The Brazilian economy has hit a wall. Real GDP contracted in the first quarter and signs of weaknesses are accumulating: investment and exports have retracted, while consumer spending – despite being supported by credit – has slowed down. Business and consumer confidence have been hit by the slow progress of the reform agenda as well as the government’s increasingly tarnished image. In a context marked by fears of recession, growth forecasts have been largely adjusted downwards. On a positive note, the Lower House approved the main text of the pension reform bill after a first round of voting. A final and second vote to approve amendments to the bill is expected to take place shortly. The bill is due for analysis in the Senate by August.
Economic growth slowed sharply in the first 5 months of the year and the central bank has revised downward its forecasts. To boost activity, the monetary authorities lowered their key rates by 25bp in June at a time when inflationary pressures had eased slightly. The government also took major steps to stimulate the potential growth rate, which has declined constantly since 2008-09. Despite the increase in public spending, the government continued to generate a big fiscal surplus in the first 5 months of the year. Although these measures are a step in the right direction, they must be accompanied by the state’s disengagement from the economy and better corporate governance to generate a substantial increase in potential growth.
Mired in stagflation, the Turkish economy might have to forego its “stop and go” tradition given the need for deleveraging in the private sector and a less favourable international environment. Disinflation continues but remains vulnerable to bouts of forex volatility. (Geo)political risks and the dollarization of the economy make monetary policy management more complex. A swelling public deficit and uncertainty about the direction of fiscal policy are sources of concern. Reducing the current account deficit will not suffice to reassure investors since capital inflows and foreign exchange reserves are both diminishing faced with the country’s substantial external refinancing needs.
Counter powers and institutional watchdogs have proved to be quite effective in stemming the government’s business-unfriendly measures and attempts to undermine the Rule of Law. This may pave the way for a more pragmatic and predictable policy stance. Meanwhile, owing to weaker external conditions, a soft landing of the economy is expected in the coming quarters whereas domestic demand should remain dynamic. Despite the lower risk of overheating, macro imbalances must be monitored: inflationary pressure is lingering and the twin deficits may widen even further. The banking system has recovered from times of trouble, and the softening of the bank tax (and other “emergency taxes”) provided significant relief for the business community.
Mexico’s economic growth prospects are deteriorating: slower growth in the US, fiscal austerity and low investment levels have dragged down growth in the last two quarters. The slowdown is likely to continue, despite support from consumer spending. The threat of trade tensions with the United States and the lack of clarity in Mexico’s economic policy, as shown by the troubled implementation of its energy reforms, are adversely affecting the investment outlook. The increase in Mexico’s medium-term sovereign risk has been recognised by Fitch, which has cut its sovereign credit rating. Fortunately, external vulnerability is limited.
Economic growth slowed in Q1 2019, but for the moment the economy seems to be fairly resilient to the decline in world trade. In the short term, dynamic household consumption, stimulated by measures to boost purchasing power, will continue to offset the slowdown in exports. In the longer term, real GDP growth is hardly expected to exceed 5-5.5%. After his recent reelection, it is vital for President Widodo to take advantage of his clear cut victory to push through the necessary reforms to stimulate foreign investment and foster growth, while reducing the country’s dependence on volatile capital flows. Foreign direct investment has declined for the past six quarters and no longer suffices to cover a swelling current account deficit.
Given its dependence on foreign trade and its integration within Asian supply chains, the Vietnamese economy is squeezed by the weakening in global demand and Sino-American trade tensions. Real GDP, exports and industry have all registered a growth slowdown in recent months. Yet Vietnam could also benefit from China’s troubles: in the short term, it could benefit from some carry-over effects if merchandise is shipped directly to US businesses seeking to avoid the new tariff barriers. Vietnam could also benefit from new foreign direct investment projects of international groups seeking to manufacture outside of China. Moreover, Vietnam’s external financial position is also expected to continue to improve.
The Saudi economy has recorded weak performances over the past three years. It has had to deal with the combined impact of reforms undertaken as part of the Vision 2030 plan and rather unfavourable oil market conditions, which have eroded public finances. Non-oil GDP growth has been slowing since 2016 due to sluggish domestic demand. Activity should pick up gradually in 2019 thanks to fiscal stimulus efforts and the steady normalisation of the labour market. Under this environment, fiscal deficits are accumulating, but the government’s solvency is still solid.
Economic growth has slowed for the past three years. OPEC+’s restrictive policy is curbing oil production. Non-oil GDP has been hit by sluggish tourist traffic, which has eroded domestic demand, notably in Dubai. In the short term, in the midst of a slowdown in world trade, the only factor that is boosting growth is the current preparations for Expo 2020. In this environment, consumer price inflation is negative, pulled down by the persistent slump in house prices. Fiscal policy remains cautious and offers little support for growth.
