Worldwide: Emerging Markets Update

It isn't the financial crisis of 1997 by any means, but the economies in Asia are struggling—again.

The Japanese yen, Indian rupee, and the Indonesian rupiah have depreciated 30 percent on average in the last 24 months. Growth rates for India and Indonesia that were around 9 percent and 7 percent respectively two years ago have dropped off significantly, with India now at half that rate. Two of the once mighty BRIC economies (Brazil, Russia, India, and China) are now included as part of a group of countries (namely Brazil, India, Indonesia, South Africa, and Turkey) that have been dubbed by Morgan Stanley as the "Fragile Five."

This Commentary considers the implications of slowing growth, currency depreciation, debt exposure, and capital egress for emerging markets, in particular India, together with the connected legal issues.

Taper Tantrums

In late May this year, the U.S. Federal Reserve (the "Fed") foreshadowed plans to taper its US$85 billion per month asset purchases, possibly from as early as October. While there have been fluctuations, the general market reaction was increased long-term interest rates in the U.S. and an egress of capital from developing countries, such as Brazil, India, and Indonesia. However, on September 18, Fed Chairman Ben Bernanke surprised commentators and markets by announcing that tapering of the Fed stimulus would not start yet because the economy was seen as too fragile to withdraw its support.

The Brazilian real, the Indian rupee, and the Indonesian rupiah have all fallen significantly against the U.S. dollar in recent months, and yields on bonds in emerging countries have jumped significantly. However, emerging markets did receive a boost from the news that tapering by the Fed will not commence in the near future. Nevertheless, the Fed's tighter monetary controls and a rising U.S. dollar predicated Latin America's crisis in the early 1980s and Asia's crisis in the 1990s, and there are suggestions that similar difficulties may still develop again. The machinations over Fed tapering have revealed some fundamental concerns regarding the status of certain emerging market economies, and these will not necessarily be resolved by the recent fillip provided by its postponement (especially as the delay was due to concerns regarding economic fragility).

The Asian currency crisis of the 1990s truly began when Thailand's central bank floated the baht after a run on the currency in July 1997. The decision triggered a financial and economic collapse that spread to other countries in the region, causing growth to plummet and companies to go bankrupt with the only solution being IMF-led bailouts.

The crisis of the late 1990s was exacerbated by a number of factors, including fixed or semi-fixed exchange rates, high domestic interest rates, heavy offshore borrowing, and large deficits. The present circumstances are different, not least because of the way in which Asian countries reacted after the previous crisis. Most Asian economies now have sizeable current account surpluses (including China, South Korea, Taiwan, Thailand, Malaysia, and the Philippines, although both Thailand's and Malaysia's balances have deteriorated recently) and foreign exchange reserves, and the proportion of non-performing loans on banks' balance sheets has generally declined. However, that is not to say all countries are in the same comparatively healthier position or that companies operating or investing in emerging markets are similarly protected.

Looking at India specifically, the country has a substantial deficit, the rupee has dropped by around 30 percent recently, and stock markets have fluctuated dramatically. In particular, the shares of banks with balance sheets suspected to hold a significant proportion of bad debts or with deposit funding shortfalls have fallen sharply. Taking another example, Indonesia is experiencing slowing growth, high inflation, and a substantial deficit.

The deficits of India and Indonesia highlight the fact that in many emerging markets, as in Europe, the availability of "hot" money appears to have covered a multitude of sins. Upcoming elections in both countries also mean that the ability to address these problems may be limited as policy makers try to avoid losing electoral capital by implementing policies to address economic indiscipline and structural reforms.

Debt Dependency

There are serious concerns that emerging market economies have been too dependent on debt. Such concerns are also mirrored at the company level, particularly in countries where companies, buoyed by strong domestic performance, have embarked on foreign investments or capital raisings.

The problems of company indebtedness are seen acutely in India. A significant number of India's industrial conglomerates are heavily in debt and suffering the ramifications of ambitious capital projects (often stalled in regulatory and bureaucratic mires). The fact that such debt is very often in U.S. dollars makes the plight of such businesses worse given India's depreciating currency. Indeed, recent research from Credit Suisse shows that 10 of India's most heavily indebted industrial conglomerates (including Reliance, Vedanta, and Essar) had combined debts in excess of US$100 billion at the end of the last financial year.

