All Emerging

AllEmerging

31 {0} Emerging(s) found
    23 July 2020
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    Since mid-April, calm has been restored in the financial markets of emerging economies. In most countries, exchange rates have begun to appreciate again, while money market rates and bond yields have eased thanks to the general easing of policy rates and greater use of quantitative easing by national central banks, external financial support, and the return of portfolio investment. As is often the case, the equity markets have exuberantly – and prematurely – welcomed this return to normal. Indeed, the economic recovery seems to be taking shape, but it remains very fragile.
    The economy has been recovering gradually since March, and the rebound in real GDP was strong enough in Q2 2020 to enable it to recover rapidly the ground lost in Q1. Yet the shock triggered by the pandemic and the ensuing lockdown measures has severely weakened some sectors (such as export-oriented industries), some corporates (notably micro-enterprises and SMEs) and some households (especially low-income earners). The central bank has cautiously eased credit conditions and the government has introduced a stimulus plan estimated at about 5 points of GDP for 2020. Public investment in infrastructure projects remains the instrument of choice, but direct support to corporates and households is also expected to boost private demand.
    India should report an unprecedented contraction in real GDP this year. The big question is how strong will it rebound thereafter? The rating agencies have begun to doubt whether India will return to its potential growth rate in the years ahead because its economic slowdown began much earlier than the Covid-19 crisis. India’s slowdown dates back at least to 2018, and could even be an extension of the 2009 financial crisis. Since 2014, real GDP growth seems to have been driven solely by positive external shocks, creating the illusion of robust growth. Yet the banking sector is still much too fragile to restore GDP to the growth rates of the past.
    While the Covid-19 epidemic continues to spread, restrictions have started to ease in parts of the country. A severe contraction of economic activity is anticipated in Q2 with the latest data indicating that a low point was reached in April. A rapid recovery of economic activity will be constrained by the economy’s weak growth engines, especially investment. Fiscal and monetary policy measures have continued to be deployed or extended to help cushion the impact of the crisis. While the currency continues to exhibit weakness and fiscal balances keep deteriorating, continued monetary easing has helped boost the stock market.
    The Russian economy is more solid today than it was five years ago. After the 2014-15 crisis, the government managed to rebuild its sovereign wealth fund, which is now enabling it to offset the loss of oil revenue. Public finances are less dependent on oil revenues, thanks to the VAT increase in 2019, and the government should have no trouble meeting its short-term commitments. Yet lockdown restrictions and the collapse of commodity prices will have a big impact on both growth and the banking sector, which is still fragile, although it is less vulnerable to a forex shock.
    The Polish economy has to smooth the impact of the Covid-19 pandemic, which hit not only through the decline in foreign demand but also through the lockdown’s impact on domestic consumption. Yet the country has enough policy leeway to do so, thanks notably to a reasonable level of public debt before the slowdown began. GDP is unlikely to return to pre-crisis levels before mid-2021, which is bound to curb investment. Thereafter, Poland is expected to return to its robust growth trajectory since its strengths remain intact (competitiveness, labour supply, low wage costs and productivity gains), which have transformed the country into the European Union’s 5th biggest industrial sector.
    Ukraine is usually quite prone to boom bust cycles. Yet high volatility has not allowed to stabilize growth towards a higher level, and fickle capital inflows have reinforced the importance of funding from foreign institutions, notably from the IMF and the European Union. Such official financing, coupled with the structural progress it has made in recent years, seem to have helped the country to cope with the Covid-19 crisis, at least for the moment, with fewer negative financial consequences than initially feared. Strong foreign demand for Ukraine’s grain, lower oil prices and the foreign financing are all favourable factors that have helped the country weather the crisis, and raise hopes for a rapid economic recovery once the Covid-19 crisis is over.
    Slovenia’s economy is in a relatively favourable position to face the Covid-19 crisis. The past three years were marked by robust growth, fiscal surpluses and the gradual clean-up of bank balance sheets. Yet as a small, open economy closely tied to the European Union, Slovenia could be significantly impacted by the crisis. European fiscal and monetary support as well as healthy public finances should soften the impact of the crisis on public finances and growth prospects.
    Growth prospects are deteriorating constantly in Mexico. In the short term, several factors are weakening the economy, including the impact of lockdown restrictions on domestic demand, the decline in oil prices, the disruption of supply chains and sluggish external demand. Without a fiscal stimulus package, the support measures announced by the central bank will not suffice to offset the enormous shock. In the medium term, the economy’s capacity to rebound is limited. The downturn in the business climate and other pre-crisis factors that contributed to the slowdown, coupled with the government’s contradictory signals, will continue to weigh on investment.
    The economic rebound expected in H2 2020 has been slow in the making. For the moment, the pandemic seems to be under control, and there have already been several phases of reopening, but domestic demand remains sluggish. Exports also fell sharply again in May. Above all, it is the absence of international tourists that is straining growth prospects, at least in the short term, because fiscal and monetary support measures – though massive – will not suffice to totally absorb the shock. As a result, the recovery is likely to be more restrained than in the other Asian countries.
    The massive use of expatriate workers, a key element in the Gulf states’ economic models, has been called into question by the economic recession, widening budget deficits and employment nationalisation programmes, particularly in the public sector. The construction and services sectors, which also depend massively on foreign workers, are suffering as a result of cuts in public spending. However, it is far from certain that the expected reduction in expatriate employment in the short term will result in a significant and lasting increase in employment for Gulf nationals. The Gulf states are likely to have difficulties to go without foreign labour.
    The shock triggered by the Covid-19 epidemic has been violent and has hit an already very fragile economy. Over the past five years, economic growth has averaged only 0.8% and the country has slipped into recession since mid-2019. The economic contraction and the deterioration in public finances will be on an unprecedented scale in 2020. Real GDP may well not return to its pre-crisis level before 2025. The government has been adept in adjusting its financing strategy to cover its needs, which have increased steeply following the introduction of the fiscal stimulus plan. The support expected from multilateral lenders in the short term is reassuring, but trends in government debt will continue to be a concern over the medium term.
