Submitted by Viktor Shvets, Macquarie commodities and global markets head of Asian strategy
Are politics & economics on a suicide course?
- An illiberal global order is being compounded by CBs draining liquidity.
- The flashpoint is now Turkey but the prospect of contagion is real.
- While Asia ex is less exposed, trade disruption, less liquidity, rising US$ and falling Rmb are a deadly combination. It could go beyond Turkey & South Africa.
Tocqueville strikes again – stress leads to illiberal answers
This week’s Economist had a timely article on Alex de Tocqueville whose classics ‘Democracy in America’ and ‘The Old regime and the French Revolution’ were the reference books for liberals like John Stuart Mill and autocrats like Xi Jinping. They guided democrats how to avoid destruction of liberal order while being equally useful to autocrats on how to avoid revolutions.
What has it to do with emerging markets? EM equities do best when volatilities are low, environment is predictable, capital flows freely and trade expands. However, as we have been highlighting, this outcome is becoming increasingly less likely. As de Tocqueville warned, while liberal order requires democracy, democracy does not necessarily lead to free and liberal order. When pressures rise, democracies frequently turn to xenophobic and protectionist policies. In such times, people do not want freedom, they want help. In our view this explains recent trend towards more illiberal causes and politicians, whether in the US, Turkey, Poland, Hungary, Italy, Mexico, Phil or India. It is not relevant whether a country lurches to the left (Mexico) or right (Turkey), the outcomes are less freedom, greater state control and international disruption.
Turkey is a canary in the coal mine; watch global liquidity & China
While history does not repeat itself, it does rhyme, and while de Tocqueville could not envisage CBs role in economic and political life, he did warn about dangers of state centralization. This brings us to Turkey. For the last decade, Turkey’s political and economic climate has become less liberal and more centralized. A hopeful spring of early 2000s, when Turkey seemed to have a realistic chance to escape never ending cycles of extreme lurches between free markets and statism and between inflationary/currency crises and periods of technocratic management, is all in the past. While in 2010, there was still a question whether Turkey would continue along liberal path, by now it has become clear that the answer is no. Also, worryingly, this time, illiberal Turkey is meeting an illiberal US and an increasingly autocratic and illiberal world.
Economic mismanagement (twin deficits are ~9% of GDP while inflation is ~15%), and ‘strong man’ stand-off between US and Turkey, has driven TRY to an unheard of levels of 7:1, raising a realistic prospect of capital controls, defaults and greater interference in CB policies, capital flows and businesses. As in the case of Greece, the danger of Turkey is not its own debts (even Eurozone banks’ impact is likely to be manageable) but contagion. As usually, the weakest (e.g. SA) are the first in the line of fire. The good news for Asia ex is that even most exposed (Indo, Mal, Phil & India) are far better positioned.
The concern is that lurches towards protectionism and trade wars are now compounded by Fed policies to drain liquidity and raise cost of capital, almost irrespective of consequences for a wider world. Even ECB and BoJ are being reluctantly dragged along. At the same time, China is caught in the middle of its de-leveraging, and it clearly uses Rmb to help economy and reduce trade drag. Less liquidity, rising US$ & declining Rmb are deadly for EM equities. Turkey might just provide a trigger. Watch China and how it manages liquidity
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