Emerging - 25 April 2018
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    The IMF reports published in mid-April insist once again on the external financial vulnerability and indebtedness of the emerging and developing countries (EMDCs). The potential risks are highly focused on the low-income countries (LICs), especially the commodity exporters. These countries benefited from a financial windfall, but did not improve their macroeconomic fundamentals. Of the large emerging economies, Argentina, Egypt and South Africa show similar weaknesses to those of the LICs. The reforms launched in the first two countries are encouraging, but further efforts are still needed. In certain respects, South Africa has made the most progress, but the hardest part is yet to come.
    Despite the current economic recovery and a persistently favourable international environment, it is still premature to hope for sustainable fiscal consolidation. The errors of fiscal policy in past years have left their mark in the form of deteriorated public finances. The new administration that will take power in January 2019 will face the formidable task of meeting high social expectations while laying down fiscal targets that reassure investors. Structural reforms will have to be reintroduced, such as the pension reform that was swept under the carpet by the Termer administration. Without structural reforms, Brazil’s public finance trajectory could become unsustainable in the medium to long term.
    Russia consolidated its macroeconomic fundamentals in 2017. The economy swung into growth of 1.5% after contracting 0.2% in 2016. The fiscal deficit narrowed sharply to 1.4% of GDP thanks not only to higher oil and gas revenues but also to spending cutbacks. The central bank has demonstrated its capacity to face up to rising credit risks and troubled banks. The creation of a “bad bank” should help clean up the banking sector even further. Despite persistently strong headwinds that are preventing growth from accelerating, the rating agency Standard & Poor’s has upgraded Russia’s sovereign rating to BBB-. However, new US sanctions against oligarchs should weigh on economic growth.
    On the positive side, growth is accelerating rapidly and should return to levels close to the potential growth rate as of fiscal year 2018/19. Private investment finally seems to be entering a sustainable recovery. As part of a bank recapitalisation plan, public banks, whose asset quality has deteriorated further, received an injection of nearly USD 14 bn in March, which should help ease the pressures on the most fragile banks and bolster the rebound in investment. On the negative side, the government has taken a pause from the consolidation of public finances. The current account deficit has widened slightly, reflecting a deterioration in the terms of trade and a decline in export market shares.
    Trade tensions between China and the US are growing. China continues to enjoy a very strong external financial position, and exports to the US account for only 4% of its GDP. Therefore, any implementation of tariff hikes by the US should have a moderate direct impact on China’s macroeconomic performance. However, protectionist measures could dampen its export growth and constrain the industry’s efforts to climb the value chain, whereas China is starting to see a slight loss of its world market share. Moreover, weaker-than-expected growth in exports and GDP could shake the determination of the authorities to slow the rise in domestic debt.
    The situation improved in 2017: the election of President Moon Jae-In marked the end of the political crisis, diplomatic relations have calmed down and GDP growth has bounced back. The outlook is good in the short term but there are still a number of weaknesses. First, the lack of parliamentary majority could make it hard for the government to implement its proposed reforms. Secondly, maintaining a normal relationship with the United States and China while fending off the North Korean threat will be a major challenge. Lastly, although South Korea’s external financial position is robust, the economy still relies substantially on its export sector, which is exposed to the ups and downs of world trade and the rising tide of protectionism.
    Poland’s economic indicators are excellent. Economic growth is the strongest since 2011. Consumption is bolstered by real wage increases and new social transfer programmes. Investment is accelerating thanks to the inflow of EU structural funds and an upturn in credit. The fiscal deficit is the lowest since 1995. Although the economy is operating at full employment, inflation is still mild and below the central bank’s target. Lastly, a compromise could be taking shape on the thorny issue of judicial reform, which has escalated tensions between Poland’s leaders and Brussels since 2016.
    Argentina continued to report robust economic growth in H2 2017, and it clearly maintained this pace in Q1 2018. From the demand standpoint, economic growth should be somewhat better balanced than it was last year thanks to an upturn in exports. However, we can already see signs of overheating and tensions: domestic lending has increased sharply in real terms, the trade deficit has widened, and above all, inflationary pressures have picked up. For the time being, there is nothing alarming about the underlying savings-investment imbalance, notably because fiscal consolidation targets have been met. Yet the authorities are faced with a monetary policy dilemma that is typical of an emerging economy.