    Although the pandemic is well contained from a health perspective, the Covid-19 crisis combined with the downturn in oil prices will have severe economic consequences. With no real fiscal leeway, the government has implemented a very modest economic stimulus plan, while massive capital outflows and the collapse of oil exports have fuelled the rapid erosion of foreign reserves, bringing the naira under pressure. The deterioration in public and external accounts despite support from donor funds hampers any prospects of a recovery. Just four years after the last recession, real GDP is expected to contract significantly again in 2020. Without an upturn in oil prices, the rebound will be mild in 2021.
    14 April 2020
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    Emerging countries have been severely affected by the COVID-19 pandemic even though the official number of confirmed cases and deaths (excluding China) is still low compared to the figures for the developed countries. A wave of slowdowns and recessions is only just beginning, and the economic fallout will probably spread beyond 2020, because the real shock (shutdown of business due to confinement measures) is compounded by a financial shock and commodity price shock. Capital outflows and the freeze on bond issues in international markets increases refinancing risk in US dollars. Preventative safety nets are being set up to reduce defaults, but the solution for the most vulnerable countries is probably a sovereign debt moratorium or a debt relief.
    China’s population and its economy were the first to be struck by the coronavirus epidemic. Activity contracted abruptly during the month of February before rebounding thereafter at a very gradual pace. Although the situation on the supply side is expected to return to normal in Q2, the demand shock will persist. Domestic investment and consumption will suffer from the effects of lost household and corporate revenues while world demand is falling. The authorities still have substantial resources to intervene to help restart the economy. Central government finances are not threatened. However, after the shock to GDP growth, the expected upsurge in domestic debt ratios will once again aggravate vulnerabilities in the financial sector.
    India was not spared the coronavirus pandemic. The economic slowdown will be all the more severe with a protracted lockdown of the population. The government also lacks the fiscal capacity of the other Asian countries to bolster its economy. Already strained by the economic slowdown of the past two years, public finances are bound to deteriorate further. Public debt could reach 75% of GDP by 2022. Refinancing risks are low, but the cost of borrowing could rise for the long term if the rating agencies were to sanction its public debt and deficit overruns. India still has sufficient foreign reserves to cover its short-term liabilities.
    The massive economic shock resulting from the coronavirus sanitary crisis will delay Brazil’s economic recovery, suspend the process of fiscal consolidation and stall progress on reforms. While the extent of the recessionary shock remains highly uncertain, measures – both fiscal and monetary – have been taken to mitigate the impact of confinement measures on economic activity, prevent a sharp upturn in unemployment and ensure that tensions over liquidity do not materialize into solvency problems. Intervention capacities on the monetary side are ample and contrast with those on the fiscal side, which are more limited due to the fragilities of public accounts. Brazil’s financial markets, which came under significant stress in Q1, will continue to be challenged.
    The Turkish economy is facing problems of a sort it has dealt with in the past: a global crisis, that will trigger a sharp fall in exports, coupled with a contraction of external financing. Unlike in 2018, Turkey’s economy does not appear to be overheating, whilst the fall in oil prices and the emergence of a current account surplus are two factors that will reduce the risk. That said, the relatively weak levels of currency reserves, the high level of external debt and the recent rise in non-performing loans are all significant risk factors. In front of the current shock, the economic policy response will have to address foreign currency liquidity needs properly in a context of dwindling capital flows.
    Romania’s economy has become gradually unbalanced in recent years, ending 2019 with significant twin deficits, i.e. both a fiscal deficit and a current account deficit. An accommodative fiscal policy has stimulated growth and should continue to do so. Even so, Romania will not avoid a contagion effect due to the COVID-19 pandemic’s economic fallout. The country is bound to slip into recession even though growth has already dwindled. Though foreign currency liquidity is still sufficient, its relatively low level could constrain monetary policy: a stable exchange rate is key for an economy that still has a significant amount of euro-denominated debt, albeit much less than before.
    The COVID-19 crisis will have a huge impact on an economy that was already weakened slightly by the slowdown in global trade in 2019. Yet Indonesia’s macroeconomic fundamentals are strong: its public finances are solid, the banking sector is robust and both companies and households have very little debt. The country has sufficient foreign reserves to cover its short-term financing needs. Yet the rupiah is bound to remain under fierce downward pressure: the current account deficit is only partially financed by foreign direct investment, and capital outflows have reached unprecedented levels since 31 January.
    The coronavirus crisis has hit a fast-growing economy, which expanded by more than 6% year-on-year in H2 2019 and looked set to continue at the same pace in 2020. The pandemic and the very strict lockdown imposed by the Duterte government will cause all the engines of growth to seize up: production will stop in the country’s economic centre, the fall in domestic demand will be exacerbated by reductions in remittances from workers abroad and losses in the informal economy, tourism will collapse and exports of goods and services will follow suit. This is a substantial shock, but the strong macroeconomic fundamentals and the modest level of government debt give the authorities scope to introduce support measures.
    The Covid-19 pandemic strikes an economy that has already been weakened by several quarters of decline in merchandise exports, tourism, private consumption and investment. Since February, the government has launched a major fiscal stimulus plan representing about 10% of GDP. The plan includes direct support measures in favour of corporates and households. Additional structural measures will be needed going forward, in order to fuel a sustainable rebound in private demand and bolster medium-term economic growth prospects. Thanks to abundant fiscal reserves and minimal debt, the government has comfortable manoeuvring room to pursue an expansionist policy for several years to come.
