22/03/2014 Talking Business with Linda Yueh

shot and secretly buried by the IRA. Mr Bell denies the charges. I will

have more for you at 9pm. Now it is time for Talking Business with Linda

Yueh. As the US Central Bank met under its new chair, Janet Yellen,

for the first time, emerging economies, like Turkey, remain in

the spotlight as the era of cheap money gradually comes to an end. Are

there lessons to be learned from the last big crisis in Asia a decade and

a half ago? In Singapore, I'm Linda Yueh and we are Talking Business.

Welcome to the programme. Ever since last May, when the US Central Bank

signalled that the era of cheap money was coming to an end,

investors took their money out of riskier emerging economies. When the

money left in the late 1990s, a crisis hit those devoting countries.

50 years later, could the same thing happen again? I went to find out how

Turkey, described as the most fragile of large emerging countries,

was faring. Where East meets West. Istanbul, the bridge between Europe

and Asia. Turkey is a strategic country that investors had

favoured, as the flow of cash from the US slows, fragility is now

exposed. For Turkish companies like Ramsey, which supplies formal wear

for Liverpool Football Club, it's a worrying time as consumers spend

less. Since the signal of the end of cheap money, it's harder to borrow

and spend than before. It's not a comfortable time at the moment.

Unfortunately, the last year or two, the business has been sort of

shaking. For factories like this one, producing power generators, the

cooling economy is a worry. Some Turkish companies have also borrowed

too much from foreign creditors that make them particularly vulnerable if

demand slows. Export is very important for the Turkish economy.

The owner tells me that relying on overseas customers will be key for

growth. It is a big change from a year ago. Turkey's economy had been

the envy of Europe. GDP growth was over 8% before the slowdown.

Inflation had dropped to 7% from 120% a decade ago. It paid off its

last loan to the IMF and was about to become a creditor for the first

time in 52 years. During the boom times the money flowed in and lead

to a lot of borrowing. What a difference a year makes. Now, as the

money is stopping, while all of that debt borrowed by households and

firms lead Turkey into crisis? Along the Bosporus, commuters go about

their daily business. It is a calm that has already been broken

regularly since last summer. Across Istanbul, protests have erupted

against the Erdogan government and over corruption. Despite Turkey's

large and young population of consumers, the end of cheap money

from the Fed, a lot of debt owed to foreigners and political protests do

not make for an attractive combination to investors. For Europe

on the brink of recovery, the last thing that it needs is a crisis on

its doorstep. I also caught up with turkey's Finance Minister, Mehmet

Simsek, who expected growth to slow as a result of the Fed's actions and

political protest over the past year, but didn't think that the

country would suffer a crisis. Growth is likely to slow down but we

will be willing to live with more modest growth. Consumer confidence

has collapsed, but industrial output is up by 7.3%. It's rather unusual,

I was surprised. Even though we may experience some slowing down, I

think it is unlikely to be sustained because what is happening was on the

back of this domestic and political noise. Is, in your kind of analysis,

how much of the fall of the Lee Roth, how much of the concerns over

Turkey is due to the fact `` the Fed, versus change in your own

domestic circumstances, whether economic or political? If you focus

on made to mid`December last year, I would say significant, substantial

portion of currency weakness is attributable to the Fed decision. If

they have provided good clarity from May onwards as to when and how...

Now it's a little bit better. Markets, once you provide the

clarity, they are just, we will adjust. But when there is

uncertainty, and that is where the problem comes in. That was the

Turkish Finance Minister, Mehmet Simsek. Up until now, the biggest

financial crisis in emergency economies had been the Asian crisis

in 1997 to 1998. It started in Thailand and spread out. These

countries have boomed and seen money flow into their borders. As a

result, foreign debt exceeded 180% of GDP. But, as the first bankruptcy

started in Thailand, the money left the region. To attract cash,

interest rates shot up to 65% in Indonesia, 40% in Malaysia and 32%

in the Philippines. National output fell from between 17% to 40% in

those countries during the crisis. Joining me to discuss whether there

are parallels between Turkey and emerging economies now, as compared

with the Asian financial crisis, and whether there are lessons to be

learned from the crisis of the late 1990s are Francois Lancon, president

and managing director for German software giant SAB. Geoffrey

Heenan, Singapore's representative to the International Monetary Fund.

And Jonathan Cavenagh, senior foreign exchange strategist for

Westpac. Do you see parallels between what happened to Asia 15

years ago on what's happening now in emerging economies? I don't see that

many parallels, it's a fundamentally different issue. The economy is a

much stronger, the fundamentals are different if you look at the

consumers and a different level of spending. The need for technology is

much higher. We are investing about $2.5 billion in those economies over

the next few years. Geoffrey, when people look at the impact of money

that has flowed in and the build`up, that's where the parallels, in. It's

true that the build`up of debt and the inflows can lead to vulnerable

to use, but the levels that the Fragile five, for example, are

experiencing... Indonesia, India, South Africa, Brazil and Turkey.

