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    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.
    30 January 2018
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    In emerging countries as a whole, economic growth has slowed since last summer but is expected to strengthen over the next two years if the global environment remains supportive and the US economy decelerates smoothly in 2019. In the medium term, there is a large consensus on the fact that growth in emerging and developing economies as a whole would be capped at around 5% per year if total factor productivity does not reaccelerate. The rebalancing of China’s economy, the necessity for this country to contain debt and to reduce its carbon footprint imply not only a lasting slowdown in economic growth, but also growth that is less fossil-fuel intensive. Oil-exporting countries will be the most affected by this change in China’s growth regime.
    Brazil’s economy expanded for the third consecutive quarter in Q3 2017 after eight quarters of recession. Our scenario continues to favour a gradual rebound in activity in 2018, buoyed by domestic and global demand. Inflation is under control and monetary easing is winding down. Yet with reforms on hold and elections wrapped in uncertainty, the financial markets may be in for a rough ride in the months ahead. Despite job market improvements in 2017, the economic and political crisis has left deep social and psychological scars that could raise the spectre of a radical election outcome, jeopardising what is already a challenging macroeconomic and fiscal consolidation in 2019.
    Economic growth slowed in the third quarter and all the indicators suggest that this slowdown continued in the final quarter. The economy is still driven by domestic demand, whilst investment has stalled, despite more favourable monetary conditions. The sharp fall in inflationary pressures (reducing inflation below the central bank’s target) has allowed the monetary authorities to cut policy interest rates by 225 basis points. The government continues to focus on the control of public spending in order to reduce its deficit and rebuild its sovereign wealth fund. It hopes to use this fund to uncouple its spending from oil revenue from 2019 onwards
    Economic growth rebounded slightly in India in the second quarter of fiscal year 2017/18. Third-quarter indicators confirmed this recovery, which is driven by industry’s dynamic momentum. In contrast, household consumption slowed and private investment is struggling to pick up again, despite a more favourable institutional and monetary environment than in the year-earlier period. Moreover, with rising inflationary pressures and the risk of budget overruns, the central bank might decide to tighten monetary policy. Despite the economic slowdown and growing social tensions, the NDA, the ruling coalition party, could win a majority in Parliament’s upper house before the 2019 general elections.
    China reported economic growth of 6.9% in 2017, up from 6.7% in 2016, according to the figures released on January 18th. The impact of policy stimulus measures on domestic demand and then the rebound in exports contributed to this slight upturn. However, the slowdown trend at work since 2010 started to resume again in H2 2017. It is expected to extend into 2018 as a consequence of structural factors and tighter domestic credit conditions. Getting “better quality” economic growth, attenuating financial risks and reducing corporate debt must remain the top priorities of the authorities. Yet there will continue to be uncertainty for quite some time over their determination to make the economy less dependent on credit at the price of slower growth.
    Vietnam’s economy is growing very rapidly, driven by booming manufacturing exports and strong domestic demand, which is supported by the rise in revenue and an expansionist policy mix. This dynamic momentum should continue in 2018-19. At the same time, economic growth could dip slightly if the government sticks to its fiscal adjustment plan and the central bank adopts a more cautious monetary policy to contain the surge in domestic debt. These actions seem unavoidable if Vietnam is to maintain macroeconomic stability and continue to improve the health of its banking sector.
    Bank lending to the private sector has finally picked up. The financial crisis, that lasted eight years, is definitely behind. Bank balance sheets have been cleaned up. The quality of assets continues to improve. Lending is boosting the economy, which has accelerated strongly after the slowdown of 2016. Investment growth exceeds 20% thanks to the support of European structural funds. Wage growth is fuelling consumption. Yet labour market and wage pressures, rising real estate prices and the recent increase in foreign funding of banks are all signalling the risk of overheating and must be monitored.
    Sebastian Piñera, of the centre-right party, won last December’s presidential election and will replace Michelle Bachelet in March. The latter’s term has been marked by a number of economic and social reforms coupled with a growth slowdown and slight deterioration in macroeconomic fundamentals. The new President’s aim is to reverse this decline by giving priority to rebuilding public finances and encouraging investment. However, his party’s weak standing in Parliament, and the lack of any ‘natural’ coalition, will force the government into numerous compromises. It therefore seems unlikely that we will see any radical change in Chile’s economic policy in the short term.
