Risks to the growth of emerging economies will depend on fiscal adjustment in the developed world, said Philip Poole, global head of macro and investment strategy at HSBC.
Though the sovereign debt crisis in Europe is no longer as pressing as before, high levels of debt and the “deterioration of fiscal performance” in the eurozone, US and UK will linger beyond the “next two quarters or even the next two years”.
Since emerging economies depend largely on net exports to the developed markets for economic development, “the deleveraging that we need to see happening in the developed world will constrain growth and force changes in the drivers of growth in the emerging world”, said Mr. Poole to The Business Times.
“Emerging economies need to therefore be more responsible for generating their own demand than they have been in the last 10 to 15 years.”
“It’s much more difficult for governments to change private sector behaviour and change consumption patterns than it is to increase domestic consumption through government spending because they can influence the latter directly but not the former,” he added.
Emerging economies have already begun addressing issues of soft domestic demand, noted Mr. Poole. China, for example, has shifted its spending from infrastructure to education and healthcare – a good starting measure to create the needed social safety nets to “drive down precautionary savings and create the scope for consumption”.
While some economists and analysts have been concerned of Chinese banks’ non-performing loans to local government investments, Mr. Poole does not think that a sub-prime mortgage crisis will emerge in the country.
“There has always been risk in the banking sector in China, but it’s not a big systemic risk, because of the relatively low levels of leverage and the large levels of reserves in the system,” he said.