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Al-Ahram Weekly 27 Jan. - 2 Feb. 2000 Issue No. 466 
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Published in Cairo by AL-AHRAM established in 1875 |
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Al-Ahram Weekly 27 Jan. - 2 Feb. 2000 Issue No. 466
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| Published in Cairo by AL-AHRAM established in 1875 |
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Egypt Region International Economy Opinion Culture Features Profile Travel Living Sports People Time Out Chronicles Cartoons Letters What did not happen
By Mohamed El-Erian *
It is customary in January to look back at the previous year and reflect on what happened. This is particularly true when we are entering a new decade, let alone a new millennium. But it is also good to think about what did not happen -- especially if these non-events have important implications for how we view the next 12 months -- including the positioning of the Arab region in the globalised economy.
No matter where you look on the globe, it is hard not to be struck by what did not happen in 1999 -- good or bad.
Starting in North America, the US economy did not slow down and the stock market (especially the NASDAQ) did not interrupt its amazing upward surge despite a series of interest-rate hikes. In Europe, the newly created Euro did not establish itself as a strong currency. Yet, the 16 per cent depreciation in the new currency did not result in a significant pick up in export and import substitution activities. In Japan, domestic demand did not emerge decisively from its slumber despite massive fiscal stimulative measures.
And then we have the emerging economies. On the positive side, inflation in Brazil did not take off despite the massive devaluation of the currency. Russia did not implode despite a series of economic, financial and political dislocations. And investor interest in emerging markets did not dissipate despite the first-ever sovereign default on Brady and Euro bonds.
Less positive is the fact that Argentina did not embark on a sufficiently strong economic adjustment programme despite growing investor concerns about the fiscal situation, the mounting financing needs and the loss of competitiveness. Also less positive, is the fact that several countries and corporations were not able to properly tap the international bond markets.
In some cases, these 1999 non-events provide encouragement for this year. In other cases, they imply caution is necessary, if not outright concern. In both scenarios, several Arab economies are positioned to do relatively well provided they maintain their policy momentum.
Let us illustrate these general points with some concrete examples. And since I tend to think of myself as a worrier by nature, let me start with the biggest flashing yellow light as we enter the new millennium: the uncertainty associated with the high valuations of certain leading equities in the US. Indeed, these valuations have reached such levels as to prompt a growing number of believers in "new era economics" to question the durability of the "valuation miracle".
For policy makers around the world, the dilemma is acute. They all favor a soft landing of the US economy. Yet the longer the equity surge continues, the greater the risk of a hard landing -- with uncertain real economy and portfolio effects across the globe.
Pity, in particular, policymakers at the US Federal Reserve. The relentless surge in US domestic consumption is placing a question mark over the effectiveness of their gradual monetary policy tightening process. The continued appreciation of the stock market is not helping; neither is the suspicion that the Fed may be inadvertently fuelling moral hazard risks. Yet -- and this is where the dilemma is most acute -- the experience of Japan ten years ago suggests that the risks of a decisive monetary policy tightening are also considerable.
On their part, European policymakers are dealing with growing evidence of the much-anticipated increase in economic activity. The question for them is how to ensure that the pick up remains non-inflationary and, therefore, sustainable.
Meanwhile, in emerging markets, investors are drawing encouragement from the generally solid performance of economies in 1999. Much of this performance reflects the lack of negative contagion from the series of breakdowns in fixed exchange rates in Latin America in 1999 (including Brazil, Chile and Colombia). Credit here the determination of policymakers in these countries to maintain appropriately tight financial policies in order to choke off inflationary pressures. This has contributed to what I call the dream-trio for emerging market investors in 1999: high returns (the highest of any pure fixed income asset class), declining daily volatility, and lower correlation with US markets.
But for this to continue, investors will also have to deal with the implications of two factors that also did not happen in 1999 -- i.e. the lack of policy strengthening in some key emerging economies, and the implications of the relatively low level of new issuance.
Both these factors serve to accentuate the cash management challenges facing certain sovereigns and corporates. The most exposed on this front are Argentine and Russian entities. Indeed, the 2000 outlook for emerging economies as a whole will be affected by how they manage the transition to what did not occur in 1999: better economic policies and enhanced access to long-term funding at reasonable rates.
Put these various positives and negatives together and what you get is a relatively favorable base-line scenario for the world economy in 2000. But it will be choppy as different parts of the globe adjust to what did not happen. Equally important is the downside risk if the delayed transitions are poorly handled, be it in the US or in certain emerging economies.
Fortunately, much of the Arab region is well placed to benefit from the baseline for the global economy while maintaining a relatively limited exposure to the downside risks.
The relatively large share of Arab exports going to the EU means that the region can profit from the rebalancing of global growth, as higher EU demand offsets lower US growth. This complements domestic restructuring measures aimed at improving the size and efficiency of the region's production base.
As regards portfolio effects, the region can build on the progress made in 1999 to secure a better standing in the international financial system. Recent encouraging steps include: establishing a larger and more stable footing through appropriately targeted new issuance and inclusion in widely-used market indices; re-enforcing institutional links with leading firms headquartered in Europe and the US; improving the infrastructure of domestic financial markets; and liberalising access.
In addition to increasing the overall attractiveness of the Arab region, these factors can enhance its relative standing, especially if some of the downside risks discussed above materialise in the course of this year. Indeed, the Arab region has the potential to benefit from a flight to quality phenomenon within emerging markets.
But, like many things in life, going from promise to reality is far from assured. What is required is a further effort on the part of Arab governments and corporates to maintain the policy momentum, improve investor relations, and step up liability management. The benefits -- in terms of a higher standard of living for the Arab population -- certainly justifies a sustained effort in these areas.
* The writer is managing director of the Pacific Investment Management Company (PIMCO). Previously he was managing director of Salomon Smith Barney/Citibank, having spent 15 years at the IMF.