    Growth slowed in 2017 because of El Niño and political instability, but the outlook for 2018 is better. Growth should be boosted by the mining sector and the government stimulus plan, while the country’s solid macroeconomic fundamentals should remain intact. However, the political crisis has not been resolved. Tension has increased late 2016, when a corruption scandal broke out in connection with Brazilian company Odebrecht. All political parties have been tainted by the affair and the President, who has been directly implicated, looks increasingly vulnerable.
    Lifted by an expansionist fiscal policy and a buoyant international environment, GDP growth could approach 7% in 2017. Signs of overheating have already appeared. Robust domestic demand, the Turkish lira’s depreciation amidst (geo)political tensions, and the rebound in oil prices have fuelled a sharp upturn in inflation and a wider current account deficit. The economic slowdown that seems to be taking shape in 2018 would be welcome. Despite inflation’s inertia and the risk of currency depreciation in the face of market sentiment, a better coordinated policy mix – with a more neutral fiscal policy and a persistently relatively restrictive monetary policy – should lead to slight disinflation.
    The main objective of the Bank of Israel, the country’s central bank, is to maintain price stability. In the short term, inflation should remain well within the central bank’s target range. As a result, the authorities should be able to maintain an accommodating monetary policy. Repeated current account surpluses have fuelled the shekel’s appreciation, to the detriment of export market shares. The central bank’s foreign currency purchasing policy has limited the shekel’s appreciation, but not enough based on recent trends. In the short term, divergent interest rate trends relative to the United States should help stabilise the shekel, but in the medium term, the high technology sector and potential natural gas exports will continue to put upward pressure on the shekel.
    Côte d’Ivoire has had to deal with a number of shocks, both domestic and external, but its economy has so far proven resilient. Growth remained firm at 7.8% in 2017 and the outlook, according to the IMF, is still bright for at least the next three years. However, sources of weakness abound, including the sharply lower cocoa prices and deteriorating public finances. There is also the risk of further socio-political tensions ahead of elections in 2020 and 2021.
    The Angola political transition is followed by a lot of expectations albeit remaining full of unknown. The new president will face several challenges in a context of dearth of hard currency. The country’s growth outlook remains constrained despite higher oil prices, due to lack of investment and persistent fx shortage. In order to preserve its foreign reserves, the BNA was obliged to abandon the kwanza peg to the US dollar, while maintaining capital controls in place. But the kwanza still remains overvalued despite the recent depreciation, which is fueling inflationary pressures. The weak banking sector is under restructuring but bad loans are piling up.
    24 October 2017
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    Foreign exchange reserves in emerging countries (excluding China) have increased rapidly since year-end 2015. Commodity-exporting countries have rebuilt their reserves, even though they have not returned to the record highs of early 2013. For commodity-importing countries, the upward trend since the beginning of this year has regained a second breath. Yet, as always, this overall consolidation masks a few weak spots.
    The recession is technically over. After eight quarters of contraction, real GDP rebounded in H1 2017. Households have seen a gradual improvement of their financial statements, but corporations and the public sector are still having trouble. Economic recovery has not yet firmly taken root, which, combined with disinflation, should encourage the central bank to continue to ease its monetary policy. Assuming no further escalation in the political crisis, an orderly election process next year, further deployment of reforms, supportive monetary policy, and a still benign global environment, we expect GDP growth to accelerate gradually, propelled by consumption and exports.
    The economy continues to consolidate. Economic growth accelerated significantly in Q2 2017, and inflationary pressures fell sharply, allowing the central bank to lower its key rates by 150 basis points since the beginning of the year. Although the banking sector is still in a fragile situation, it continued to improve in H1 2017. The share of risky assets is declining, the supply of new loans is accelerating, and bank profitability is picking up. At the same time, the government is still determined to consolidate public finances, as illustrated by the decline in the fiscal deficit (even excluding oil and natural gas revenues). Under this environment, Fitch switched to a positive outlook for its sovereign rating for Russia.
    Economic activity has slowed sharply since January. This deceleration is the result of the combination of two temporary shocks: demonetisation and the introduction of GST. However, it also reflects a slowdown in investment, which continues to be hampered by overcapacity in manufacturing industry and the growing problems at public-sector banks. The government’s scope of action to stimulate activity and support its banks remains limited if it wants to avoid weakening the public finances. The deficit for the first five months of the 2018 fiscal year is already 96% of the full-year target. In addition, government finances could be significantly affected by the writing off of loans to farmers.