    The impact of the COVID-19 pandemic on the Egyptian economy will be significant and will result in a sharp economic growth slowdown this year. Growth is nevertheless likely to remain positive. In the short term, the expected deterioration in public finances is sustainable, and the government can deal with a temporary downturn in international investors’ appetite for Egyptian debt. Foreign currency liquidity across the whole banking system has improved significantly in recent months, supporting the pound in the currency market. As a result, the financing of the current account deficit, repayment of foreign debt and the ability to cover massive capital outflows are all guaranteed for the short term.
    As the most diversified economy of the Gulf countries and a major oil producer, the United Arab Emirates faces a double shock: the economic fallout of the COVID-19 pandemic and plummeting oil prices. The current situation risks accelerating the real estate market crisis in Dubai, which has been developing for several years, eroding the financial health of companies in the construction and services sectors. As credit risk rises, it will place a negative strain on banks. Although public finances seem healthy enough to handle the decline in oil revenues, public debt is bound to rise. The UAE’s solid external position guarantees the dirham’s peg to the US dollar.
    The Moroccan economy will see significant consequences from the coronavirus pandemic. Tourism has been at a standstill since March and will remain so until May at the earliest. The automotive sector and remittances from the Moroccan diaspora will also be hit by the crisis in Europe. However, and provided that the situation improves in the second half of the year, Morocco should be able to avoid recession. Macroeconomic fundamentals are solid and the country will benefit from a substantial fall in oil imports. Moreover, the authorities have reacted swiftly to dampen the shock.  
    Kenya’s real GDP growth was subdued last year and it will come under stress in 2020 due to coronavirus outbreak effects. The lower GDP growth will further constrain the fiscal policy space whereas the country’s forex receipts are also weakened by adverse climatic conditions. While political rivalries continue to complicate the implementation of fiscal policy, failure to reduce budget deficits will challenge the sovereign’s debt solvency in the medium term. Meanwhile, monetary policy easing and emergency measures in the banking sector could hamper banking sector prospects, which had started to improve following the recent removal of the interest-rate cap law.  
    28 January 2020
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    The end of the CFA franc and its replacement with the eco scheduled for next June address the legitimate desire of WAEMU member countries to manage what is already their single currency. Governance of the currency regime will change as the French Treasury pulls out of WAEMU entities, although it will still serve as the lender of last resort. Though the euro peg will limit monetary policy’s independence, it is necessary to shore up the macroeconomic stability of WAEMU, which is still fragile.
    In 2019, economic growth slowed to 6.1%. Total exports contracted and domestic demand continued to weaken. The year 2020 is getting off to a better start as activity shows a few signs of recovering and a preliminary trade agreement was just signed with the United States. Yet economic growth prospects are still looking downbeat in 2020. The rebalancing of China’s growth sources is proving to be a long and hard process, and economic policy is increasingly complex to manage. Faced with this situation, Beijing might decide to give new impetus to the structural reform process, the only solution that will maintain the newfound optimism and boost economic prospects in the medium term.
    India’s real GDP growth remains far below its long-term potential, and economic indicators do not suggest a significant turnaround in the short term. The government has little manoeuvring room to stimulate the economy. In the first eight months of the fiscal year, the budget deficit already amounted to 115% of the full-year target, and the central bank must deal with rising inflationary pressures, which are hampering its monetary easing policy (which is not very effective anyway). The prospects of materially lower economic growth has led the rating agency Moody’s to downgrade its outlook to negative. Yet it is the financing of the economy as a whole that is at stake.
    Despite a more challenging global environment and a deterioration in the country’s external accounts, Brazil’s economic recovery is gaining some traction on the back of a strengthening domestic demand. In 2020, GDP growth is forecast to improve but questions remain nonetheless regarding the economy’s ability to build up and keep up momentum. The easing of monetary and financial conditions should help support the credit market but should continue to have a weakening impact on the currency. During his first year in office, President Jair Bolsonaro’s losses in terms of approval ratings contrast with his government’s notable gains on the public finance front.  
    In 2019, despite weak growth and a drop in oil revenues, Russia’s macroeconomic fundamentals remained sound. This said, growth prospects remain weak despite disinflation and a relaxation of monetary policy. Standards of living are still low and the poverty rate has increased. The main threat to economic growth is a tightening of sanctions, even though the sharp increase in foreign exchange reserves, the rebuilding of the national wealth fund and the significant reduction in external debt are all factors that reduce the country’s dollar financing requirement. A toughening of sanctions could hit foreign direct investment, which has fallen sharply over the last five years.    
    Having more or less stagnated in 2019, economic growth is likely to bounce back a little in 2020, boosted by private consumption and net exports. Despite an infrastructure programme that is largely open to the private sector, the outlook for investment is struggling to improve. One year after Andres Manuel Lopez Obrador, generally known as AMLO, came to power, his economic policy is still hard to decipher. The lack of clarity on energy sector reform is also affecting investor sentiment. At the same time, the risk of a loss of control of the public finances is growing: against a background of low growth, maintaining the austerity programme favoured by the government will prove more difficult from 2021.
    With violent protests rocking Chile since October, the government announced a series of measures to combat inequality and proposed a new version of its pension system reform. Above all, the government signed an agreement with the main opposition parties to draw up a new constitution. Yet persistently fierce political and social tensions are bound to curtail growth. Forecasts for the next two years have been revised largely downwards. The public debt and deficit are also expected to swell over the next five years.
    Taiwan’s export sector has been hit by the slowdown in trade between China and the United States since spring 2018, but it has also benefited rapidly from some of the positive effects of the trade war. US importers have replaced certain Chinese products with goods purchased directly from Taiwan. Plus the US-China trade war provides Taiwanese manufacturing corporates an incentive to leave Mainland China and relocate production in Taiwan, with firm government support. Thanks to these developments, Taiwan’s economy reported stronger than expected growth in 2019, and this trend should continue in 2020.
    Economic growth was still robust in 2019 despite a less favourable local and international environment. Healthy external performances fuelled a significant upturn in the shekel, which in turn curbed inflationary pressures. The start-up of natural gas exports in 2020 should support this trend. Under this environment, the central bank has few policy instruments available. It resumed currency market interventions to try to curb the shekel’s appreciation. After the budget overruns of 2019, however, we do not expect public finances to improve significantly given the high level of political uncertainty.
