Saturday, January 07, 2006

Yes, that great optimism is back. Most analysts are painting ?

Yes, that great optimism is back. Most analysts are painting rosy scenarios for the world economy, particularly in emerging markets. In December Morgan Stanley said the global outlook for 2006 "is as sweet as it gets." Goldman Sachs estimated that emerging markets would have another great year, with growth of 6.6 percent, compared with 6.7 percent in 2005. The Institute of International Finance forecasts capital flows to emerging markets of well over $300 billion, 50 percent higher than those of a few years ago.

Of course, any broad show of optimism only provokes a counterreaction. It's no surprise, then, that some experts are pointing to any one or a combination of events, none by themselves implausible. Interest rates could shoot up in the United States and suck out money from all over the world. Growth could slow in the United States and China, clobbering the vital exports of developing countries. Oil prices could turn up once more and hurt key energy-importing emerging markets. A few big corporate-governance scandals in emerging-market multinational companies could shake investor confidence. A flu pandemic could shut down world trade. In truth, a crisis never comes from where it is expected, but there is no lack of scenarios.

These concerns are reinforced by a sense that as 2005 ended, global investors had become too lax in their evaluation of emerging-market risk. Questions were being raised as to whether the emerging-market boom was based mostly on the huge amounts of cheap money sloshing around the global economy seeking any decent return, reinforced by the herd mentality of financial markets, and therefore easily subject to a major reversal. Exhibit A was the premium on Third World debt, lower in some cases than that on junk bonds in the United States, lower than those many developing countries had received since the 19th century. Kristin Forbes, an MIT economist and a former member of George W. Bush's Council of Economic Advisers, captured the spirit of the pessimists. "I worry that there is a perfect storm coming from emerging markets," she recently told The Washington Post.
Stephen Rene
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