The Tunisian economy has begun to show signs of stabilisation. Inflation is falling, exchange rate pressures are easing and the government finally managed to uphold its commitment to fiscal consolidation in 2018. Yet the country’s prospects are still very fragile. Although the support of international donors is reassuring, the persistence of major external imbalances exposes the economy to shocks. Bank liquidity is already under pressure due to the tightening of monetary policy, and the high level of public debt calls for further reduction in budget deficits that could be hard to achieve. Above all, economic growth is still sluggish.
After tightening in Q4-2018, external financing conditions in the emerging countries have eased since the beginning of the year. At the same time, there was a net upturn in non-resident portfolio investments, which shows that investors have a greater appetite for risk after the US Fed announced that it would pursue a cautious and flexible monetary tightening policy, and would pause the reduction of the Fed’s balance sheet. The Institute of International Finance (IIF) even concluded that investors were overexposed to the emerging markets. According to the IMF, so-called passive fund management (ETF and other indexed funds) has either reached critical mass or at least has sufficient leverage to trigger financial market instability.
Industrial enterprises were squeezed by tighter financing conditions in 2017 and early 2018, and then hit by a slowdown in production and revenue growth last year. These troubles have contributed to the deterioration of their payment capacity, resulting in a surge in defaults in the local bond market. The increase in defaults is an indicator of the financial fragility of corporates, and also seems to be going hand-in-hand with greater differentiation of credit risks by lenders and a certain clean-up of the financial sector. These trends are expected to continue in the short term as the authorities conduct a targeted easing of monetary policy. However, the persistence of the debt excess in the corporate sector will maintain high credit risks in the medium term.
After nearly five years in power, Narendra Modi’s track record is generally positive, even though the last year of his mandate was tough, with a slowdown in growth in Q3-2018/19. The main growth engines are household consumption, and more recently, private investment, thanks to a healthier corporate financial situation, with the exception of certain sectors. In full-year 2018, external accounts deteriorated slightly as a swelling current account deficit was not offset by foreign direct investment. A big challenge for the next government will be to create a more conducive environment for domestic and non-resident investment.
The hopes of seeing economic activity pick up following the election of Jair Bolsonaro have fallen. Some indicators point to a possible contraction in economic activity in Q1 2019 at a time where confidence indicators were seemingly improving. Meanwhile, the reform of the pension system – a cornerstone of President Bolsonaro's economic program – was presented to Congress in February where it is currently under discussion. Negotiations will likely be more protracted and be more difficult than originally expected. Indeed, since taking office, the popularity of the Brazilian president has sharply declined and relations between the executive and the legislature have strained.
Economic growth slowed in the first months of 2019, and is now close to its potential growth rate of 1.5% according to the central bank. A 2-point VAT increase on 1 January has strained real wage growth and sapped household consumption. Inflation (5.2% year-on-year in February) is still below the central bank’s expectations, and the key policy rate was maintained at 7.75% following the March meeting of the monetary policy committee. In the first two months of 2019, investors were attracted by high yields on Russian government bonds, despite the risk of further tightening of US sanctions. The rouble also gained 5% against the US dollar in Q1 2019.
Economic growth rose to 5.1% in 2018, the highest level since the global financial crisis, with few signs of overheating. In 2019-2020, a less favourable cyclical environment in the eurozone and international trade tensions are bound to strain the Polish economy. Even so, domestic demand will remain relatively solid, bolstered by wage growth driven by labour market pressures as well as by the government’s fiscal stimulus measures announced in February in the run up to European elections in May and legislative elections in October. Under these conditions, inflation is likely to accelerate and the twin deficits to widen, albeit without compromising the country’s macroeconomic stability.
Singapore is highly vulnerable to contagion effects of US trade hikes on Chinese imports due to its large dependence on tech exports and integration Asian value chains. Exports have contracted since last November and economic growth has slowed. Monetary policy tightening, which started last year, should pause in the short term while the government is expected to increase public spending to support activity. Its fiscal room for maneuver is significant given the strength of public finances. This will also enable the authorities to continue to implement their strategy aimed at stimulating innovation, enhance productivity and improve Singapore’s medium-term economic growth prospects.
GDP growth rebounded in 2018, buoyed by higher copper prices and the renewed confidence of investors following the election of Sebastian Piñera. Over the course of his mandate, President Piñera’s ambition is to implement fiscal policies that will boost growth and stimulate investment while consolidating public finances, but this could prove to be harder to achieve than expected. The president’s party lacks a congressional majority, and is struggling to push through the fiscal and pension system reforms that have been presented so far. Even so, economic growth prospects will remain rather favourable over the next two years and fiscal consolidation should continue.