It is in this context that, in August, the Reserve Bank of India restricted overseas investment by companies to 100 percent of their net worth (down from 400 percent). This move made foreign investors fearful that their own funds could be trapped (as occurred in Malaysia when capital controls were imposed following the crisis of the late 1990s) and caused further capital egress from India. Furthermore, such restrictions have been mirrored for individuals as the level of permitted external remittances made by Indian residents was recently reduced to US$75,000 from US$200,000.

In an environment of reducing growth and returns, firms may struggle to meet their obligations, especially those in foreign currencies. The possibility of increased insolvencies for businesses will be a major concern for India's state-owned banks that already hold a large amount of bad debt. A warning sign for such banks is the rising level of credit default swaps on State Bank of India that reflect a sense of growing risk.

Legal Considerations

The difficult economic circumstances give rise to a number of legal considerations. Currency fluctuations may expose companies to the risk that they may be unable to meet payment obligations. By way of example, this exposure could arise in the context of power supply contracts whereby a contractor or supplier has agreed to provide power at a fixed cost but is subject to flexible and, therefore, increasing input costs owing to currency changes. Other similar exposures may also arise in respect of joint ventures or acquisitions relating to emerging market investments, and in all such scenarios there will be a number of legal issues to address.

For example, firms may need to seek advice in relation to potential insolvencies (either on their own part or on the part of joint venture partners or other counterparties). Furthermore, where a firm's counterparty has reneged on its obligations, firms will need to seek advice on their enforcement rights and dispute resolution options (which may include direct negotiations, mediation, arbitration, or litigation). Alternatively, businesses will require assistance in navigating the legal requirements for terminating agreements and mitigating the related risks.

Issues Relating to Foreign Investment in Emerging Markets. A prime historical example is provided by the disputes relating to foreign investments in Indonesia to generate electric power that were made prior to the Asian currency crisis of the late 1990s. In 1994, Caithness Energy (U.S.) and Tomen (Japan) agreed to develop specific Indonesian geothermal sites, if they proved feasible, to produce electricity. Caithness, Tomen, Florida Power (another U.S. firm joining in 1996), and a local Indonesian partner (Sumarah Daya Sakti) incorporated Karaha Bodas Company ("KBC") to undertake the project. KBC was to deliver and sell the electricity produced to PT PLN (Persero) ("PLN"), the state-owned electricity company, on a take or pay basis at, initially, 8.46 cents (US$) per kwh.

After Indonesia was hit by the currency crisis and as demand projections fell, it became apparent that PLN did not need and could not pay the contracted price for all the power it had committed to take. Furthermore, the fact that the energy sales contract set prices in U.S. dollars meant that the rupiah payments would be around five times the amount contemplated when the contract was agreed. As a result, KBC served notice of arbitration in 1998 seeking the termination of the relevant contracts and damages for actual investments and expected future profits. Eventually, KBC was awarded approximately US$260 million. The present currency worries give rise to concerns that more recent projects may suffer in a similar way.

Considering such issues from another angle, it is not only those entities that owe obligations in stronger foreign currencies that should be concerned by recent developments but also those that are otherwise exposed to the same risk. For instance, foreign investors will be wary of investments exposing them to aborted projects and the possibility of extended dispute resolution and enforcement processes to realize hoped-for returns.

Indeed, terminating agreements for these types of breaches can be a particularly tricky area with many technical legal requirements to be satisfied. Companies that wish to terminate an agreement for a perceived breach by their counterparty should therefore seek initial advice on the subject. It is very likely that there will be formal stipulations relating to default and termination notices and cure periods, which, if not followed, may invalidate, or at least complicate, proper termination. Furthermore, companies should be aware that, if they have previously waived breaches but subsequently wish to terminate on the basis of further similar breaches, their counterparty may seek to argue that termination should be estopped.

