Boom Bust Cycles: The Skyscraper Curse in Emerging Markets (and the Philippines)

The New York Times associates the skyscraper curse in Emerging Markets with the prospects of bursting bubbles.

In a city where skyscrapers sprout like weeds, none grew as high as the Sapphire tower in Istanbul.

Today, it stands as a symbol of how far the mighty may fall.

Like a vast majority of new buildings that have blanketed the Istanbul hills in recent years, the Sapphire — at 856 feet it is the tallest in Turkey and among the loftiest in Europe — was built on the back of cheap loans, in dollars, that have flooded Turkey and other fast-growing markets like Brazil, India and South Korea. The money began to flow when the Federal Reserve and other major central banks cut interest rates to the bone in 2009 and cranked up the printing presses in a bid to spur recovery in the United States and other advanced industrial nations.

But now, with expectations mounting that the Federal Reserve, led by its departing chairman Ben S. Bernanke, may soon begin to tighten its monetary spigot, Istanbul’s skyline could well be a harbinger of an emerging-market bust brought on by unpaid loans, weakening currencies, and, eventually, the possible failure of developers and banks.

The artificial boom spurred by easy money had mainly been boosting egos and the ambitions of politicians and more importantly inflates the wallets of the politically connected… (bold mine)

Goldman Sachs is forecasting a dollar-lira rate of 2.2, representing a 15 percent mini-devaluation from the current level of 1.95. “The Turkish economic miracle was built on liquidity and a massive appreciation of the Turkish lira,” said Atilla Yesilada, an economist at Global Source partners in Istanbul, who has lived through Turkey’s previous financial crashes in 1994 and 2001.

These loans — many of them relatively short term — also highlight a recurring characteristic of the emerging-market growth boom: the powerful nexus between ambitious governments eager to promote high-profile investments and politically connected business groups ready to take on such projects.

The Sapphire tower in Turkey is a perfect example in this regard.

The 54-floor tower, which received a ceremonial baptism from Prime Minister Erdogan when it opened in early 2011, is the signature property of the Kiler Group, one of the many construction-themed conglomerates that have achieved extraordinary success since Mr. Erdogan came to power in 2003. Like Mr. Erdogan, whose family comes from the northern Black Sea region, these businessmen hail from Turkey’s conservative Islamist provinces.

Since most people see only the visible, the mushrooming grandiose projects have broadly been misinterpreted as signs of prosperity by the public and by experts who mistakes interpreting statistics as economics.

But all these have been an illusion, as the great leader of Austrian school of economics Ludwig von Mises warned,

Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later it must become apparent that this economic situation is built on sand.

Well, Turkey’s case where central bank easy money policies redistributes wealth in favor of the cronies and the political class are really subsidies that comes at the expense of society. This has been no different than the Philippines. 

The Philippines has its own race to build the tallest skyscraper version which is seen by the mainstream as signs of “this time is different” boom.

Here are the 10 top ten list of tallest completed buildings in the Philippines as compiled by Wikipedia.org

I wrote about the ASEAN skyscraper curse which may herald a regional crisis here.

The ongoing tightening of money, via the bond vigilantes has hardly been due to the Fed’s tapering, but about the unsustainability of the current debt financed bubbles. The continuity of the global bond market rout will expose on the fragilities brought about by massive capital misallocations that would lead to a systemic bust.  

And as anticipated, Emerging markets have been showing the way.