Colombia is coming off a four year macroeconomic adjustment, orchestrated by a large terms of trade shock following the end of the commodity super cycle in 2014. Colombia made a number of policy adjustments to deal with the shock and since 2017, the economy has largely corrected allowing the current account balance to narrow, the fiscal balance to improve and inflation to converge towards the target. However, the intensification of the Venezuelan migrant crisis is challenging fiscal accounts. President Duque’s pledge to make adjustments to the 2016 peace agreement represents a source of risk to the security environment. Meanwhile, the economic slowdown has bottomed out in 2018. Growth is set to accelerate in 2019 but will remain modest.
Nigeria is having a hard time recovering from the 2014 oil shock. Although the economy has pulled out of recession, growth remains sluggish at 1.9% in 2018. Moreover, the central bank’s recent decision to cut its key policy rate is unlikely to change much. With inflation holding at high levels, it is still too early to anticipate further monetary easing. Defending the currency peg is another constraint at a time when the stability of the external accounts is still fragile. Between soaring debt interest payments and the very low mobilisation of public resources, there is only limited fiscal manoeuvring room. It is hard to imagine a rapid economic turnaround without the intensification of reforms.
After the appeasement of political tensions in the aftermath of the presidential election rerun, the improved political environment has led to a stabilization of Kenya’s macroeconomic situation. The president's "Big Four" agenda for boosting growth and development spending will shape economic policy during the next five years. But the Kenyan sovereign still faces the serious challenges of fiscal consolidation and the high government debt level that weighs on investors’ appetite for risk. In the meanwhile, the recent High Court suspension of the contentious policy issue of an interest rate cap on bank lending should probably speed up a further agreement with the IMF, which is vital to reduce the borrowing cost burden in a context of increasing financing needs.
Due to the country’s economic development, the agricultural sector is in relative decline as a share of GDP. Moreover, investment in agriculture is fairly sluggish. Yet the sector still plays a decisive role in food security in Egypt, a country where demographic growth is strong and households are highly sensitive to food prices. The agri-food sector also has an impact on macroeconomic fundamentals, including inflation, foreign trade and the public accounts. For Egypt, like the rest of the region, water resources are a major issue. Yet in Egypt’s case, this issue is especially crucial given the uncertainty that looms over the waters of the Nile and their availability for agriculture in the medium term.
Real GDP growth will remain weak this year due to expected cut in oil production. Non-oil GDP should get a boost from public expenditure, especially investment spending, and from a slight growth in private consumption. Inflationary pressures could increase slightly but will remain moderate. High fiscal surpluses are funnelled into the sovereign funds, which guarantee the Emirate’s long-term solvency. Faced with this situation, the government has little incentive to set up fiscal consolidation measures. High and recurrent trade and current account surpluses ensure the stability of the dinar.
In emerging and developing countries, debt has become a recurrent theme that pops up whenever financial conditions tighten and/or economic activity slows. The IMF recently published a blog post on the subject with a rather alarming title. Granted, the combined impact of several factors, namely the downward revision of growth forecasts, a stronger dollar and the normalisation/tightening of monetary policies that have been rather accommodating until now, will increase the weight of the debt burden. Yet not very many countries are at high risk of debt distress, and there is little probability that debt will trigger a systemic credit crisis, even though the risk has increased for the most vulnerable countries.
Economic growth slowed to 6.6% in 2018 from 6.8% in 2017 and should continue to decelerate in the short term. The extent of the slowdown will depend on the still highly uncertain evolution of trade tensions between China and the United States as well as on Beijing’s counter-cyclical policy measures. However, the central bank’s manoeuvring room is severely constrained by the economy’s excessive debt burden and the threat of capital outflows. Moreover, whereas Beijing has pursued efforts to improve financial regulation and the health of state-owned companies over the past two years, its new priorities increase the risk of interruption in this clean-up process. Faced with this situation, the central government will have to make greater use of fiscal stimulus measures.
EcoEmerging is the monthly review of the economies of emerging countries. Written by economists from the Country Risk Team of BNP Paribas Economic Research, this publication offers an overview of the economy of a selection of countries through the analysis of the main available economic indicators.
Each economist bases their analysis on the quarterly data (real GDP, inflation, fiscal balance, public debt, foreign exchange reserves, etc.) and focuses on the economic situation of one or more emerging countries in order to keep up with developments in the past quarter. The key themes that they look at include industrial production, quarterly gross domestic product (GDP) and inflation expectations with changes in consumer prices (CPI) and producer prices (PPI), employment and unemployment figures, the real estate market and stakeholder opinions (e.g. household confidence and the business climate). The author comments on the main factors that influence and determine the economic activity of the country concerned and on the economic outlook.
It provides an outline of an emerging economy using indicators for the past quarter and it looks ahead in order to better understand and anticipate the main economic problems of the country in question.