Potential Problems Arising from Overseas Investment by Domestic Companies. Indian companies have grown increasingly frustrated by the failures of policymakers to carry out economic and infrastructure reforms over the past decade. For example, businesses in the energy and manufacturing sectors have often made foreign investments to offset unreliable power and water supplies at home (for instance, investments in Malaysia, where power and water are more abundant). Other companies have diversified to offset slowing domestic demand in other industries.

Furthermore, new land acquisition legislation in India may also cause Indian companies to consider making further investments overseas rather than at home. The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Bill 2013, which seeks to replace the Land Acquisition Act 1894, was passed by the Indian parliament at the beginning of September. The new legislation is designed to ensure that people losing land will be adequately compensated and to streamline the existing rather chaotic process, but it is also expected to significantly affect the development of large infrastructure and other industrial projects to the extent that they fall within its scope.

The amount of compensation for land acquisition is now expected to increase by around three to five percent, potentially making industrial projects unviable and raising costs in the overall Indian economy. In addition, the mandatory consent requirements (80 percent of landowners must agree to the acquisition for private projects and 70 percent of landowners for public-private-partnership projects) may also delay the process for land acquisitions and, in turn, the projects. Such legislative changes may not only result in reduced domestic investment but may also limit the future viability of infrastructure projects as the increased input costs, potential consent, and resettlement delays as well as continuing difficulties in monetizing such projects raise the inherent risks beyond acceptable levels.

Such overseas investment has a substantial economic cost for India. Overseas direct investment, including bank guarantees issued to overseas units, was approximately US$20 billion in the first seven months of 2013 (up around 40 percent from the same period in 2012). Foreign investment by Indian firms not only equates to the loss of domestic investment and a heightened dependency on foreign investors in India but also exposes Indian firms making such investments to related currency risks.

Indian companies will often implement foreign investments through the acquisition of established market players in foreign territories and may also choose to create joint ventures with overseas partners. In a cross-border acquisition context, one of the key terms of any transaction will be the purchase price. Commonly, forms of consideration include cash, shares, debt instruments, and/or an element related to future performance known as an earn-out. To the extent that the consideration is variable or payment is staggered, this might give rise to exposure to currency-related risks. Early advice should be sought in respect of such issues, especially in the current climate.

To the extent that a joint venture structure is used, an option agreement may be put in place in respect of shares in the joint venture entity. These provide parties with the right but also possibly the obligation to purchase the shares of another shareholder or vice versa, for example, in the case of disputes. Where the option price is set in a foreign currency (against which the rupee may have depreciated, such as the U.S. dollar), the obligation to purchase shares at a price that is effectively inflated by currency fluctuations may be very burdensome.

Difficulties Relating to Debt. Companies established in countries that have suffered recent currency depreciation (including India) could be hurt by their significant exposure under foreign currency bonds. Indeed, as the domestic currency depreciates, the effective burden for such exposed companies increases.

It is possible to protect against such fluctuations using hedging mechanisms, but not all emerging market companies have been careful to put such measures in place. Morgan Stanley has estimated that approximately half of India's US$225 billion corporate bond exposure is unhedged. Even those companies with the protection of overseas revenues (such as energy and commodity conglomerates) and/or with hedging insurance may suffer from the effects of currency depreciation. Indeed, at the very least, the cost of such insurance is likely to rise considerably. Firms should closely consider their hedging strategies, to the extent these are appropriate, with their professional advisors.

In light of such concerns, there are signs that international investors are growing wary of private sector debt exposure and are moving to protect themselves from potentially vulnerable markets. In the same way as companies and investors, banks are also exposed to currency risk. In India, the state-owned banks have high levels of bad debts, with infrastructure and project loans being particularly perilous, and they are exposed to the failure of their borrowers. In turn, foreign shareholders in such banks suffer exposure to related risks. If necessary, recapitalization of the banks would likely make them more attractive to foreign investors and facilitate more lending to boost any recovery. However, the funding for such recapitalizations would likely need to come, at least in part, from the government, which is already struggling with its own deficit.

That being said, if India has to seek an alternative, such as funding from the IMF, then this could be even worse both for India and other emerging markets given the potential domino effect that could take over in today's interconnected global economy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Matthew J. Skinner
Jayant W. Tambe
In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions