Academic warns of new crisis as world fails to recover
Global financial markets could be wrong as the world economy has still not recovered from the financial crisis in 2008, a foreign academic said yesterday.
"We might be at the beginning of another one right now," said Arturo Bris, director of the International Institute for Management Development’s World Competitiveness Centre.
The US Federal Reserve’s timing for its interest-rate increase and another panic sale in China are still the main concerns for emerging markets in Asia.
"What financial markets are telling us now is that the previous crisis is over, and when you look at the Thai market, it is even better.
"You would have made around 600 per cent in returns if you invested in the Thai stock market only in the beginning of the 1970s, but this trend cannot continue forever," he told the "Thailand Competitiveness Conference" seminar arranged by the Thailand Management Association.
"What we have seen now is an amazing performance of markets and a display of optimism that does not seem to correspond to economic reality," the professor said.
There are three facts in 2015 that are the current signs of concern:
l The global economy has been slowing down since 2007, the year before the US-led financial crisis;
l 57 per cent of world government bonds are yielding less than 1 per cent;
l The US dollar has been strengthening while the United States is still the biggest importer in the world, and that poses a risk to export-driven countries like Thailand.
Only three of 36 advanced economies will grow more in 2015 than in 2007, and they are the United States, Mexico and the United Arab Emirates.
Economies like China and Thailand are going to grow but overall global growth will be way more modest than it was in 2007, when it was about 6 per cent. Today, 3 per cent is the norm.
"The fact that government bonds yield less than 1 per cent also reflects a lack of macroeconomic risks as perceived by markets. You put that together with the fact that economic growth relative to 2007 is not there yet and it is an interesting conundrum, because the question is, what are the markets really saying?" Bris said.
Global asset prices are so high that there is an asset bubble, and what is more worrisome is that in the last few weeks, there were signs that the bubble is coming to an end, in particular the latest slump in Chinese stock markets.
"The massive drop in Chinese asset prices points to a big correction, and as I have always said since two years ago, the next crisis will come from China, and at the very moment that China becomes weak, it is time to be worried," he said.
"The important transmission mechanism that will affect Southeast Asian markets is that China will drive a massive correction in prices.
"And with the potential of higher interest rates in the US, there is going to be a massive problem for companies in Southeast Asia and in Thailand, because the current level of debt we have seen in the SEA corporate sector is resembling the period before the 1997 financial crisis, which means that there could be a massive default from this region going into the future," he said.
Emerging markets are now weaker than they were two years ago during the period when the US was tapering its quantitative easing programme.
The previous and current low-interest-rate environments meant that companies have built up debt to a dangerous position where the strengthening of the US dollar and the expected rise in US rates will worsen the situation for indebted companies in this region.
"What the Chinese government has done in the last week is pure market manipulation, and we know from experience in the past 10 years that this does not work and that it will lead to a very bad outcome in the long run, since it could create panic from a lack of public trust if the government continues to pump money into the market without real growth," Bris said.
