How much worse will it get?



20th Septermber, 2001.

With rich countries reeling, emerging economies can do little but hold tight and hope. Their problems may vary, but last week's attacks will harm all of them in one way or another: whether through rising bond yields, falling exports, or more jittery visitors and investors. The saving grace for some might be shifting geopolitics, which could bring aid and lower debt burdens to America's new allies.

Debt worries have become starker. Investors were already demanding stiff premiums to buy emerging-market bonds. Those premiums have now risen again (see chart). Yields on Argentine government bonds jumped this week to more than 16 percentage points above those on American Treasuries. That puts them back where they were in early August, before the IMF stepped in with its $8 billion rescue plan. The setback is rattling Argentina's neighbours. Brazil may have joined it in recession in the third quarter; and Mexico, already in recession, depends heavily on American demand.

Since a currency board pegs Argentina's peso to the dollar, it could yet benefit if the greenback continues to slide. Moreover, none of the governments of the three biggest Latin American economies will need much new finance for the rest of the year. But if investors do not regain an appetite for risk by next year, Argentina could yet be forced to seek another bail-out, and Brazil could face a crunch. The IMF's boss, Horst Köhler, says that "It is premature to announce big new programmes."

Although high debt burdens abound in other regions as well, weak export demand poses an even bigger threat to many emerging economies—especially in Asia. America's slowdown began with a steep drop in technology investment, which was already hurting Asia's export-driven economies. Singapore's non-oil domestic exports fell in August by 30% compared with a year earlier, the biggest drop ever. South Korea, Malaysia, the Philippines and Taiwan have all seen demand evaporate. Now the region faces fewer air passengers, a blow to countries such as Thailand that rely heavily on tourist revenues.

Along with fewer capital flows and exports, two other factors will affect emerging markets, although in different ways. One is the price of commodities, especially oil. Always a worry in bellicose times, the outlook for oil prices is even murkier this time around. Several Gulf states promise to release oil reserves to prevent a supply squeeze; and slumping demand worldwide (especially for air travel, which accounts for around a tenth of America's oil consumption) could also hold oil prices in check. Yet the initial spike in oil prices following the attacks will still worry many developing countries, since energy accounts for a bigger share of their cost base than it does in rich countries.

Another issue is what attitude official creditors take to troubled Muslim countries. Two to watch, besides Pakistan, are Indonesia and Turkey, a pair of moderate Muslim countries with secular governments. On September 17th Kemal Dervis, Turkey's economics minister, declared: "Western allies should consider the cost that Turkey will have to bear." Mr Köhler responds tartly: "It is premature to hear from newspapers that Mr Dervis wants more money from the Fund."

On September 19th, Indonesia's president, Megawati Sukarnoputri, was in Washington on a trip scheduled before the attacks. Although she faces pressure from Islamists at home, Miss Megawati offered support to America. That may help her country to reschedule debts with Paris Club creditors. Yet however much help western governments give to moderate Muslim countries, private investors may undo it as they head for the exit.