    After the Egyptian pound’s floatation in November 2016, the Central Bank of Egypt (CBE) drastically tightened its monetary policy. Inflation has fallen regularly since Q3 2017, and should meet the central bank’s target. Money supply is growing at a relatively fast pace, bolstered by capital inflows. Maintaining interest rates at a high level is placing a major strain on lending growth, and the monetary easing that began in 2018 will continue gradually. The ongoing decline in inflation is still vulnerable to higher energy prices, and external financing constraints are still high.
    In a less buoyant regional environment and at a time of fiscal consolidation, economic growth has remained positive even though it slowed in 2017. Thanks to a mild upturn in oil prices and fiscal stimulus in 2018, the economy should gradually return to more robust growth, despite some persistent geopolitical and economic uncertainties. The country’s fiscal position is still precarious, but the government’s solvency is solid. In the medium term, the public sector’s external debt should continue to swell. The Emirates benefit from favourable financing conditions, which will facilitate ongoing efforts to diversify the economy.
    The year 2017 ended with record high twin deficits, which brought the exchange rate and inflation under fierce pressure. Strengthening macroeconomic stability will be hard to achieve. The authorities have very little manoeuvring room. Foreign exchange reserves have fallen below the threshold of three months of imports. The central bank has tightened monetary policy at the risk of increasing the squeeze on bank liquidity, but the impact on inflation will remain small as long as the dinar continues to depreciate. Fiscal consolidation also promises to be a difficult process. Between social pressures, conditions imposed by the IMF and a high public debt, the government has no other option but to reduce the fiscal deficit.
    Cyril Ramaphosa became South Africa’s new President in February 2018, which created a positive confidence shock. The formation of a new government, the presentation of the 2018-2019 budget and the announcement of structural reforms ended a long period of political uncertainty, restored investor confidence, strengthened the rand and paved the way for improvements in public finances. In the short term, renewed confidence should boost economic growth. If the recovery is to extend into the medium term, however, the country must successfully introduce major structural reforms that are essential for raising the potential growth rate.  The new administration, and the ones to follow, face a daunting challenge.
    In the midst of an economic transformation, Ethiopia is the fastest growing country in Sub-Saharan Africa, thanks to major public infrastructure investments. But this robust activity hides major macroeconomic imbalances and the vulnerability of the country to fluctuating weather conditions and commodity prices. Low foreign exchange reserves and high current account deficits remain a major source of concern despite the birr’s recent devaluation against the dollar. Above all, an increasingly tense political climate could slow the country’s economic development.
    Emerging - 30 January 2018
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    In emerging countries as a whole, economic growth has slowed since last summer but is expected to strengthen over the next two years if the global environment remains supportive and the US economy decelerates smoothly in 2019. In the medium term, there is a large consensus on the fact that growth in emerging and developing economies as a whole would be capped at around 5% per year if total factor productivity does not reaccelerate. The rebalancing of China’s economy, the necessity for this country to contain debt and to reduce its carbon footprint imply not only a lasting slowdown in economic growth, but also growth that is less fossil-fuel intensive. Oil-exporting countries will be the most affected by this change in China’s growth regime.
    Brazil’s economy expanded for the third consecutive quarter in Q3 2017 after eight quarters of recession. Our scenario continues to favour a gradual rebound in activity in 2018, buoyed by domestic and global demand. Inflation is under control and monetary easing is winding down. Yet with reforms on hold and elections wrapped in uncertainty, the financial markets may be in for a rough ride in the months ahead. Despite job market improvements in 2017, the economic and political crisis has left deep social and psychological scars that could raise the spectre of a radical election outcome, jeopardising what is already a challenging macroeconomic and fiscal consolidation in 2019.