    Ukrainian growth accelerated rapidly in the first nine months of 2019, driven notably by the agricultural sector and household consumption, the latter being largely stimulated by borrowing. The appreciation of the hryvnia (UAH) triggered a sharp drop in inflation, which facilitated greater monetary policy easing. In the short term, monetary policy support should offset the impact of the global economic slowdown, which has already eroded industrial activity. At the same time, the announcement of a new IMF agreement is bound to reassure foreign investors. The central bank will have to deal with a classic dilemma: it needs to ease monetary policy to curb portfolio investment inflows, but doing so risks triggering a credit boom.
    Non-oil GDP growth rebounded strongly in 2019 after three years of disappointing performances. Household consumption and public sector investment spending are the main growth engines driving the recovery. Economic prospects are still positive in the short term due to the slowdown in the pace of fiscal reforms. The fiscal deficit will remain high, although exceptional one-off income and the transfer of spending to extra-budgetary entities should help hold it down. Potential growth is hampered by the erratic pace of fiscal reforms and the mixed outlook for the oil market.
    With anaemic growth, strong pressure on hydrocarbon revenue and substantial twin deficits, the macroeconomic situation is worrying. For the time being, forex reserves remain at comfortable levels but the speed and scale of their contraction is a major source of vulnerability over the short to medium term. Meanwhile, although certain decisions suggest a change of tack in the government’s position after years of economic protectionism, this progress is still too hesitant given the challenges. It is also of limited effectiveness whilst the business climate has not yet stabilised.
    In order to support economic growth, the Ethiopian government is transitioning from the traditional debt investment strategy to a foreign equity-based one, by privatizing some state-owned entities and removing foreign investments’ barriers. The recently approved IMF program is targeted to address foreign-exchange shortages as well as to contain debt vulnerabilities by strengthening state-owned enterprises management. Nevertheless, the moving towards a more liberalized exchange rate will be done gradually to avoid triggering inflationary pressures and consequent social unrests.
    18 October 2019
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    Growth prospects for the emerging countries in 2020 (EC) have dimmed with the slowdown in export markets and the climate of uncertainty that reigns with the US-China trade war. This uncertainty has increased the volatility of portfolio investments since last summer, although external financing conditions are still favourable on the whole. The majority of countries have also eased monetary policy, and the pass-through of key policy rates to lending rates is functioning rather well. Yet private sector debt has risen sharply over the past decade, which could hamper monetary easing if credit risk were to rise.
    Since Q2 2018, Beijing has let the yuan depreciate against the dollar each time the US has raised its tariffs on imported goods from China. Yet, exchange rate policy as an instrument to support economic activity is expected to be used moderately in the short term. There is also little room to stimulate credit given the excessively high debt levels of the economy and the authorities’ priority on pursuing efforts to clean up the financial system, the public sector and the housing market. Torn between stimulating economic growth and deleveraging, the authorities’ dilemma could get worse if recent fiscal stimulus measures do not have the intended impact on domestic demand, or if the external environment were to deteriorate further.
    Economic activity slowed sharply in the first quarter of fiscal year 2019/2020 and second-half prospects are looking morose, even though the monetary authorities and the government have taken major stimulus measures. Monetary easing resulted in a mild decline in lending rates. The recently announced cut in the corporate tax rate should boost domestic and foreign investment in the medium term, although it will not impact growth much in the short term. Companies might decide to consolidate their position rather than to invest in the midst of a sluggish environment.
    The world’s projectors have descended on Brazil following raging fires in the Amazon forest. President Jair Bolsonaro has come under pressure for his lack of engagement and commitment to protecting the environment. The pace of economic growth is still struggling to accelerate. Confidence indicators are ambivalent while investment remains weak. In the wake of a much less buoyant external environment and low inflation risk, the Central Bank has lowered its policy rate by a cumulative 100 basis points since August. The pension reform was approved in the Senate (first round) but was subject to revisions. Throughout the fall, a number of major reforms should be deployed and privatizations and concessions should accelerate.
    In August, the rating agency Fitch upgraded Russia’s sovereign rating based on its greater resilience to the external environment. The timing might seem surprising considering that Russian GDP growth slowed sharply in H1 2019 and the central bank had to revise its outlook for 2019-2021 downwards again. Even so, the consolidation of Russian fundamentals is undeniable. Currently the main sources of concern are the sharp increase in household lending and the delays in implementing public spending programmes, which should stimulate growth in the medium term.
    In the first half of 2019, Poland’s economic growth held up well to the deterioration of international conditions. Its economic prospects remain relatively positive in the short term despite the downturn in the cycle. The economic model of competitiveness and low labour costs – the foundation of the economic transition of which Poland is a successful example – will be altered by the more generous social policies introduced by the current government. Cyclical and structural factors argue for a slowdown in investment growth over the short and medium term. Of the factors weighing on medium and long-term growth potential, the demographic decline seems the most potent.
    Korea’s economic growth prospects have continued to deteriorate. Recent trade tensions with Japan have come on top of the slowdown of the Chinese economy and in global demand as well as the conflict between the United States and China, hitting exports and investment. The authorities have some scope to stimulate domestic demand. As has been the case for several years now, fiscal policy will remain expansionary in 2020, whilst the central bank could cut its policy rate in the short term. Stimulus measures will nevertheless not be enough to boost economic growth significantly in 2020.
    The Macri government faces an emergency situation in the run up to October’s general elections. Confronted with the erosion of foreign reserves and its failure to roll over short-term bonds, the government was forced to 1) delay payment of Treasury bonds held by local institutional investors, 2) announce debt “re-profiling” and 3) tighten capital controls. After this summer’s primary election, the opposition is largely expected to take power. The future government will have to manage numerous priorities and will probably roll back certain economic liberalisation measures. Yet, it has very little manoeuvring room since it cannot risk breaking off relations with the IMF, which is now its main creditor.
