The reversal of fortunes is nearly complete. A decade ago, East Asian economies were frozen. Leading banks and corporations in Thailand, South Korea, and Indonesia were insolvent. Even manufacturers with firm export orders couldn't borrow funds to build goods. The U.S., meanwhile, was swimming in liquidity. Now, the U.S. party is over—and Asia is awash in dollars.
Between the central banks, commercial banks, and investment funds such as Singapore's Temasek Holdings, Asian governments have $2.6 trillion in foreign assets available for investment, according to research firm Global Insight. The Gulf States have hundreds of billions in foreign banks and equities. Russia and Brazil boast hefty reserves and trade surpluses. "The contrast between the U.S. and the developing world is almost a mirror image of the late '90s," says economist Phil Suttle of the Institute for International Finance.
Does that mean boom times in emerging markets? A lot depends on how countries are managing their economies while stockpiling dollars.The big winners appear to be in Asia, where corporations have kept debt in check and banks have largely shunned the risky mortgage-backed paper from the U.S. Despite ill-timed investments in the likes of Morgan Stanley (MS) and Merrill Lynch (MER), government investment funds such as China Investment Corp. and Singapore's Temasek can still buy stakes in U.S. companies at bargain rates once the smoke clears.
TOO MUCH CASH
Beijing's problem recently has been too much foreign cash, which has led to stock speculation and overinvestment. But if a U.S. slowdown hits China's exporters, the nearly $2 trillion in foreign assets Beijing controls leaves plenty of leeway to expand credit. Council on Foreign Relations geoeconomist Brad W. Setser estimates foreign assets in Chinese institutions swelled by $700 billion just this year. "This gives them enormous freedom to stimulate the economy," Setser says.
Mountains of dollars won't guarantee prosperity, though. Many Latin banks and government budgets are in their best shape in decades. "But they ran surpluses at the expense of investment in infrastructure," says Pamela Cox, the World Bank's Latin America vice-president. That has made it hard to expand in industries other than commodities such as oil and copper, where world prices are dropping.
Despite $432 billion in foreign reserves, Russia is in financial crisis due to capital flight and weak banks. Kuwait and the United Arab Emirates are struggling to contain inflation and property bubbles.
Cash-flush regimes may be tempted to shun the U.S. But "emerging markets are too small to absorb much more investment," says Jan Randolph, Global Insight's head of sovereign risk. So the bulk of emerging-market wealth will likely keep flowing to U.S. Treasury notes—including those floated to fix the U.S. financial mess.