That's right. They were identified as being the most vulnerable in

mid`2013. But if we were to look at the fundamentals of those economies

in terms of external debt, the amount of short`term debt to GDP,

these were all lower than the Compper for countries which were

involved in the Asian financial crisis. Not only that, the Fragile

five have higher levels of reserves. They also have far better

policy frameworks. In particular, all of them have floating exchange

rates which have, to some extent, allowed them to whether this

volatility in the change in global markets. Isn't one of the issues

when money starts to cost more, it's less cheap, then investors pull out

of riskier emerging economies, and that is essentially what happened in

the late 1990s, they had a massive pull`out. The driver now is the

Central Bank in the US. Not printing as much money, but you don't have as

much cheap money as you had. Investors think again about where

they put their money. That is right. That was a big issue for some of

these emerging markets through the course of 2013. But I don't see it

as being a huge issue as we progress through the rest of this year. If

you look at a market like Indonesia, foreign investors are still holding

a record amount of their bonds. If foreign investors were incredibly

concerned about the Indonesian outlook, I think we would have seen

a lot of disinvestment out of that target market. Since the start of

this year, foreign investor holdings of Indian bonds have climbed 30%.

There is still a case for money to be put to work into emerging

markets. If the broader investment community was that concerned, I

think we would have seen the continued outflow story. That hasn't

been the case. I'm going to put you on the spot. The fundamentals are

good, they've learned their lessons, they borrowed less in

foreign currencies and yet people in the market was selling these

countries off like crazy when they first started to talk about

tapering. What a difference less than a year makes. When the agenda

comes onto the market like this like it did last year, you can pinpoint

this to when Ben Bernanke first mentioned that word. You can plot

how some of these emerging market currencies started to trade after

that. The correlations across different emerging markets tend to

be strong. Investors tend to sell first and ask questions later. Now

that we've got our idea around what tapering actually means, so the Fed

balance sheet is still expanding but it's just expanding at a slower

rate. US interest rates at the short end of the curve remain very low.

They are the row. That's right. If you can get a much better yield in

somewhere like Indonesia or India, that is still going to be attractive

to some of these investors. For you, what determines confidence in these

countries? We talk to customers will stop if you look at the customers,

will you have fundamentally three segments. The governments. The

government are either investing in infrastructure, or if they are not

because of some reasons, we are in talks with them about future

infrastructure project. Either it's happening all it's bound to happen.

The second segment is the local companies, but the big shift we see

from ten years ago, the local companies are becoming global. A

typical example is in Indonesia. By 2015, if they don't go in other

countries, somebody will come to them. The third is the small and

medium business. That is technology. That's what makes us

confident. I sort of feel like we're downplaying some of the issues in

some of these countries. I didn't want to downplay it. There

definitely are some issues. With the countries that did suffer the most,

what that illustrates in the last 12 months is that the countries that

have been most affected and had the most pressure on exchange rates and

local asset prices have had weaker external positions and higher

inflation. This is reflecting the build`up of vulnerabilities. What we

have seen in most cases is significant and meaningful policy

responses. In Indonesia, India, Turkey, there have been increases in

interest rates to deal with high inflation, and to reduce and

reorient the economy, perhaps to reduce the external financing

requirement. But in the medium to long term, we still need to see

structural reforms across emerging markets. I'll come to you on the

same topic. Some of these economies do have structural problems. They do

need to have structural reforms. It's not just a case of easy money,

is it? We shouldn't downplay some of the big challenges of growth. No,

most definitely. I think for a long period of time, the quantitative

easing at the Federal Bank has allowed some of these countries to

paper over some of their problems. I'd like to go around and try to

help our viewers to differentiate amongst emerging economies.

Sometimes it does get discussed as a class, but some are doing better

than others in terms of growth, reforms, not having external

vulnerabilities. Francois, which emerging economy do you think is

well positioned going forward? I think Southeast Asia overall will

benefit from the economic activity and have a bit of an edge. People

are investing strongly today in India and Brazil. I wouldn't want to

necessarily give investment advice. I would like to say that Asia, one

thing that has happened, there was a bit of turmoil through January and

fabric, and Asia was less affected. `` February. That reflects the fact

that investors are differentiating. How about you? I think one of the

safest places in Asia for us would be in Korea. We think that's... I

mean, you compare Korea now to back in the 80s. It is a vastly different

situation. I think Korea has almost a safe haven status at the moment.