    Although still showing a significant deficit, the trade balance has improved substantially since 2017. It has benefited from a recovery in hydrocarbon exports, whilst the steep depreciation of the pound has had only limited consequences on trade in non-hydrocarbon goods. A substantial share of imports is incompressible, whilst structural constraints weigh on the country’s export potential. Moreover, the moderate appreciation of the pound over the past year has not helped price competitiveness. Measures have been introduced to support exports, but we remain cautious on the prospects for a significant improvement in international trade over the medium term.
    The Qatari economy is struggling to find new sources of growth beyond the hydrocarbon sector. Given the stability of hydrocarbon production and the ending of infrastructure investment cycle, economic growth is likely to hit a record low in 2019. Over the medium term, the introduction of new LNG production capacity is likely to bolster the economy. Against the background of a sluggish economy, inflation is likely to be dragged into negative territory by the on-going fall in real estate prices. This said, the public finances and external accounts remain solid and are likely to improve further as the gas rent increases over the medium term.
    Between difficulties in Europe and a poor agricultural harvest, Morocco faces numerous headwinds. Growth slowed in 2019 for the second consecutive year. Yet domestic demand remains robust, bolstered among other factors by low inflation and an accommodating monetary policy. The authorities are also counting on major privatisation proceeds to soften fiscal consolidation without worsening public debt. Above all, the ongoing development of the automobile industry raises hopes for a rebound in GDP growth in 2020, while lower oil imports should help to reduce the current account deficit.
    The country has renewed relationship with the IMF and obtained its financial support in late 2018. Under the Fund supervision, a mild recovery is expected in the near term but outlook remains weak due to a still tight foreign currency liquidity, a troubled banking system and a poor external environment. Amid higher oil price volatility, Angola continues to rely on the oil sector as a source of economic growth, fiscal income and foreign exchange earnings. Despite supportive measures to attract international investors, important deficiencies keep FDI weak. Some fiscal reforms are also ongoing, but governement room for maneuver remains slim.  
    Economic growth is forecast at only 0.4% in 2019, after averaging 1% a year in 2015-2018. The Ramaphosa government has little manoeuvring room to implement reforms, and strong structural headwinds continue to hamper economic activity. Illustrating the country’s enormous lack of infrastructure, major power outages disrupted activity in the first months of the year. To address the severe financial troubles at Eskom, the state-owned company behind the power outages, the government had to unblock additional funds to come to its rescue. The latest rescue package will accelerate fiscal deficit slippage and further weaken sovereign solvency in the medium term.
    15 July 2019
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    Growth concerns for both advanced countries and emerging countries have picked up again on the back of a collection of new economic data but also — and perhaps more importantly — due to continued high uncertainty. The latter stems from escalating tensions between the US and China over trade. The effects of this confrontation already show up in the Chinese data while in the US, mounting anecdotal evidence also point to its detrimental impact on business and the agricultural sector. The Federal Reserve has turned a corner and indicated that rate cuts are coming, much to the joy of the equity market. The ECB has also changed its message: with risks tilted to the downside and inflation going nowhere, it considers more easing is necessary.
    With the export sector hard hit by US tariff measures and private consumption growth weakening, investment growth has slowed. Although domestic demand could pick up in the short term, bolstered by monetary easing and fiscal stimulus measures, export prospects depend on the outcome of trade talks between Beijing and Washington, which remains highly uncertain. The authorities are bound to use foreign exchange policy sparingly to avoid creating a source of financial instability. Moreover, the current account surplus has improved again in recent months.
    Narendra Modi won a major victory in the general elections, further bolstering his legitimacy. His party won a strong majority in the lower house of parliament and could go on to clinch a majority in the upper house by late 2020 as well, if it manages to maintain power in the upcoming State legislative elections. The country’s economic situation was not very favourable for the Prime Minister as his first mandate came to an end. Economic growth slowed sharply in the last quarter of fiscal year 2018-19 and prospects have been revised downwards. The government must accelerate the reform process in order to increase the pace of job creations and encourage foreign investment.
    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.
    19 April 2019
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    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.
    24 January 2019
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    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.
    India’s economic growth slowed between July and September 2018, hard hit by the increase in the oil bill. The sharp decline in oil prices since October will ease pressures, at least temporarily, on public finances and the balance of payments, and in turn on the Indian rupee (INR), which depreciated by 9% against the dollar in 2018. In a less favourable economic environment, Narendra Modi’s BJP party lost its hold on three states during recent legislative elections.
    The election of Jair Bolsonaro at the presidency of Brazil has marked a swing to the right, the weakening of traditional political parties and a return of the military to national politics. The new administration faces the challenges of rapidly engaging its fiscal reform, gaining the trust of foreign investors while reconciling ideological differences across its ranks. How society will adjust to a new era of liberal economic policy remains the greatest unknown. Meanwhile, the economy is still recovering at a slow pace. Supply-side indicators continue to show evidence of idle capacity while labour market conditions have yet to markedly improve. Sentiment indicators have shown large upswings in recent months which should help build some momentum in economic activity over Q1 2019.
    In 2018, Russia swung back into growth and a fiscal surplus, increased its current account surplus and created a defeasance structure to clean up the banking sector. The “new” Putin government affirmed its determination to boost the potential growth rate by raising the retirement age and launching a vast public spending programme for the next six years. Yet the economy faces increasing short-term risks. Monetary tightening and the 1 January VAT increase could hamper growth. There is also the risk of tighter US sanctions, which could place more downward pressure on the rouble.    