    The authorities have activated all leverages to guarantee stability in 2017, in preparation for this month’s 19th National Congress of the Communist Party. Economic growth accelerated slightly in the first half. In the financial system, monetary and regulatory tightening has triggered deleveraging among banks and non-bank institutions, which should help curtail some of their most risky activities. While household debt continues to rise, but remains moderate, the increase in corporate debt has slowed. The authorities have also managed to reduce capital outflows and to stop the fall in foreign exchange reserves, while the yuan has rebounded against the dollar since the beginning of the year.
    The political crisis is at a pause: the royal succession went smoothly; the new constitution was introduced in April and elections will probably take place by the end of 2018. However, this appearance of stability does not prefigure a return to democracy in Thailand. Political and social conflict has been smothered rather than resolved, and a new phase of political instability cannot be ruled out. On the economic front, real GDP growth is benefiting from the recovery in global trade, but domestic demand remains weak and the scale of the recovery is limited given the structural challenges that the country faces.
    Economic growth rebounded in H2 2016-H1 2017 and is projected to reach in 2017 its strongest rate in the past seven years. The external environment has become more supportive given the revival in trade flows and the recovery in Chinese tourist arrivals. Domestic credit growth has picked up again since mid-2016 and the property market has rebounded after a short period of correction. Economic growth is expected to weaken again in the short term, especially as China’s economic growth should slow, credit conditions should tighten as the result of US monetary policy normalization and the government should take actions to cool the property market and improve housing affordability, which has deteriorated severely in recent years.
    The Czech Republic has reported solid performances since 2014, and economic growth is well balanced between consumption and investment. The economy is operating at full employment: the unemployment rate is at an all-time low, which is driving up wages. Even so, wage growth is not as strong as in neighbouring countries. The speculative positions on the Koruna were not as lucrative as expected. Given the amounts at stake, unwinding these speculative positions will complicate the central bank’s task. The country reports both a fiscal and current account surplus. The regional environment is buoyant, bolstered by EU structural funds.
    The country reports record-high economic growth for the European Union. Consumption is the main growth engine, followed by private investment. Public projects, in contrast, are at a standstill despite the availability of European structural funds. Wages are rising, buoyed by public-sector salary increases. Fiscal policy favours boosting consumption via wage increases, to the detriment of investment spending. The government will have to adopt a more restrictive stance in the future to avoid the risk of macroeconomic destabilisation.
    Relations with the United States are still tense, and negotiations over Nafta are far from the endgame phase. The climate of uncertainty will only grow with the approach of Mexican elections. At the same time, macroeconomic fundamentals are relatively healthy and economic growth was rather resilient in the first half of 2017, buoyed by dynamic exports and decent growth in private consumption, in keeping with the renewed confidence of economic agents. The second half promises to be more difficult, while 2018 will be handicapped by low carry-over effect at the end of 2017, the lagging impact of higher interest rates and the wait-and-see attitude of investors in search of greater economic and political visibility.
    After slowing sharply in 2016, the Saudi economy will probably enter recession in 2017. This downturn is mainly due to the drop in public investment caused by lower oil revenues. In the non-oil sector, economic prospects are still mixed in the short term. The fiscal reform process is bound to slow, and companies and the banking sector are paying the consequences of this economic slowdown. The need for further fiscal consolidation and the slow pace of economic diversification will continue to strain economic activity in the medium term.
    Morocco’s macroeconomic fundamentals remain sound. The balance of payments has been subject to some pressure, but the risk of external instability is low. The current slowdown in import growth should help stabilise the current account deficit, while pressures on forex reserves have abated since the authorities postponed the exchange rate reform. Fiscal prospects are also looking much better after a poor performance in 2016, and the economy is benefiting from better external conditions and the rebound in agricultural output. In the non-agricultural sector, however, growth is still too sluggish.
    The unprecedented Supreme Court decision to cancel last presidential election’s outcome has been welcomed as a triumph of democracy in Kenya. But today Mr. Odinga’s withdrawal from the next rerun together with the controversial changes to electoral legislation has rather the bitter taste of a political crisis. The climate of political uncertainties is weighting on Kenya’s economic growth prospects and on its public finances. Growth already slowed down significantly in the first semester and there is good reason to fear that the economy has fallen into recession since the elections at the beginning of August. Moreover, the introduction of the interest rate cap has led to a vicious cycle between higher NPLs and greater banks’ risk aversion.