We're seeing inflows into the bond market from lots of different

countries. There is definitely a big tick there. Strong current account

surplus. Strong central bank etc. If investors were going to put their

money into one market, we think that is a safe one. Things that we are

still concerned about ` India and Indonesia still have a lot to do on

structural reform. But there is a lot of upside potential there. It

would not take much in terms of some positive reforms to really unleash

some very strong growth, particularly in India. So I think

India will be fascinating to watch over the next kind of two or three

months as we see the election unfold and what the potential new

government can deliver. Thank you all very much. All of these show the

economy is finally recovering after the global financial crisis, but is

it sustainable? Over the past few months, we took Talking Business to

people in the US, UK and Hong Kong to find out if the world and British

economy is truly on the mend. After five years of slow growth, the

outlook is starting to look brighter for the global economy. Nowhere more

so than Britain. This year, the economy will finally recover to the

size it was before the crash. And believe it or not, the growth rate

is even outpacing that of other rich countries. You can't miss our saying

it, forecasters are forecasting it. But when will it feel like a

recovery to us? YELLING.

Memories of the crash are still fresh. Unemployment remains high.

Price rises have squeezed our incomes, and our pay isn't keeping

up. It's a similar picture in America,

where the housing crash set off the global financial crisis. Small towns

like Crisfield, Maryland, have been in an economic deepfreeze. I met

with the mayor, PJ Purnell, and asked him how the town was faring.

There was a joke we used to tell around here ` if we had a

depression, it would take us ten years before we knew it because we'd

been depressed for so long. CHUCKLES. It's small towns like this

one the US central bank, the Federal Reserve, must help. Its head hands

over a tough task to the new federation chair, Janet Yellen. Boom

turned to bust, and to support the recovery, he flooded the economy

with cheap cash for five years and kept rates low.

Consuming based on borrowing is what got us into a mess before. Now in

the UK, we are borrowing even more. In fact, household debt is at a

record high, even higher than before the crash.

It's because five years ago, interest rates were slashed to a

smidgen above zero percent to support the recovery. The problem is

previously, when rates were low, cheap credit also helped fuel a

housing boom that eventually went bust.

PHONE RINGS. With rates now at the lowest that

they have ever been, is it creating another housing bubble? A house like

that at $3 million... I met the editor of Money Week, who tells me

that her readers are most concerned about the housing market. It doesn't

sound like the recovery is being driven by sustainable drivers. At

the moment, it would be very hard to argue this is a sustainable

long`term recovery. Three quarters of the growth over the last couple

of years has clearly come from financial services, and the rest

from housing. This is taking us back to the mistakes we made before,

relying on two sectors to drive everything. We need more

manufacturing, we need exports, we need a broader spread of sectors

driving things, and also things that aren't purely driven by very low

interest rates. You have to remember that the housing market is almost

entirely driven by the price of money, which is interest rates. One

day that has to rise. Is it the right kind of recovery? When rates

go up, debt could become unsustainable, while relying on debt

to grow could just result in another crisis. What is the alternative? How

well can a country grow without relying on borrowing?

ORIENTAL MUSIC. Japan is a country that has been

through it. It no longer grows via debt after its housing market

crashed. And it's been stagnant ever since.

I went along to see the economist who wrote the definitive book on

Japan, and asked Richard Koo why growth has not returned. Japan

doesn't seem like it has come through it, even though as you say,

the bubble burst 20 years ago. The trauma with debt, which I think

Europe will face soon, maybe the UK and US once the balance sheets are

repaired, that's when you realise people are still not borrowing

money. This is a very difficult problem to get hold of, because it's

a psychological problem. If it is a mechanical problem, you do this, and

then something will happen. But it's a psychological problem. Until you

get over the trauma, you have to keep on trying different measures

until you get over the trauma. How did the US get over the trauma after

the great depression? It took them a long time. It took 30 years,

until1959, for interest rates to return to the average of the 1920s.

The great depression started in 1929. It was 1959 when interest

rates finally returned to 4%. Both at the short and long end. It took

that long. Due to being traumatised by debt,

Japan's growth has been slow. It's because without relying on debt,

what you spend depends on what you earn. And that is not helped by an

ageing population, where there are more pensioners than young people in

work. This is what the West worries about ` lower demand and permanently

slower growth. If Japan can reverse its stagnation, then there is hope

for the UK and US, who are facing tepid recovery five years after

their banking crises. If Japan can't, then it's a glimpse of the

future of other rich countries who have the same ageing population but

are just a few years behind Japan. The government aims to squeeze more

out of workers, like these in Tokyo's fish market. If they are

more productive, then their bosses will pay them more, and the recovery

would be on a sounder footing. It's not just the developed

economies. China's population is also shrinking. So it's not an easy

choice anywhere. Growth via debt may ultimately be unsustainable. But the

alternative could be slower growth than what we're used to. The global

and British economy will be recovered this year, although it may

be some time yet before it feels like it. But importantly, growth has

returned, and tomorrow looks more promising than today.

The global economy is recovering. Actions continue to have a big

impact, and emerging economies are in the spotlight. There are

parallels between the last big crisis in Asia and now. Countries

like Turkey, they will hope that investors continue to have faith in

their growth potential, which could help them weather the current

concerns that are hurting investor confidence. That's all we have time

for. Check out our website, and me on Twitter. Join us next time for

more Talking Business with me, Linda Yueh.

Reports of a fuel hail showers today. Area is cold enough for

winter nears certainly. We will find