Monday, August 26, 2013


My post last Friday voicing my concerns about the emerging markets (EM) was not well-received by some of my colleagues.

They noted that the stock markets in the EM had already suffered considerable carnage over the past few years, lagging the U.S. markets by a wide margin.

In addition, valuation levels in markets like China and Brazil already are trading at historically low levels, setting them up for the possibility of a fall rebound.


On the other hand, it is also possible that U.S. investors are underestimating the popular anger that many EM countries are witnessing.  One of the most extreme cases is in Egypt.

I am far from an expert on the Middle East.  However, it seems to me that much of the turmoil in the region over the past few years has centered around religion:  Sunni vs. Shia, Jewish vs. Muslim, etc. Egypt's problems, however, are focused on economic conditions.

Quartz had a very interesting piece over the weekend discussing the reasons that so many Egyptians have taken to the streets, risking their lives in protests against the government.

When oil production started to decline in 1996, the article notes, the Egyptian government struggled to maintain decent living standards for its citizens.  It didn't help, of course, that its politicians were largely corrupt and despotic.

The government turned to the credit markets to try to keep its standard of living intact, and now faces a crushing debt burden, much of it owed to foreign creditors.

The Egyptian population has grown by +21% since 2000, but living conditions have steadily declined.  Here's an excerpt from the piece:

Rapid population growth and continued economic mismanagement has meant that youth represent about 25% of the population—but more than half of them suffer from poverty and unemployment. Economic mismanagement, much of which was quietly championed by the IMF and the World Bank (though they have now belatedly noticed that much of the policies they previously encouraged are now deeply problematic), has caused a widening of overall poverty while enriching mostly Egyptian elites.
With some 40% of the population living on $2 a day or less, and rates of illiteracy and unemployment hovering around a third of the population, it was only a matter of time before economic grievances translated into political outrage. The trigger factor, though, was food—on which a quarter of Egyptians spend more than half their incomes 

If you have time, you should read the entire piece - it does a good job of illustrating how difficult the whole situation has become.

I also believe that other EM governments will look at the Egypt as an object lesson of the dangers of trying to meet the demands of foreign creditors at the expense of providing basic necessities.

Put another way:  while the EM countries have the resources to meet it obligations, they may decide instead to brave the anger of foreigners if it means maintaining their positions.