    10 July 2017
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    In emerging countries, the economic recovery is firming thanks to China’s growth stabilisation, the upturn in foreign trade and the normalisation of financial conditions after the turmoil that followed Donald Trump’s election. The main two global risks – the threat of protectionism and the risk of an accelerated tightening of the Fed’s monetary policy – do not seem to be as menacing as in late 2016. But the international financial institutions keep drawing our attention to other specific risks, which call for caution.  
    The political and legal saga that has shaken the country over the past three years is perpetually postponing the normalisation of the institutional environment. Accusations against the President are unlikely to prevent him from finishing his mandate, and the financial markets have reacted less virulently than during previous episodes. But the smooth implementation of structural reforms and the confidence of economic agents and investors are critical for fostering a solid, sustainable economic recovery. Faced with another bout of uncertainty, the central bank continues to support monetary easing in a persistently disinflationary environment.
    Russia’s macroeconomic situation has consolidated significantly in recent months. Real GDP growth accelerated to 0.5% year-on-year in Q1 2017, and the latest indicators point to an upturn in household consumption in early Q2 2017. The banking sector situation has stabilised since the end of last year, which should help support the recovery in H2 2017. Moreover, in the first five months of fiscal year 2017, the deficit narrowed sharply, thanks to higher oil and natural gas revenues and cutbacks in spending. The Russian authorities have also begun to rebuild the reserve fund, using surplus fiscal revenues, without placing a strain on the rouble.
    Economic growth slowed in the fourth quarter of fiscal year 2016/2017. This slowdown is only partly due to the demonetisation process. As of September, investment began to slow and the production of capital goods to decline. Looking beyond the difficulties of some corporates, the deterioration in the quality of bank assets has placed a heavy strain on loan distribution. Faced with this situation, the government adopted a new measure to increase the central bank’s role in managing non-performing loans. Although this measure should accelerate the debt resolution process, it will not offset the major capital needs of the state-owned banks.
    Monetary tightening and a stricter prudential and regulatory framework for the financial sector should curb domestic credit growth in 2017. For the time being, the main consequences are a slowdown in interbank financing, a bond market correction and the slower expansion of certain shadow banking activities. Commercial bank loan growth has not really decelerated yet. The slower growth in the real estate sector in recent months could spread to other sectors that are credit-dependent, and economic growth is likely to slow again in the quarters ahead.
    Since taking office in June 2016, President Duterte has adopted a brutal governing style and opted for drastic methods in his war against crime, drugs and corruption. Political predictability has lessened as a result. In the meantime, the country continues to enjoy strong economic growth and good macro fundamentals. On the fiscal front, the new government plans to reform the tax system and increase spending to close infrastructure gaps and reduce poverty. This will lead to wider deficits, which can be manageable given the currently moderate levels of fiscal imbalances and government debt. However, the authorities will have to be careful not to damage the credibility of the Philippines’ policymaking, which has been built gradually since the early 2000s.
    The number three, a symbol of unity, marks Turkey’s history and provides a cardinal reference point for the country’s modern economy. More prosaically, despite recent geopolitical and financial upheavals, the Turkish economy remains relatively dynamic. Yet the substitution of public spending for private spending raises questions about the quality of its policy mix and the sustainability of growth, at a time when potential GDP is slowing and the country faces chronic macroeconomic imbalances. The predominance of political and geopolitical issues has relegated essential economic reforms into the background, while relations with Europe have become tempestuous.
    The economy entered a phase of cyclical acceleration. The output gap is closed and inflation is gradually picking up tough from a low level. Unemployment reached a historic low and continues to slide, driven by growth-driven job creation and the still large supply of posted workers to other countries in the EU. Real wages’ growth exceeds productivity growth. Fiscal stance is pro-cyclical with several increases in spending stimulating the already buoyant domestic demand. The EU funds’ in-flows are expected to accelerate in 2017, boosting growth and investment further.
    After a severe political and economic crisis, the economy returned to country has swung back into growth. Stabilisation of the exchange rate laid the groundwork for lower inflation. The central bank has begun to ease monetary policy, but for the moment it has not yet had an impact on lending, which continues to contract. The IMF programme has encountered new delays: it is conditioned on the implementation of pension reform, which will not be adopted before fall. The recovery is too tepid to create jobs, and numerous Ukrainians have left to seek work in neighbouring countries. Exports are picking up, and will now receive greater EU support. The uneasy situation in the eastern part of Ukraine (embargo, armed conflict) hampers a veritable industrial recovery.