    With the approach of municipal elections on 31 March, which will be another key test for the government, major manoeuvres have been launched on both the macroeconomic and geopolitical fronts to stimulate activity and advance a foreign policy agenda (notably in Syria) at the expense of diplomatic tensions with the US. The financial strain has soothed since the currency crisis in August 2018, but cyclical conditions have deteriorated. We seem to be heading for a recession scenario lasting several quarters, with the financial weakness of many non-financial corporates being a main concern. The rapid narrowing in the current account deficit and the disinflationary process initiated in recent months attest to the scope of the macroeconomic currently underway.
    Hungary’s macroeconomic situation provides a good illustration of how Central Europe is flourishing economically, but has jettisoned some of the principles of liberal democracy, which is the crucible of the European Union. Hungary’s real GDP growth is estimated at an average of 4.5% in 2018, the highest level since 2004 and higher than its long-term potential. Endogenous and exogenous factors announce a downturn in the economic cycle in the quarters ahead. Yet there is nothing alarming about the expected deterioration in macroeconomic fundamentals in the short to medium term.
    Economic growth in Serbia has accelerated since 2017, fuelled by consumption and investment. Inflation is still mild thanks to the appreciation of the dinar. This favourable environment has produced a fiscal surplus that gives the government some flexibility. The public debt is narrowing, even though it is still relatively high and vulnerable to exchange rate fluctuations and the appetite of international investors. Several factors continue to strain the potential growth rate of the Serbian economy, including unfavourable demographic trends, the slow pace of public sector reforms, and a tough political environment.
    The strength of internal demand remains the main engine of economic activity, which is growing at over 3% per year. This is feeding through into a resurgence of inflationary pressures, although these have been very modest so far. The budget deficit is growing but it remains within the limits set by the government. International trade is seeing some significant shifts. A loss of momentum in goods exports has reduced Israeli products’ market share; at the same time exports of hi-tech services have become the real driving force behind the country’s international trade. Changes in oil prices continue to be a key determinant of the current account balance, despite the exploitation of gas resources.
    Calm has returned to Argentina’s financial markets since the end of September 2018. The peso has levelled off after depreciating 50% against the dollar in the first 9 months of the year. The central bank finally managed to loosen its grip after raising its key policy rate by 70%. Restored calm can largely be attributed to IMF support, but it comes at a high cost: a strictly quantitative monetary policy and the balancing of the primary deficit as of 2019. The economy slid into recession in Q2 2018 and is likely to remain there through mid-2019. So far, the recession has not eroded the country’s fiscal performance, the trade balance has swung back into positive territory and inflation has peaked. Yet will that be enough to restore confidence before October’s elections?
    The elections promised by the military regime ever since it took power in 2014 are finally slated to be held in 2019. Yet this does not mean that the political and social crisis has been resolved: the ruling junta intends to remain in power without providing a veritable solution for “national reconciliation”. From an economic perspective, short-term prospects are still upbeat. The Thai economy will be hit by the slowdown in China, but thanks to dynamic domestic demand, growth should approach its long-term potential this year. In the long term, in contrast, the outlook continues to deteriorate as the political environment holds back the economy’s growth potential.
    Export and real GDP growth have started to suffer from US-China trade tensions and from the mounting difficulties of China’s external trade sector. Taiwan is highly exposed to this type of external shocks due to its heavy reliance on exports of tech products to the Chinese and US markets. However, Taiwan is also well-armed to absorb shocks. External accounts and public finances are strong, and the authorities have a good margin of leeway to act. They are expected to maintain accommodative monetary and fiscal policies in order to stimulate domestic demand in the short term, and should continue some structural reform measures aimed at improving Taiwan’s longer-term economic prospects.
    In late 2017, the authorities decided to resort to direct financing of the Treasury by the central bank to stabilise a dangerously deteriorating macroeconomic situation. The injection of funds helped rebuild bank liquidity via the reimbursement of the debt of state-owned companies. In the absence of a real fiscal impulse, and thanks to prudent monetary policy, inflation remains under control. Without structural adjustments, however, the situation could become very risky.
    19 October 2018
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    In the October 2018 World Economic Outlook, the IMF lowered its economic growth forecasts for the majority of the emerging and developing countries. Over the past six months, the downside risks to their short-term prospects have worsened, and some have even materialised. The IMF sees higher tariff barriers and trade tensions as one of the main threats to economic growth. International financing conditions are also expected to deteriorate further. Investors proved to be selective during the recent bout of emerging market turmoil. However, the sources of vulnerability are likely to continue to rise and the risks of contagion in case of a shock could spread gradually.
    The Chinese authorities have responded to the economic slowdown and US trade barriers by loosening monetary policy and letting the yuan depreciate in recent months, while considering fiscal stimulus measures. With policies to boost demand, the economic growth slowdown is likely to continue at a moderate pace in the short term. Any rebound in investment, however, is likely to be limited, restricted by the deterioration of export prospects, corporates’ excessive debt, industrial restructuring measures and Beijing’s determination to promote healthier development in the real estate market. As to private consumption, it may not be strong enough to pick up the slack.
    Pressures have been on the rise since April 2018. Narendra Modi’s power has eroded. His party lost its majority position in the lower house of parliament. Growing difficulties in the financial sector have sparked higher refinancing costs. Despite solid growth in the first quarter of fiscal 2018/2019, the rupee has fallen to the lowest level on record after depreciating by more than 13% against the USD. India is vulnerable to higher oil prices (23% of imports) and capital outflows. Although its external position has weakened, India is nonetheless in a much more comfortable position than it was five years ago. At the end of September, foreign exchange reserves still covered 1.4 times its short-term external financing needs (less than 1 year), compared with 0.9 times in 2013.
    The economic, political and moral crisis that has held Brazil in its thrall for several years has crystallised in general elections that have seen a section of the electorate swing to the right. The Roussef and Temer presidencies – marred by corruption scandals and two years of deep recession in 2015 and 2016 – have provided a fertile ground for a further fragmentation of Brazil’s political landscape. The swinging of the political pendulum risks increasing social tensions at a time when the macroeconomic environment deteriorates as growth loses steam, investment contracts, government debt builds up and the external environment looks increasingly uncertain.
