A wave of demonstrations in key emerging countries has spooked many bond investors but there are local reasons for each protest and there seems little risk of radical new regimes
There are several factors behind the sharp fall in the price of emerging market debt since its peak in early May.
No doubt all the talk of tapering by America’s Federal Reserve has played an important role. A reduction in liquidity from the US’s central bank could hit emerging economies directly as well as spooking investors.
Concerns have also surfaced about the ability of emerging economies to maintain their strong economic performance of recent years (see graph). A Chinese slowdown in particular could have a global impact.
A final set of factors relates to the wave of protests that has hit some key emerging economies in recent weeks. Brazil, Egypt and Turkey have seen large-scale demonstrations that have played a role in unnerving investors. Although each country has its unique characteristics it is worth looking more closely to see what patterns emerge.
Too often commentators on these events look to historical analogies to explain them. They make comparisons with the wave of protests across Europe in 1848, the demonstrations in 1968, the Eastern European “velvet revolutions” of 1989 and the UK’s poll tax riots of 1990. It would be far better if they examined the recent wave of unrest in contemporary terms rather than rely on dubious parallels with the past.
It is certainly the case that different factors have triggered the protests in different countries. In Brazil it started with bus fares while in Turkey the catalyst was the proposal for a shopping complex in central Istanbul. In Egypt the protests started as a way of complaining about the then government led by the Muslim Brotherhood.
Having said that it is important to distinguish between the immediate trigger for protests and the reason they catch the popular imagination. In Turkey, for instance, it would be wrong to infer from the protests’ origins that the main thrust of subsequent demonstrations was environmental. Turkey has long-standing tensions between the ruling AK Party, which consists of conservatives and moderate Islamists, and more secular citizens.
Egypt was until recently also led by an elected Islamist government although, unlike Turkey, it has never declared itself a secular state. Another difference was the willingness of the Egyptian army to overthrow the elected government. It is possible this could happen at some point in Turkey but there are no signs of it yet.
Islam is clearly not a factor in Brazil. Instead a belief that a corrupt elite is benefiting from spending on the World Cup and Olympic games seems to be an important factor. Plutocrats appear to be enriching themselves as a result of the shift while the living standards of others are being squeezed. Brazil is also a lot larger, in both economic and demographic terms, than the other two as well as more unequal.
Despite these differences – and it would be possible to delve into them in a lot more detail – there are some notable similarities. All of the countries involved are large and important in emerging market terms. Brazil is the “B” in Bric while Turkey plays an important role in the Middle East and Egypt is the most populous Arab country.
The countries all seem to have experienced relatively fast but uneven economic growth. Turkey, for instance, has generally enjoyed sharply rising output in recent years although it suffered reversals in 2001 and again in 2009. Some fear that economic bubbles could also be in the processing of inflating.
Another common feature is the urbanisation of all of these countries including the emergence of huge cities. Although it is notoriously difficult to measure the size of urban areas accurately – since there is substantial room for dispute about where to draw their borders – all of these countries have at least one city that dwarfs London. In Brazil these include Sao Paulo (20 million) and Rio de Janeiro (12 million), in Turkey there is Istanbul (10 million) and in Egypt there is Cairo (nine million). Such figures are important as it indicates that all these countries have moved a long way from dependence on agriculture.
As prosperity has risen a relatively well-educated and affluent section of the young population has emerged. Often the opportunities available to this segment of society are not as plentiful as they would like. Under such circumstances it should not be a surprise that they often constitute a large share of protestors.
However, the discussion of these protests has generally missed one particularly important common element. The character of the demonstrations has in many ways been apolitical. Protestors have reacted against particular actions by the authorities but there are no loud calls for a transition to a fundamentally different type of society.
This depoliticised character of dissent is perhaps most apparent in Egypt. Protestors have generally reacted against what they see as unreasonable rulers, first Hosni Mubarak and then Mohamed Morsi, but they have not questioned the army’s role as a neutral arbiter. In this sense the protests are about personalities more than politics.
From a bond investor’s perspective the lack of politics should be noted. It means that although there is scope for substantial conflict there appears to be no immediate prospect for the emergence of radical regimes in these places.
Daniel Ben-Ami is a writer on economics and finance. His personal website can be found at www.danielbenami.com.