    Economic growth slowed in the third quarter and all the indicators suggest that this slowdown continued in the final quarter. The economy is still driven by domestic demand, whilst investment has stalled, despite more favourable monetary conditions. The sharp fall in inflationary pressures (reducing inflation below the central bank’s target) has allowed the monetary authorities to cut policy interest rates by 225 basis points. The government continues to focus on the control of public spending in order to reduce its deficit and rebuild its sovereign wealth fund. It hopes to use this fund to uncouple its spending from oil revenue from 2019 onwards
    Economic growth rebounded slightly in India in the second quarter of fiscal year 2017/18. Third-quarter indicators confirmed this recovery, which is driven by industry’s dynamic momentum. In contrast, household consumption slowed and private investment is struggling to pick up again, despite a more favourable institutional and monetary environment than in the year-earlier period. Moreover, with rising inflationary pressures and the risk of budget overruns, the central bank might decide to tighten monetary policy. Despite the economic slowdown and growing social tensions, the NDA, the ruling coalition party, could win a majority in Parliament’s upper house before the 2019 general elections.
    China reported economic growth of 6.9% in 2017, up from 6.7% in 2016, according to the figures released on January 18th. The impact of policy stimulus measures on domestic demand and then the rebound in exports contributed to this slight upturn. However, the slowdown trend at work since 2010 started to resume again in H2 2017. It is expected to extend into 2018 as a consequence of structural factors and tighter domestic credit conditions. Getting “better quality” economic growth, attenuating financial risks and reducing corporate debt must remain the top priorities of the authorities. Yet there will continue to be uncertainty for quite some time over their determination to make the economy less dependent on credit at the price of slower growth.
    Vietnam’s economy is growing very rapidly, driven by booming manufacturing exports and strong domestic demand, which is supported by the rise in revenue and an expansionist policy mix. This dynamic momentum should continue in 2018-19. At the same time, economic growth could dip slightly if the government sticks to its fiscal adjustment plan and the central bank adopts a more cautious monetary policy to contain the surge in domestic debt. These actions seem unavoidable if Vietnam is to maintain macroeconomic stability and continue to improve the health of its banking sector.
    Bank lending to the private sector has finally picked up. The financial crisis, that lasted eight years, is definitely behind. Bank balance sheets have been cleaned up. The quality of assets continues to improve. Lending is boosting the economy, which has accelerated strongly after the slowdown of 2016. Investment growth exceeds 20% thanks to the support of European structural funds. Wage growth is fuelling consumption. Yet labour market and wage pressures, rising real estate prices and the recent increase in foreign funding of banks are all signalling the risk of overheating and must be monitored.
    Sebastian Piñera, of the centre-right party, won last December’s presidential election and will replace Michelle Bachelet in March. The latter’s term has been marked by a number of economic and social reforms coupled with a growth slowdown and slight deterioration in macroeconomic fundamentals. The new President’s aim is to reverse this decline by giving priority to rebuilding public finances and encouraging investment. However, his party’s weak standing in Parliament, and the lack of any ‘natural’ coalition, will force the government into numerous compromises. It therefore seems unlikely that we will see any radical change in Chile’s economic policy in the short term.
    Growth slowed in 2017 because of El Niño and political instability, but the outlook for 2018 is better. Growth should be boosted by the mining sector and the government stimulus plan, while the country’s solid macroeconomic fundamentals should remain intact. However, the political crisis has not been resolved. Tension has increased late 2016, when a corruption scandal broke out in connection with Brazilian company Odebrecht. All political parties have been tainted by the affair and the President, who has been directly implicated, looks increasingly vulnerable.
    Lifted by an expansionist fiscal policy and a buoyant international environment, GDP growth could approach 7% in 2017. Signs of overheating have already appeared. Robust domestic demand, the Turkish lira’s depreciation amidst (geo)political tensions, and the rebound in oil prices have fuelled a sharp upturn in inflation and a wider current account deficit. The economic slowdown that seems to be taking shape in 2018 would be welcome. Despite inflation’s inertia and the risk of currency depreciation in the face of market sentiment, a better coordinated policy mix – with a more neutral fiscal policy and a persistently relatively restrictive monetary policy – should lead to slight disinflation.
