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Do Brazil, Russia, China, and Gulf States have enough reserves?
LONDON : As western investors dump emerging market assets, the fate of the sector's major economies will hang on whether Brazil, Russia, China and others like Gulf Oil producers have built up enough funds to survive the storm. Just months ago, many analysts argued that the fast-growing emerging markets had ''decoupled'' from the developed world. But the Wall Street-led rout has since hit stock markets from Lusaka to Mumbai.
Lehman Brothers' failure recently prompted the biggest withdrawal of cash from emerging stocks since fund monitor EPFR began records in 2002. The sector's benchmark just had its worst quarter in two decades. That would have devastated emerging economies a decade ago but analysts and investors say this time the sector heavyweights, including India or the Gulf states, have enough cash to keep themselves in the black.
''Over the next five to 10 years, emerging markets are still going to be a growth story and asset managers are going to be putting more money there,'' said Nigel Rendell, emerging markets strategist at Royal Bank of Canada. ''But in the short term, people are going to be pulling money out.''
That leaves emerging economies largely dependent on their own resources or those of peers and neighbours. Will they be able to hold up domestic demand, maintain at least reasonable exports and keep the capital and liquidity flowing?
''I think that at the moment people are finding it difficult to know where to put their money,'' said HSBC Halbis Frontier markets fund manager Andrea Nannini _ who has been increasing the position of his US$240-million fund in the Middle East.
''In this environment, the safest places are those that have their own sources of funding through oil revenues.'' Vast sovereign world funds such as those in the Gulf are seen as increasingly reluctant to risk money in Western markets facing a potential recession. Spending that money at home or in fellow emerging markets could change the picture.
Russia, which had seen mass capital flight for weeks even before the crisis partly because of the Georgia war, plans to spend its vast reserves at home rather than overseas in order to keep its struggling markets and economy moving.
In China, which has seen exports to the US falling and equities and housing markets slumping, growth still outstrips most emerging economies at 10%. China still retains the world's largest sovereign wealth fund that could be used to stimulate both the local economy and invest in other emerging markets for both financial returns and political influence.
HSBC said in May that emerging markets had contributed more than 50% of global nominal growth over the past three years and would be likely to represent even more as growth slowed in richer countries.
But analysts still have little clue how bad the crisis will get in the West and how that would filter down to emerging economies.
More bullish analysts point to little direct exposure to the sub-prime sector in emerging economies and say emerging banks have healthier balance sheets than their Western rivals.
But others worry emerging firms will fail to cover or refinance foreign currency debt made pricier by a resurgent dollar. REUTERS
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