Goldman Sachs Group Inc chief executive officer Lloyd Blankfein said emerging markets are better able to weather an investor retreat now than in 1998, when currency turmoil spread and forced international bailouts.
“There were a lot of things in ’98 that don’t exist now,” Blankfein, 59, said in an interview yesterday with Bloomberg Television’s John Dawson in Hong Kong while attending the Goldman Sachs Global Macro conference. Those markets now have “better reserves, more flexibility in exchange rates, better policy orientation,” he said.
Emerging-market stocks posted their worst start to a year since 2009, evoking comparisons to the Asian financial crisis, as China’s economy slowed and the US Federal Reserve began easing its monetary stimulus program.
Investors including Mark Mobius, who oversees US$50 billion in developing-nation assets at Templeton Emerging Markets Group, are predicting that the worst is not over.
“There were tailwinds for the emerging markets over the last several years” with low interest rates globally attracting funds into those markets and commodity prices climbing, Blankfein said. “The risk returns to roost, not possibly, but inevitably. It has to. It’s part of a cycle.”
In the late 1990s, Asian nations including South Korea and Thailand spent reserves trying to defend exchange-rate pegs, only to eventually devalue and seek IMF bailouts. As currencies became delinked from the US dollar, investors attacked in waves that culminated in Russia’s debt default and the collapse of hedge fund Long Term Capital Management.
“Barriers were defended, and when they gave way, it was like a tsunami coming through a dike,” Blankfein said of that crisis. “Central banks of those countries were very underwhelming,” while governments were trying to hold currencies at untenable rates, he said.
What happened in 1998 “wasn’t the end of the world,” and those countries have been “doing very well” for the past 10 to 12 years, Blankfein said.
“It’s going to be like three steps forward, one step back,” he said. “Money was flowing very freely — in some cases, maybe freer than it should have — into emerging markets and that’s going to have to consolidate.”
China’s economic growth will have “huge consequences” for global expansion prospects, though his firm will be judicious in how it invests in the Asian nation, the CEO said.
Goldman Sachs became the first Wall Street firm to start underwriting securities in China after winning a license in 2004. The New York-based bank also has private-equity, asset management and institutional brokerage businesses in the world’s second-largest economy.
“We’d be making a mistake if we overfunded it, put too many people, too much investment,” Blankfein said yesterday. “We want to keep growing our business commensurate with opportunities set in China.”
The firm was the top adviser in helping Chinese companies sell shares overseas last year, data compiled by Bloomberg show, and ranked second in advising on China domestic equity and equity-linked offerings through its joint venture.
China’s economy grew 7.7 percent last year, the same rate as in 2012. Expansion is forecast to be 7.4 percent this year, the weakest pace since 1990, based on the median estimate in a Bloomberg News survey.
“The whole world really depends on China working out well,” Blankfein said. “We really need that growth in China to occur.”