    Despite the improvement in economic fundamentals (strong rise in the current account surplus, accelerating GDP growth and a fiscal surplus), the rouble depreciated by 13% against the dollar between April and September 2018. Tighter US sanctions in April and again in August 2018, combined with the threat of new sanctions this fall, triggered massive capital outflows. Despite a highly volatile rouble, bond and money market pressures have been mild. To counter the downside pressure on the currency, the Russian central bank raised its key rates in September, for the first time since 2014, and halted its foreign currency purchases on behalf of the finance ministry.
    A currency crisis broke out in August. Beyond (geo)politics, the main reasons behind the collapse of the TRY are the worsening in Turkey’s macro fundamentals and erosion of the credibility of its policy mix. The authorities have limited room for manoeuvre and announced a tightening of economic policy, which has led to some respite in the financial markets. Reconciling with the West is also required to regain investors’ trust. Turkey’s economy is heading toward a text-book “boom and bust” cycle and stagflation. The macro adjustment is going to favour a narrowing of the current account deficit, but the country’s external financing needs will remain huge. Banks are the main channel for the transmission of balance of payments troubles to the real economy.
    Ukraine’s economy has stabilised somewhat after the crisis in 2014-2015. The economic recovery is still on track. Thanks to tight monetary policy, inflation has been moderating and the Hryvnia has been broadly stable despite emerging market tensions. The government has met its fiscal targets and reformed the gas and banking sectors. But the economy is not yet out of the woods. Ahead of the presidential elections (March 2019), (geo)political risks are high. Structural reforms need to be completed to strengthen investors’ confidence. Given large FX debt repayments in the coming year, Ukraine needs to unlock new financing from the IMF and other official lenders as well as global markets in order to avoid liquidity shortages.
    The USA, Mexico and Canada have completed negotiations on a new trade deal to replace NAFTA, which has been in force since 1994. The signature of an agreement in principle is good news for Mexico, as it will calm uncertainties about future trade links with the USA. On the domestic front, the new government is preparing to take power on 1 December. The reforms proposed are already some distance from the statements made during the campaign. Most notably, the incoming President has committed to maintaining the independence of the central bank, fiscal discipline and the country’s trade agreements.
    Despite the turmoil that has swept the emerging markets in recent months, we are still confident in the solidity of Egypt’s external accounts in the short term. Last year, the current account deficit narrowed significantly, thanks to remittances, tourism and an improved energy account. In the short term, higher oil prices should have only a small impact on the current account. For the moment the central bank’s cautious policy is containing the risk of a sudden outflow of portfolio investment. In the medium term, however, several sources of vulnerability persist, including commodity prices, the political environment and the rising cost of debt in foreign currency. The “détente strategy” adopted by President Moon since taking office in May 2017 would seem to be bearing fruit: in September, the leaders of the two Koreas held their third meeting, and a new trade deal was signed with the USA. On the economic front, the outlook remains good, despite the trade war between China and the USA. On the one side, South Korea’s positioning on value chains is shifting, which should allow it gradually to reduce its exposure to the Chinese economy. On the other, macroeconomic fundamentals are solid and the country’s external vulnerability is very low, allowing it to stimulate the economy if needed.
    Despite the turmoil that has swept the emerging markets in recent months, we are still confident in the solidity of Egypt’s external accounts in the short term. Last year, the current account deficit narrowed significantly, thanks to remittances, tourism and an improved energy account. In the short term, higher oil prices should have only a small impact on the current account. For the moment the central bank’s cautious policy is containing the risk of a sudden outflow of portfolio investment. In the medium term, however, several sources of vulnerability persist, including commodity prices, the political environment and the rising cost of debt in foreign currency.
    Thanks to increased oil production and higher public spending, Saudi Arabia’s economic growth should be able to be positive again in 2018. Yet the private sector is showing only timid signs of recovery, despite fiscal stimulus measures, and we are not expecting a significant turnaround in activity in the short term. Job market reforms and their negative impact on domestic demand have sharply curtailed economic activity. The total number of employed workers has declined while the unemployment rate remains high, especially among youth. Saudi Arabia’s low attractiveness for foreign investors does not facilitate the essential reform process.
    A review of Joao Lourenço’s first year in office reveals a rather positive shift in government policies, given the determination to clean up politics and the scope of the economic reforms engaged. After a two-year freeze, Angola is cooperating with the IMF again and a new financing agreement is being prepared in the short term. Yet despite the new government’s positive drive and the upturn in oil prices, the country faces several challenges: a deteriorated oil sector, a foreign currency liquidity squeeze, the erosion of household purchasing power and a severely troubled banking system. Mired in a severe economic crisis, the recovery is bound to be very gradual at best.
    Morocco’s performance was mixed during the first half of 2018. The economic growth recovery is still mild despite good performances in the tourism and manufacturing sectors. Social unrest is rising against a backdrop of endemic unemployment, while the economy is hit again by a swelling energy bill. After several years of consolidation, the twin deficits are expected to widen slightly this year. Although Morocco’s macroeconomic fundamentals are still solid, structural reforms are needed to raise the growth potential.
    13 July 2018
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    In emerging countries, the risks to economic growth are crystallising. Exports are slowing and portfolio investment flows have dried up, reflecting worries about the extent of the upturn in US long-term rates, the strength of the US dollar and trade war threats. Several central banks have raised their benchmark rates to counter the US dollar’s appreciation. Tariffs levied by the United States and the retaliatory measures that have followed in their wake can only accentuate the slowdown in exports. They will not only have adverse effects on world trade, but also threaten the recovery of private investment in emerging countries.
