While the threat of credit rating downgrades hangs over Europe, a few big emerging market economies are on the upswing.
Indonesia provides arguably the starkest contrast. Fitch's upgrade of Indonesia's sovereign rating on Dec. 15 restored it to investment grade status for
the first time in 14 years. Back in 1997, when the Asian financial
crisis exploded, the International Monetary Fund had to step in with a
three-year loan worth $10.1 billion at the time.
"Indonesia's banking sector was not prepared to withstand the financial turmoil that swept Southeast Asia," the IMF
said then.
Fast-forward
to 2011, and it is European banks that are the focus of concern as the
euro zone struggles to come up with a politically palatable way to solve
its own debt crisis.
All
three of the world's major ratings agencies have warned that European
countries face downgrades if they cannot stem the crisis. Fitch said on
Dec. 16 that a comprehensive solution was "technically and politically
beyond reach."
Sentiment
toward Europe has turned so dark that the most positive thing Northern
Trust economists could say about the outlook there was, "Our base case
is that the euro zone does not completely collapse within the next two
years."
Why the Role Reversal?
Indonesia's
2012 growth is expected to reach 6.4 percent, according to a Reuters
poll of economists, down only slightly from 2011's estimated 6.5
percent. The euro zone is widely expected to be stuck in recession next
year, while U.S. growth will probably trudge along at one-third of
Indonesia's pace.
The lesson that Asia learned from its financial crisis in the late 1990s was, "make sure you've got good insurance."
Asia
now holds most of the world's foreign exchange reserves, with about
$4.5 trillion concentrated in China and Japan combined. But there are
also large stockpiles in India, Indonesia and South Korea.
That
cushion can provide protection from financial market turbulence.
Indonesia, South Korea, India and others have tapped reserves this year
to defend their currencies from extreme volatility.
"Schizophrebic" Investors
The
IMF itself seems to have learned a few lessons from its experience in
Asia, especially on how deep budget cuts can hurt a country's economic
growth and its citizens.
Its
November 1997 statement announcing Indonesia's bailout arrangement
spelled out the IMF's policy prescription: tight fiscal and monetary
policies and "substantial" fiscal measures to keep the budget in
surplus.
The IMF at
the time expected Indonesia's growth, which had been around 8 percent
before the crisis, to slow to 5 percent in the first year of the program
and 3 percent in the second. In fact, Indonesia's economy contracted by
13.1 percent in 1998 and grew by only 0.8 percent in 1999.
Former
IMF Managing Director Dominique Strauss-Kahn acknowledged in February
2011 that the IMF's reform program had been "harmful and painful" for
the Indonesian people.
Many
economists worry that Europe's austerity measures, much like those in
Indonesia in the late 1990s, will end up doing even more damage to the
economy, worsening the debt picture.
IMF Chief Economist Olivier Blanchard said investors were "schizophrenic" about austerity and growth.
"They
react positively to news of fiscal consolidation, but then react
negatively later, when consolidation leads to lower growth — which it
often does," Blanchard said.
Who Is Next?
European
countries are the obvious candidates for imminent downgrade. S&P's
move could come any day. Moody's said on Dec. 12 it will revisit its
European ratings in the first quarter of 2012.
While
downgrades and the threat of more have received the most media
attention this year, Fitch said its sovereign rating actions
year-to-date were almost evenly split between upgrades and downgrades.
Since
Aug. 5, when Standard & Poor's stripped the United States of its
AAA-rating, countries including Indonesia, Brazil, Estonia, the Czech
Republic, Paraguay, Peru, Kazakhstan and Israel have received upgrades
from at least one of the world's big three ratings agencies.
Next
on the upgrade list may be the Philippines. Its leaders expressed some
disappointment that Indonesia got the nod from Fitch first, although
S&P revised its outlook to "positive" on Dec. 16.
But
it is the negative actions that pose the global economic threat. The
advanced economies in the Organization for Economic Co-operation and
Development have 2012 borrowing needs estimated at $10.5 trillion. A
number this large means even a small increase in borrowing costs is
meaningful.
"OECD
debt managers are facing unprecedented funding challenges in meeting
higher-than-anticipated, strong borrowing needs," the OECD said in a
report on sovereign debt.
