The docks at big Indonesian ports like this one are quieter these days, as China’s demand for raw materials has begun to cool.
However, drive an hour inland and the agricultural giant Cargill is racing to finish a cocoa bean processing plant, while a large instant-noodle factory is running full tilt to meet the demand for convenience food from Indonesia’s large and growing middle class.
“We’re having quite a tough time keeping up,” said Tjun Sulestio, a general manager of the noodle factory run by PT Suprama.
The contrast in many emerging markets between signs of a looming currency crisis and strong domestic demand is visible around the world. Stock markets and currencies have fallen in recent months in places like Buenos Aires, Jakarta, Manila and Istanbul, as investors have worried that weaker Chinese growth and a US Federal Reserve that is pumping out fewer dollars will cause a global stumble in many developing nations.
Like limbo dancers struggling to shuffle under a low bar before standing upright again, emerging markets must shuffle along under weak commodity exports and capital outflows before they can recover their balance and let strong domestic demand for products like cars, electronics and instant noodles carry their economies forward again. The question is whether their consumers and businesses will continue to spend, or will international troubles spill into domestic economies in ways they cannot control?
“We don’t want that bar to go too low,” European Business Chamber of Commerce in Indonesia chairman Jakob Sorensen said. “The lower it goes, the harder it will be.”
There are reasons for optimism. Many stock markets in emerging economies rebounded last week. International problems have not yet caused the bank runs and large-scale flight of international investors that made previous crises so severe, like the Asian financial crisis in 1997 and 1998.
Central banks in emerging markets have gone out of their way to accumulate rainy-day funds of US dollars and other foreign currencies. With the conspicuous exception of China, bank regulators in emerging markets have also imposed tougher lending regulations and kept shadow-banking operations on tight leashes.
While emerging markets may face trouble from beyond their borders, in many of them, spending at home has seldom been so strong. Many businesses are even struggling to find enough workers.
In the Philippines, a popular chain of chicken restaurants now promises a free meal to new employees and their families within five minutes of their signing up for work. Some McDonald’s franchises have put up signs offering free meals merely for filling out a job application.
“I’d never seen a sign like that,” Philippine President Benigno Aquino III said in an interview at the Malacanang Palace in Manila last week.
India and Indonesia suffered large declines in their currencies and stock markets in summer last year, lasting through early autumn, after then-US Federal Reserve chairman Ben Bernanke indicated in May that the Fed would start easing back on measures that helped keep longer-term interest rates at historically low levels. Bernanke’s warnings had the effect of attracting money from overseas investors to the US.
Both India and Indonesia have since sharply narrowed the deficits in their current accounts, a broad measure of trade and financing. They allowed significant depreciation in their currencies last year, which made imports more expensive and their exports more competitive.
As a result, both countries have less need of further foreign investment in their financial markets, although they could still be hurt if overseas investors withdrew money that they had already put in.
“There definitely will be an effect of both the Fed tapering and a cooling China,” said Saugata Bhattacharya, chief economist at Axis Bank in Mumbai, India.
However, “India is definitely better prepared today to deal with these foreign shocks than it was nine months ago,” he added.
Political troubles have played a role in market declines in countries like Turkey and Argentina. They have also played a role in Asia, most notably in Thailand, where Bangkok has been clogged with demonstrators for weeks.
Yet even the Thai tourism industry seems to be weathering the difficulties well so far.
“Even though everyone says the economies in China and India are having problems, we still see increases in their numbers” of tourists, said Pornthip Hiranyakij, the managing director of Destination Asia, a travel company.
The big question now is how much further growth in China will slow. A serious cutback in China’s demand would not just harm emerging markets’ shipments directly to China, it would also cause further erosion in the already falling world prices for emerging markets’ coal, copper, palm oil and other commodities.
Hong Kong-based Mizuho Securities economist Shen Jianguang (沈建光) last week labeled troubles in China’s so-called shadow-banking sector the biggest potential threat to that country’s economic growth this year.
China has been able to contain meltdowns in the shadow-banking sector to a few cities so far, but they have been spectacular where they have occurred, as in Shenmu in the northwest, where all but one of the car dealerships failed last summer and scores of other businesses closed.
HSBC calculates that growth in China’s economy now adds twice as many US dollars to annual global demand as growth in the US economy and far more than the anemic economies of the EU.
“China needs to keep humming, or US and EU growth would need to step up meaningfully to make up the difference,” said Frederic Neumann, the bank’s co-head of Asian economic research.
One way for developing countries in South and Southeast Asia to avoid being clobbered by weaker commodity exports is for them to displace China’s own increasingly high-cost producers of coal, aluminum and other minerals. Some of that is already happening, with China announcing on Wednesday last week a jump in imports during last month.
Another tactic is for emerging markets to start replacing China as the preferred locale for making export goods like clothing, shoes and electronics. Blue-collar wages have increased at least fivefold in China over the past decade, prompting a few industries, including garment and shoe production, to start shifting to Southeast Asia.
However, China is still gaining global market share in consumer electronics. That may change, though not rapidly enough to help emerging markets this year.
Indonesian Vice Minister of Trade Bayu Krisnamurthi said in an interview in Jakarta that the Foxconn Technology Group of Taiwan — the main manufacturer of Apple devices, as well as other consumer electronics — was preparing to build a large factory in Indonesia.
“The other brands will come in their footsteps,” he said.
Foxconn said in an e-mailed reply to questions that “we are currently in discussions with potential local partners and government officials, a process we expect to finalize in 2014.”
Indonesia was once a symbol of everything that could go wrong in a commodity-dependent country during tough times. During the Asian financial crisis, banks collapsed and civil unrest forced a change of government.
However, at least for now, Rolls-Royces can still be seen purring through the streets of Surabaya, Indonesia’s second-largest city, and new apartment buildings are still under construction.
Whenever global economic troubles threaten, “people are calling for the end of the world in Indonesia,” said Jean-Louis Guillou, the president of Cargill’s Indonesia operations. “And so far, I haven’t seen the evidence for that.”
Additional reporting by Joe Cochrane, Neha Thirani Bagri and Thomas Fuller
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