    The Algerian economy has been hard hit by the drop off in oil prices. Although the adjustment process was launched rather late, the first measures are beginning to pay off. Though still significant, the budget deficit nonetheless contracted in 2016, and the government’s goal is bring the budget deficit close to zero by 2019. The roadmap looks very ambitious, possibly excessively so. Major cutbacks in public spending threaten the economy, which is already showing signs of weakness. Granted, there is still some manoeuvring room. The external position is still solid despite the rapid drop in foreign reserves, and public debt is moderate. However, it is still uncertain how the authorities intend to cover their future financing needs.
    Economic activity has been severely hit by the decline in oil prices and the troubles disrupting oil production. Real GDP contracted by 1.5% in 2016, and the recession continued in first-quarter 2017. Stimulated by higher crude oil prices and an increase in oil production, the return to growth will nonetheless be sluggish. Restrictions on external liquidity continue to hamper industrial activity and weaken the exchange rate. President Buhari’s health problems, the risk of terrorist attacks, and the sabotage of oil facilities are all threats to economic activity.
    The floatation of the Egyptian pound since November 2016 and the introduction of fiscal reforms have significantly improved the macroeconomic situation, in particular forex reserves. The sharp EGP depreciation has pushed inflation to 30-year high, highlighting the sensitivity of consumer prices to currency fluctuations. However, other factors have also had a key role such as strong corporate pricing power in the consumer goods sector, particularly due to supply chain inefficiencies. Fiscal policy is also contributing to rising prices, but to a more limited extent. Getting inflation down could take some time, and in the short term, the authorities have limited resources to tackle it.
    The impact of the Saudi and Emirati embargo against Qatar will depend on the length of the crisis and on the intensity of the sanctions. Economic growth should slow but remain positive and CPI inflation should accelerate. Fiscal accounts are expected to be moderately affected. The main threat would be an extension of sanctions to the financial sector. Qatar is highly dependent on external financing, and the liquidity of a part of the sovereign fund could be questionable. Nevertheless, the government should confirm its support to the banking sector in case of deterioration in the situation of banks.
    27 April 2017
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    The rebound in oil and metal prices has stalled since the beginning of the year. Yet world growth seems to have accelerated. Reasons to explain the pause in the commodity price recovery have to be found on the supply side. They will probably be only temporary for metals, but look more lasting for oil. For commodity-exporting emerging countries, the rebound in prices in 2016 gave them some extra breathing room. But for the most fragile economies, the turnaround needs to continue to truly restore their external liquidity.
    Economic activity was disappointing again in late 2016, bringing the contraction in GDP to an average of 3.6% for the year. Yet there are increasing signs that the economy is pulling out of recession, lending credibility to the hypothesis of a very gradual upturn in economic activity in the quarters ahead. Restricted in recent years by inflationary pressures and budget overruns, the central bank now has free reign to ease monetary conditions (good cop). A stronger real, rapid disinflation and the highly awaited decline in real interest rates are all support factors for a recovery, unlike fiscal austerity (bad cop), which is nonetheless essential for the credibility of the policy mix.
    Russia’s macroeconomic situation has consolidated. After a 2-year recession, the Russian economy swung back into growth in fourth-quarter 2016, inflationary pressures dropped sharply allowing the central bank to ease monetary policy, the rouble has appreciated significantly over the past twelve months, and the government launched a major programme to consolidate public finances. In the light of this new environment, the rating agency Standard & Poor’s attached a positive outlook to Russia’s sovereign rating, suggesting that it could soon be upgraded to “investment grade” if the country’s macroeconomic situation continues to strengthen.
    The withdrawal of 500 and 1000 rupee notes does not seem to have had much of an impact on economic activity or on Narendra Modi’s popularity. His BJP party won a major victory in legislative elections in Uttar Pradesh, India’s most heavily populated state. Although Mr. Modi still falls short of a majority in the upper house of parliament, this victory nonetheless consolidates his power: he now controls 17 states and two union territories. Despite demonetisation, GDP growth reached 7% year-on-year in the third quarter of fiscal 2016/17, buoyed by robust domestic demand. Nonetheless, the difficulties of public-sector banks still seem to be squeezing financing for corporate investment.