    Beijing is worried about the economic slowdown and its effects on the financial health of Chinese corporates. Domestic demand growth is weakening and the external environment is worsening, notably because of protectionist measures taken by the US. The authorities are adjusting their economic policy accordingly. They have slightly loosened monetary conditions, without changing their objective of cleaning up the financial sector and state-owned enterprises. They have also let the yuan lose 5% against the dollar in the last three months. It is now essential for the yuan’s depreciation to remain under control, in order to avoid any dangerous capital outflows and further pressure on the currency, as seen in 2015-2016.
    India has not been spared from the mistrust of international investors since April, even though growth has accelerated strongly. At a time of rising inflationary pressures, the central bank raised its key rates in June for the first time since 2014. This monetary tightening combined with the troubles reported by state-owned banks could strain the recovery of corporate investment, even though companies are in a better financial situation. Banks, in contrast, have accumulated financial losses of more than USD 9 bn following rule changes for the classification of credit risk. These losses account for nearly 75% of the amount of government injections into the banking sector in fiscal year 2017/2018.
    The recession is over, although there are signs that the recovery is flagging. Brazil has avoided a financial crisis. However, the fiscal situation remains very worrying and there is still a crisis of a political, social and even moral nature, with a general election also coming up in October. Against a background of emerging-market tension since March, international investors are worried that the next Brazilian administration might move away from the reform agenda. On the positive side, Brazil has addressed its macroeconomic imbalances – other than its fiscal ones – while its banks are solid and private-sector agents have deleveraged.
    Economic activity rebounded in Q1 2018 and the outlook for growth is still upbeat. Household consumption is expected to boost activity in the second half of 2018, bolstered by higher real revenues. Yet inflationary pressures could intensify with the rouble’s depreciation and the prospects of a 2-point VAT hike in January 2019. A gradual increase in the official retirement age starting in 2019 should help offset some of the structural constraints hampering growth potential, by increasing the share of the active population and reducing spending allocated to financing the pension fund deficit.
    After the re-election of President Erdogan and the AKP-MHP alliance’s victory in the 24 June parliamentary election, the markets welcomed the end of political uncertainty for the time being. Still, against a background of tensions in emerging markets and increasing geopolitical risk, investors are worried about Turkey’s economic and political trajectory. The authorities must respond to macroeconomic imbalances (inflation and current account deficit) and send a clear signal regarding the central bank’s independence. However, recent news concerning the new government do not suggest any change in its policy of supporting GDP growth, despite the macroeconomic risks.
    Economic activity rebounded significantly in 2017, notably buoyed by productive investment and dynamic export growth. In the short term, private consumption is also expected to be a major growth engine. Thanks to this favourable environment and moderate spending, the government managed to balance the budget, and public debt is declining. This trend should continue at least in the short term, notably thanks to the reduction in the debt service. The situation in the banking sector is improving, even though lending remains fairly lacklustre. Slovenia’s main sources of vulnerability are linked to the eurozone’s economic prospects and the political uncertainty that has emerged following the June elections.
    The newly elected government of Mahatir Mohamed inherited a country with solid macroeconomic fundamentals, even though it is highly vulnerable to the external environment. Real GDP growth was still robust in Q1 2018 and prospects are looking upbeat. Yet certain risks are on the rise. Uncertainty over fiscal policy could strain public and private investment. Moreover, the elimination of the goods & services tax and the freeze on diesel prices could trigger an upturn in the fiscal deficit as of 2018. However, the new government might be able to reverse the downturn of the business climate, which has been deteriorating for the past five years.
    In the Philippines, real GDP growth should reach 6.7% again in 2018, which is close to its long-term potential. The economy is showing signs of overheating: inflation is rising and will exceed the central bank’s target range in 2018, and the current account deficit has widened slightly. However, in the short term, the risks of overheating should remain limited, and the country benefits from solid macroeconomic fundamentals. Even so, economic policy will have to be managed very rigorously to minimise the risk of slippage.
    Since taking office in May 2017, Lenin Moreno has launched a radical transformation of Ecuador’s economy. The aim is to increase the private sector’s weight, clean up public finances and boost the country’s attractiveness in the eyes of foreign investors. In the very short term, however, the economy faces the effects of the growth slowdown and the sharp increase in public debt, which have been registered since commodity prices dropped off in 2014. Although the proposed measures are welcome, they might not suffice to strengthen the government’s solvency.
    By using alternative trade channels and through massive government support of the banking sector, the Qatari economy has stabilised since the end of 2017. Despite the constraints of the embargo, Qatar’s economic growth remains robust, thanks notably to the government’s ongoing investment programme. Yet external debt is huge, notably for banks, and represents a significant source of vulnerability. In the medium term, although there is room to question Qatar’s capacity to diversify the economy, the coming on stream and exporting of new natural gas resources should bolster the emirate’s financial solidity.
    Nigeria is slowly exiting recession thanks to the rebound in oil production and the upturn in crude oil prices. Forex reserves have virtually doubled since end-2016, the spread between the new benchmark exchange rate and the official rate has narrowed, and the risks of further pressure on the local currency seem limited in the short term. Even so, the situation is still fragile. Public finances are constrained by the very low revenue base and the high cost of domestic debt. The monetary environment is still restrictive, the financial system is becoming increasingly vulnerable and the non-oil economy has not yet recovered. It is hard to be completely reassured with the approach of general elections in 2019.   
    The political tensions that flared up after Kenyatta’s re-election in the re-run of the presidential election have begun to ease recently. The appeasement of the political climate has been accompanied by improvements in several key economic indicators: growth has been showing signs of recovering, inflation has slowed down and external liquidity has strengthened. But the country’s financial stability is still fragile, notably due to the high level of government debt. Despite fiscal consolidation efforts, the budget deficit is expected to remain high given the social programme planned for the president’s next mandate. Lastly, despite the rationing of private-sector lending, non-performing loans continue to swell in the banking sector.
    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.
ABOUT US Three teams of economists (OECD countries research, emerging economies and country risk, banking economics) make up BNP Paribas Economic Research Department.
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