006, the economy grew by 10 percent of GDP. Similar economic performance was recorded in Lithuania and Estonia. Both these two countries came very close to adopting the Euro by 2007 but just missed out because price inflation was too high. In 2009, Latvia expects to see a contraction of up to 18 percent of GDP, Lithuania and Estonia expect to see falls in GDP of high single digits (International Monetary Fund, 2008). The rate of loan defaults is accelerating as the credit crunch and the impacts of de-leveraging are being felt in these countries – prior to the collapse, lending in foreign currency in Latvia went from 60 percent of the total in 2004 to 90 percent in 2008 (The Economist, 2009). At the end of February, Standard and Poor downgraded to Latvian sovereign debt to junk status (The Financial Times, 2009a). One consequence has been the collapse of the Latvian centre-right government, accompanied by violent street protests and it is fully expected that governments in Lithuania and Estonia may struggle to stay in power.

While the impact of the global economic crisis has been less marked in other CEECs, there is an expectation that as aggregate demand falls in Germany, France, the UK and Italy, there will be a contraction in exports from CEECs who export heavily to these countries. For example, the Romanian government announced it had reached agreement with the IMF, World Bank, EBRD and EU for a €20 billion loan package (The Wall Street Journal, 2009b). Even Slovakia and Slovenia who as of yet have not felt the full force of the slowdown could be impacted as demand for automotive products falls. Slovakia is Europe’s largest per capita automotive exporter. The flipside of a weakening currency is a rise in import prices. Early evidence of the impact has shown up in food prices with Unilever increasing its food prices by 12 percent in CEEC compared with just 3 percent in the final quarter of 2008 (The Wall Street Journal, 2009c).

At this stage, there is some good news relative to events elsewhere in the region. The largest CEEC economy, Poland, appears to be coping robustly with the current economic downturn. Since Poland benefits from a relatively large domestic market there could be some protection against the global economic crisis. Compared to other open CEECs, less than 40 percent of Polish GDP is earned through exports. Retail sales in January 2009 in Poland rose higher than expectations (The Financial Times, 2009b)). Early forecasts for CEECs in South Eastern Europe estimated that they should grow at 1.5 percent in 2009, but that would be still significantly down from 7 percent growth in 2008 (EBRD, 2009).

Overall, the CEECs can expect more negative economic news before things improve. Their fortunes are largely to be impacted by the success of undertaking domestic economic reforms, the extent of de-leveraging in the financial sector and the degree to which the EU will be able to rescue these countries with a credible package of loans and structural support. What is for sure is that the CEEC economic miracle of the period 1991-2006 has well and truly come to an end and governments, companies and citizens from the region will need to adjust to the new and painful economic reality.

Look out for a special issue of IJoEM on the impact of the global economic crisis on emerging markets to be published soon!

Yusaf H. Akbar

Note

Data taken from the Central Bank of Hungary (Magyar Nemzeti Bank) statistics.