    Economic growth has picked up slightly over the past two quarters, supported by the authorities’ stimulus policy measures. In Q1 2017, the growth acceleration was fuelled by a rebound in industrial activity, lifted by stronger domestic demand and an upturn in exports. This cyclical strengthening has enabled the central bank to start to tighten monetary policy cautiously, in response to the continued rise in credit risks and liquidity risks in the financial sector. However, downside risks to short-term economic growth prospects remain high, and the authorities’ determination to contain financial risks could be tested rapidly in case of another slowdown in economic activity.
    Since 2014 Colombia has been in the frontline of the strong external shock resulting from the collapse of global commodity prices, notably for oil. Its macro fundamentals deteriorated markedly up to early 2016 (i.e. a widening of twin deficits, a sharp depreciation of the Colombian peso and a surge in inflation), but economic growth has remained decent, driven by consumption. The macro rebalancing is not over and should continue in the coming quarters. Meanwhile, two key political achievements occurred in late 2016: the signing of the peace agreement with FARC, and the adoption of fiscal reform. These elements pave the way for brighter medium-term macro prospects, while economic growth should remain lacklustre in the short term.
    For more than a year, Mauricio Macri has been pursuing far-reaching economic reforms: the country has returned to the international financial markets, numerous taxes have been eliminated, energy prices and exchange rates have been deregulated, and the quality of statistics has been improved. The brisk pace of reforms initially sent the country into recession and triggered high inflation. But the expected benefits of the reforms are finally taking shape: the confidence of international investors is facilitating government financing, growth is picking up and inflation has begun to ease.
    Power sharing between the centre-left Social Democrats, the big winners of the December 2016 legislative elections, and the president from the centre-right National Liberal Party have gotten off to a rocky start. Anti-corruption protests have weakened the new majority, which has turned to public spending to bolster its image. Yet with the economy going strong, the increase in fiscal expenditure will only have a pro-cyclical effect. Fiscal deficits are mild for the moment, but excessive populism risks damaging macroeconomic stability. The fiscal discipline imposed by the EU should nonetheless help the government avoid any excessive overruns.
    Early legislative elections, called after the Socialist Rumen Radev won the presidential election last November, have strengthened his party’s position, but not enough to allow him to form a new government. That task goes to the former prime minister, Boyko Borissov the leader of the pro-European liberal right forces. Although it is too early to say how this power-sharing arrangement will work out, we can already count on the continuity of macroeconomic policies. The economic situation has improved significantly over the past two years, with the acceleration of growth and the improvement in the external accounts. The banking sector took advantage of this improvement to pursue restructuring.
    The year 2016 ended with presidential elections and the victory of the opposition party. Although the transition has unrolled smoothly, the new executive team will not benefit from much of a honeymoon period. The announcement of massive budget overruns threatens to weaken an economy that is only just getting back on its feet. The prospects of an “oil boom” will not change anything. To restore the confidence of investors, the fiscal consolidation programme backed by the IMF will have to be revised. The budget presented in March is a step in the right direction, but there are still numerous sources of tension.
    The Tunisian economy has just weathered two tough years, and the road ahead looks just as difficult, at least in the short term. Although growth should pick up somewhat thanks to the turnaround in the tourism sector, it will not be enough to bring down the very high unemployment rate. Rising government debt and persistently major external imbalances are also worrisome. Fortunately, the country should continue to receive massive financial support from international donors, providing the IMF programme remains on track.
    Egypt has laid out its vision to become a regional energy hub following discoveries of large offshore gas reserves in the East Mediterranean. This vision is critical as the energy sector remains the major driver of the country’s balance of payments. Recent developments suggest that Egypt has a clear potential to become a trading and export hub, notably for natural gas. However, the realisation of this ambition will depend on the country’s capacity to mitigate geopolitical, financial and regulatory risks. This should go hand in hand with energy diversification to reduce dependence on gas and sustain anticipated exports.
    31 January 2017
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    The “Trump tantrum” has left few traces on the financial conditions of emerging countries, with the exception of Mexico and Turkey. Despite higher US long-term rates, the cost of corporate financing in dollars is at an all-time low. Oil and metal prices continue to recover and foreign trade seems to be picking up. Even so, the IMF and the World Bank have revised downwards their growth forecasts for 2017, insisting on the downside risks more than on the gearing effect of a US fiscal stimulus. Are they being overly cautious after years of systematic downward revisions? It is hard to be so certain given the kaleidoscope of potential risks.
