Media release - 18 August 2008 
 

 Media release - 18 August 2008 

Credit crisis lingers and commodity prices lower as political risk in India rises

Australia’s export credit agency EFIC’s August World Risk Developments released today says a moderate slowdown remains likely. 

World Risk Developments August 2008 Highlights

  • International systemic risk contained, but credit crisis lingers
  • International commodity prices down, but not out
  • India – Terrorism adds to political risk
  • Turkey – AK Party reprieve lowers political temperature

Credit Crisis

According to EFIC Chief economist, Roger Donnelly, systemic risk has been contained, but the credit crisis lingers.

 “Continuing buoyant, if slowing, growth among emerging markets, particularly ‘Chindia’, or more broadly the ‘BRICs’, is moderating the world economic slowdown.  But in the other direction, credit losses threaten to spread from US sub-prime mortgages to other markets and economies where reckless lending occurred, posing downside risks for both industrial economies and emerging markets with big external funding needs.”

Commodity prices

Despite the largest single month falls in 28 years, commodity prices remain high relative to their historical trend driven by continued demand from China and India.

“Many analysts see prices remaining ‘stronger for longer’ especially for Australian exporters,” says Donnelly. 

“Burgeoning demand from ‘Chindia’ as those countries engage in commodity-intensive industrialisation and urbanisation and an inelastic supply response at least for some years as resource companies struggle to find new low-cost sources of supply will keep commodity prices high.”

India political risk rises

A spate of bomb blasts in Bangalore and Gujarat have re-focused attention on the complex political, religious and strategic undercurrents affecting India’s economic prospects.  In the short term, according to Donnelly, investors are unlikely to be deterred by the violence but recent events do add to the political risk associated with India. 

 “The longer term reaction is less certain.  If the government can’t stem the violence, foreign investors may start scouting for more secure locations,” says Donnelly. Companies such as IBM, Accenture and Goldman Sachs employ thousands in Bangalore and other cities.

Turkey’s Constitutional Court eases the political tension

Business and investors have hailed a decision by Turkey's Constitutional Court not to ban the ruling AK Party for 'anti-secular activities'.

“Turkey is a country with large external funding needs,” says Donnelly. A decision to ban the AK Party would have thrown Turkish politics into turmoil and jeopardised its access to balance of payments financing. 

But says Donnelly:  “Despite the drop in political temperature, risk remains elevated because of deep-seated divisions between the AK Party and the secularist/nationalist establishment.”