By: Emma Rumney
25 Nov 16
Two pervasive “mega volatilities” are set to throw emerging market government finances into cyclical disarray for years to come, global economics expert Nenad Pacek has told delegates at the CIPFA international seminar in Luxembourg.
Pacek, president of Global Success Advisors GmhB and founder of the CEEMEA Business Group, said the unchecked, speculative buying and selling done by the world’s financial institutions has huge implications for public accounts.
Since the financial crisis, he continued, financial institutions have started “two major parties” around the world in pursuit of the biggest returns.
The first was heavy investment in high-yield government bonds in emerging markets, leading to “unprecedented inflows of freshly printed money [generated by quantitative easing in major economies]” from the advanced to the developing world starting in 2010.
Suddenly, he said, “everyone feels richer”: the value of emerging market currencies inflates, and governments have easy access to finance.
But this would not endure. He pointed to 2013/14, when governments began thinking about stopping their money printing programmes. Pacek said “panic set in” and funds started pulling their money out of emerging markets.
Investors either no longer wanted to buy government bonds or demanded such high premiums that no governments could afford it. Easy access to finance was over, currencies deflated and there were “mega, mega outflows of capital”, making it very difficult to run economic policy successfully.
“We are going through these waves because nobody is controlling any capital inflows and outflows,” he highlighted, with only China maintaining restrictions on buying renminbi.
Pacek described it as a massive problem that “no one is debating” the issue.
Commodity futures are similarly problematic, he continued, dubbing them “nothing but a big gambling casino” run by the world’s financial institutions.
Futures are being “misused”, he said. Almost all – 97.3% – of futures transactions do not result in a trader taking physical possession of commodities. Less than 3% are linked to real-world demand.
Prices can rise and fall dramatically in a matter of a few weeks, “because it has nothing to do with physical supply and demand,” Pacek noted.
He called this a “disaster” for countries dependent on commodity exports, which suddenly find themselves in economic crisis and “suffering” because they have no money and having to borrow to pay for basic services.
Pacek pointed to the recent, dramatic downturns in economies like Brazil, Russia and South Africa.
“We will have these two mega volatilities still happening in the future,” he said. “Inflows of cash going into emerging markets on the wave of enthusiasm, and then leaving in panic.
“What that means for the availability of government finances is absolutely critical. During the good times, access to finance is good and cheap, and governments are able to do something. But many are not ready for what comes next, which is when the outflow happens.
“These two issues will be pervasive for many, many years to come and nothing will change that. That volatility will stay with us.”
Pacek also covered issues facing the developed world: namely, low growth in the eurozone, which only began its own quantitative easing programme in March 2015; and the impact of Donald Trump’s presidency in the US.
In the European economy, he said the European Central Bank’s programme of printing money to buy €80bn worth of bonds per month is having a positive impact.
As a result, after many years of “misguided austerity”, governments are able to breathe easier.
Across the Atlantic, he predicted that Trump’s policies, which include tax cuts and infrastructure spending, could deliver a short-term “growth injection” for the US.
“But later on it all gets very murky and fuzzy because after an initial boost of growth, it means a significant increase in government deficits, government debt and so on. That will have some implications.”