    The financial markets are “bullish” on the new president’s reform programme and seem to be showing patience with a persistently sluggish economy, despite a few positive signals before summer. Certain conditions have nonetheless come together for a gradual upturn in economic growth: a stronger real (BRL), disinflation and monetary policy easing. Yet hopes for a strong, rapid recovery of the Brazilian economy are built on shaky grounds. Budget austerity, unpopular reforms and a deteriorated job market will continue to weigh down consumption in H1 2017.
    The Russian economy is steadily pulling out of recession. In the first 9 months of the year, economic activity contracted by only 0.7% compared to a 3.7% decline in the year-earlier period. In Q3, growth swung slightly back into positive territory. Lower inflationary pressures and higher real wages should steadily lead to an increase in real revenues and an upturn in household consumption in 2017. The government could break with its budget plan and decide to stimulate growth if oil prices were to rise above its assumption. It seems preferable to us for any extra revenues to be allocated to the reserve fund, which is set to dry up sometime in 2017.
    In the first half of fiscal year 2016/2017, India’s GDP growth reached 7.2%, buoyed by the dynamic pace of household consumption in a disinflationary environment. In H2, in contrast, growth is expected to slow significantly due to the shock created by demonetisation. The liquidity shortage triggered a sharp drop in automobile sales, and PMI indexes have plunged to May 2013 levels. This shock should nonetheless be short lived. Activity is expected to rebound in FY 2017/2018, facilitated by the consolidation of corporate balance sheets, even though the troubles of state-owned banks could restrict loan distribution.
    There is no doubt about the authorities’ determination to maintain “stability” through the 19th Party Congress in fall 2017. Yet short-term growth prospects present high downside risks, such as the possibility of a downturn in the real estate market and mounting trade tensions with the United States. Capital account dynamics could also become a source of instability. Growing pressures on the yuan and capital outflows have grown in recent months and are expected to persist in the short term. As a result, foreign reserves should decline further and yuan depreciation should continue. To limit these trends, the authorities will not hesitate to introduce more capital control measures.
    Economic growth held above 6% in 2016, bolstered by export manufacturing and sectors focused on domestic demand, such as construction and services. In the short term, the country is expected to continue to expand its export base thanks to foreign investment, while private consumption growth should accelerate thanks to a better performance of the agricultural sector. Therefore, economic growth prospects are still looking strong. The risk of increased protectionism is a big cloud on the horizon. Moreover, in 2017, the authorities will certainly have to tighten monetary policy and increase fiscal consolidation efforts in order to contain the risks of macroeconomic instability.
    After months of political crisis, the Korean parliament voted to impeach President Park in early December. Pending validation by the Constitutional Court, which would allow new elections to be held, the Prime Minister has been named as interim President. Political uncertainty in the coming months will hold back growth, but a greater contribution to the slowdown expected in 2017 will come from the limited support from economic policy and the lack of vigour in the export sector. There are considerable challenges ahead for the medium term, but the good health of external accounts and public finances and the solidity of the banking sector should help South Korea to make reforms without increasing structural vulnerabilities.  
    After a tough year in 2015, Indonesia’s macroeconomic situation picked up in 2016. Economic growth accelerated slightly, driven by a hefty increase in public spending in the first half of 2016. Moreover, public finances improved, external vulnerability declined and corporates consolidated their balance sheets. At the same time, reforms were stepped up and the business environment improved. Even though credit risk continued to rise despite the rebound in commodity prices, the banking sector has large capital buffers to handle the situation.
    “Revision” is the key word: of the national accounts, of the constitution and of diplomatic policy. The first one suggests that Turkey was a tiger economy without knowing it in 2012-2015, whereas all indicators were previously pointing to a slowdown in growth made worse by the deteriorating political situation. However, the rewriting of Turkey's economic narrative does not remove the external vulnerability and the limited credibility of monetary policy. There are plans to revise the constitution in order to strengthen the president's powers, and Turkey has overhauled its geostrategic vision. Political and security concerns are likely to continue dragging down confidence among economic agents and investors, as well as the Turkish lira and economic activity, in 2017.  
