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Global economy: a world of worry

Obama tries to fend off criticism of the QE2. It isn't working.

Southeast Asia: A weakened dollar is roundly feared among Southeast Asia’s emerging economies, which will likely see their currencies grow comparatively more expensive. That’s bad news for a region reliant on exporting goods at competitive prices. Thailand is already panicking over the appreciation of its currency, the baht, which has shot up 12 percent this year against the dollar. Vietnam has devalued its rising currency, the dong, three times this year. Still, Thai Finance Minister Korn Chatikavanij insists Thailand and its neighbors need to start adjusting to their stronger local currencies. As Southeast Asia finds itself increasingly squeezed by decisions in Beijing and Washington, the region should also play a stronger mediation role, he said. “We would like the two economic giants to settle their differences on the exchange rate issue,” Korn told Bangkok’s The Nation newspaper. “I think they understand our predicament.”

A farmer works with a buffalo on a rice field in the northern province of Son La, Vietnam, on July 25, 2010.
(Hoang Dinh Nam/AFP/Getty Images)

The most immediate danger to Southeast Asia is a sudden flood of short-term capital investments from foreign powers, skittish of the weak dollar and seeking better gains in the developing world. Too much investment too soon could rattle these less-mature economies, sending stock, assets and real estate prices soaring and inviting the threat of inflation. Every Southeast Asian currency has strengthened this year and stock markets in Malaysia, Indonesia and the Philippines have hit record highs. What can be done to keep currencies low? The two largest Southeast Asian economies, Indonesia and Thailand, are both openly warning of higher taxes to ward off the influx of foreign investment.

By Patrick Winn in Bangkok

Russia: The Fed’s announcement has failed to solicit wide comment from top officials. President Dmitry Medvedev’s economic adviser, Arkady Dvorkovich, criticized the U.S. for failing to consult with its partners in the G20 ahead of the move, but quickly moved on to praise QE2’s potential effects on Russia. “Capital inflow for Russia now is a plus,” he said. “It may not be a plus for other emerging countries such as Brazil or China where economies are overheated. Our economy is not overheated.”

A man walks in front of the Novokuibyshevsk refinery near the city of Samara, Oct. 28, 2010.
(Nikolay Korchekov/Reuters)

While the ruble had bounced back from its managed 30 percent devaluation in the wake of the crisis, its value has slid in recent months because of concerns about Russia's economic recovery and current account balance, as well as political risks. So while most emerging economies worry about QE2’s effects on their rising currencies, Russia can largely sit back and relax.

What’s more, a weaker dollar tends to lead to higher commodities prices and Russia’s economy relies mainly on exports of oil, gas and metals. And a stronger ruble would decrease the debt burden on banks and oligarchs with foreign creditors, as well as potentially help combat inflation, which has long been a major preoccupation in Russia.

Russia is also relatively safe when it comes to foreign reserves. It holds the world’s third largest, with the total value of its foreign exchange and gold holdings coming in at nearly $500 billion. Of the forex portion, 47 percent is held in dollars — the rest in euros and pound sterling.

By Miriam Elder in Moscow

South America: Brazil has been by far the most vocal critic of the Fed’s plan in all of South America. Finance Minister Guido Mantega raised the specter of a worldwide currency war even before the bond buying was announced. And since then, current President Luiz Inacio Lula da Silva and President-Elect Dilma Rousseff have both criticized the Fed's move, focusing on its likely devaluation of the dollar. Rousseff went so far as to say that the last time world nations took competitive steps to devalue their currency “it ended in World War II.”

Brazil's President Luiz Inacio Lula da Silva shows his hands, dirty with the first extraction of pre-salt oil, at the Petrobras platform, Oct. 28, 2010. (Antonio Scorza/AFP/Getty)

The rhetoric has been muted in Argentina and Chile, where the plan has barely made headlines. Argentina’s finance minister, in Seoul for the meeting of the G20, spoke obliquely of the need to moderate capital inflows and pour more capital into production, as opposed to “speculation.”

Brazil may well have the most to lose. Goldman Sachs ranked Brazil’s real as one of the world’s most overvalued currencies last year, and — despite measures to curb capital inflows — it has continued its surge against the dollar. The U.S.’s quantitative easing is likely to keep pushing investors toward Brazil, which officials worry could create a bubble. The Chilean government is also worried about its currency: the Chilean peso has gained more than 10 percent against the dollar in recent months. Argentina, by contrast, seems relatively less vulnerable. Their currency fell this year helping create an export boom, mainly of agricultural commodities like soybeans.

By Solana Pyne in Rio

South Africa: Finance Minister Pravin Gordhan reacted angrily to the U.S. "unilateral" move, warning of “devastating consequences” to the developing world, which he said will "bear the brunt of the U.S. decision to open its flood gates.”

A shopkeeper receives payment for a bag of maize meal at his shop in Soweto south west of Johannesburg, March 23, 2008. (Siphiwe Sibeko/Reuters)

South Africa’s currency has been steadily strengthening, and the latest round of qualitative easing by the United States may push it up further. The rand has gained 39 percent against the dollar since 2009, and it was boosted again by speculation that QE2 would fuel the inflow of foreign funds. Gordhan said that if the South African rand continues to strengthen, lifted by increased capital inflows as a result of QE2, there could be substantial job losses — a key concern for a country with a 25 percent unemployment rate.

South Africa is the biggest economy in Africa, but the strong rand is making its products more costly, hurting its export competitiveness. The high price of minerals, especially gold which surged this week to a record high, have also lifted the rand.

The challenge for South Africa is to reduce foreign inflows from speculators seeking higher-yielding assets, without discouraging future foreign capital, much needed for growth in South Africa, a country with a low level of domestic savings and high unemployment and poverty. So far South Africa has responded by increasing foreign reserves and lowering interest rates, but this hasn’t had much effect. If the G20 meeting fails to deliver a global solution, South Africa may look at domestic options including taxes on short-term capital inflows.

By Erin Conway-Smith in Johannesburg

Editor's note: This story was updated to add the day's news from the G20 summit in Seoul.

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