    The main objective of the Bank of Israel, the country’s central bank, is to maintain price stability. In the short term, inflation should remain well within the central bank’s target range. As a result, the authorities should be able to maintain an accommodating monetary policy. Repeated current account surpluses have fuelled the shekel’s appreciation, to the detriment of export market shares. The central bank’s foreign currency purchasing policy has limited the shekel’s appreciation, but not enough based on recent trends. In the short term, divergent interest rate trends relative to the United States should help stabilise the shekel, but in the medium term, the high technology sector and potential natural gas exports will continue to put upward pressure on the shekel.
    Côte d’Ivoire has had to deal with a number of shocks, both domestic and external, but its economy has so far proven resilient. Growth remained firm at 7.8% in 2017 and the outlook, according to the IMF, is still bright for at least the next three years. However, sources of weakness abound, including the sharply lower cocoa prices and deteriorating public finances. There is also the risk of further socio-political tensions ahead of elections in 2020 and 2021.
    The Angola political transition is followed by a lot of expectations albeit remaining full of unknown. The new president will face several challenges in a context of dearth of hard currency. The country’s growth outlook remains constrained despite higher oil prices, due to lack of investment and persistent fx shortage. In order to preserve its foreign reserves, the BNA was obliged to abandon the kwanza peg to the US dollar, while maintaining capital controls in place. But the kwanza still remains overvalued despite the recent depreciation, which is fueling inflationary pressures. The weak banking sector is under restructuring but bad loans are piling up.

On the Same Theme

Between comfort and unease 4/16/2018
High confidence levels, a global economic upswing, cautious central banks, sustained job creation and companies’ stepped up investments: enough reasons to feel comfortable when assessing the outlook for world economic growth. Yet a feeling of unease has been on the rise in recent weeks. The softening of sentiment indicators confronts us with the question of what happens after the peak. Is the flattening of the yield curve in the US a harbinger of bad weather to come? Should the share price decline of certain tech companies be read with the experience of TMT stocks in 2000 in mind? Will US inflation end up overshooting the Fed’s objective? And last but not least, to what level will the trade disputes escalate?
Tensions flare up 1/25/2018
It looks like 2018 will be a year of strong growth across the globe, with very few countries left behind. In the United States and the eurozone, business climate indicators are close to the peaks last seen in the mid-2000s. Although pressure on production capacity has been rather mild so far, business leaders are beginning to feel it more acutely. Asset prices – both financial and real estate – continue to rise, and some now fear the emergence of bubbles. The time is ripe for the normalisation of monetary policies. The central banks are cautiously pulling out of the government bond market, which is likely to spark an upturn in interest rates. This risks placing a damper on activity as of 2019.
The recovery continues, but… 7/11/2017
A wave of optimism is sweeping the economy, especially in the eurozone, where growth is accelerating and spreading to all member countries. As we enter summer 2017, all economic indicators are looking upbeat, job creations are picking up, and unemployment is declining at a faster pace. The horizon looks bright, with just one exception, China, where a few clouds are forming. Beijing is taking action to curb credit growth again, which is bound to strain activity, notably in the real estate sector. Heavy industry is already showing a few signs of relapsing, and global commodity prices are easing.
Stronger momentum 4/25/2017
Economic indicators are picking up in most of the developed countries. Eurozone growth is more robust, at an annualised rate of nearly 2% in first-quarter 2017. The rebound is also better distributed, as the economic cycles of the 19 eurozone member countries are tending to move more in sync. The United States reported an upturn in oil and shale gas- related activities, and corporate investment in this sector probably rebounded at the beginning of the year. Inflation rebounds, approaching or overshooting the official 2% target. The central banks keep calm, however.
Change of scenery 1/24/2017
Donald Trump’s election as president of the United States opens a vast range of possibilities, including a possible surge in activity in the short-term. Consequently, we are raising our outlook for US growth, inflation and interest rates for the horizon 2017 and 2018. Upcoming tax cuts – the size of which remains to be seen – will occur at a time of quasi full employment, which is bound to accentuate wage and price pressures. Inflation is likely to rise above the official 2% target, which would encourage the US Federal Reserve (Fed) to raise its key rates a bit faster. This would boost the dollar, notably against the euro, whose weakness is largely due to the European Central Bank (ECB).

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