    Growth slows down. Consumption accelerates, boosted by job creations and wages growth. Investment collapses in 2016, reacting to the slowdown in EU funds’ absorption, but should recover in 2017. Inflation is back in positive territory, but does not justify a tightening in monetary policy. With the cut in corporate income tax and the reduction in social contributions the government intends supporting activity as well as boosting the country’s attractiveness for investors. The intensity of the crowding out effect is weakening, paving the way for  a recovery in banks’ lending to the private sector.  
    Egypt’s economic slump could bottom out in 2016/2017. Ongoing fiscal reforms, a floating currency, massive external support and favourable energy prospects could lead to a reduction in the fiscal and current account deficits. Yet any improvements will be slow in the making, and vulnerable to external economic and political factors. Above all, high inflation introduces the risk of social discontent in the short term. The return to strong, sustainable growth will depend on the authorities’ capacity to restore the confidence of local and non-resident investors.
    Economic growth is picking up, buoyed by favourable tailwinds and the start-up of an ambitious infrastructure programme. The consolidation of public finances continues to progress, and public debt should begin to decline as of 2017. Yet there is little manoeuvring room. Fiscal discipline cannot be eased given the high level of public debt. Alongside financial constraints, the authorities will have to engage in a vast reform programme to set economic growth on a more solid path. As a member of the West African Economic and Monetary Union (WAEMU), Senegal can nonetheless count on the stabilising mechanisms of the CFA franc zone, whose sustainability is not threatened yet despite persistent vulnerabilities.
    In Angola, adjusting to the “new normal” for oil prices has been particularly painful due to the economy’s lack of diversification. Growth has slowed sharply at a time of currency rationing and drastic cutbacks in public spending. The current upturn in the oil market should have a favourable impact, albeit without triggering a real easing of external or fiscal constraints. This environment raises the question of the sustainability of public and external debt, notably in the medium term.
    21 October 2016
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    The economic growth deceleration in emerging countries as a whole seems to have come to an end. Confidence indicators in the manufacturing sector have improved and external financing conditions have become very favourable. However, the recovery remains uneven and fragile. Beyond the fact that the Brazilian and the Russian economies are expected to emerge from recession, the recovery will remain constrained by the structural slowdown in world trade and the very gradual deleveraging of corporates.
    Despite uncertainty over the new government’s reform programme, the markets and investors reacted positively to the political changes of the past few months. The same cannot be said for the local population, who fears a shift towards liberalism and the hardships of reforms, after weathering the turmoil of the political and economic crisis over the past two years. Squeezed by a sluggish labour market, a decline in purchasing power eroded by inflation and a heavy debt burden, household consumption is unlikely to make a positive contribution to the economic recovery for several more months. Even so, the economy could benefit from a gradual rebound in private investment.
    The Russian economy is getting a bit better. In the second quarter, GDP growth contracted by only 0.6% and manufacturing activity accelerated slightly. In addition, the business sector started to rebuild inventories and survey results have been positive. However, the recovery is fragile. Household consumption remains depressed by falling real wages and the government does not have sufficient fiscal rooms for manoeuvre to support the economy. The consolidation of public finances has become its priority. To achieve this, it is ready to freeze spending for the next three years. It hopes to reduce the budget deficit by 1 point of GDP per year, bringing it to no more than 1.2% of GDP in 2019.
    Two years after taking power, the Narendra Modi government managed to pass a unified VAT bill. Even though it will take a few years to feel the positive effects of this reform, the bill is a major advance. The government estimates the gains in terms of potential growth at between 0.9 and 1.7 points. Even though the country still faces enormous structural weaknesses, the business climate is improving. According to the latest competitiveness report, India gained 16 ranks last year and is now ahead of Indonesia. The rating agencies have turned a blind eye to these changes so far. A high public debt continues to block any improvement in India’s sovereign rating.
    The slowdown in China's economic growth has paused since the second quarter of 2016 thanks to stimulus policy measures. The stabilisation in industrial production growth, the upturn in the real estate market and monetary loosening could help reduce pressures on corporates and local governments by easing their liquidity constraints in the very short term. However, their solvency is not improving, their debt levels have become even more excessive over the last year and their capacity to service their debt remains weak. In this context, credit risks in the financial sector continue to increase and the performance of commercial banks deteriorates gradually.
    The DPP’s victory in the presidential and general elections last January rode on a wave of dissatisfaction with the poor economic performances of recent years, even though growth is expected to rebound in the short term thanks to the recovery in the global electronics cycle and the stabilisation of Chinese growth. The election results also reflect the people’s resistance to an overly close alignment with China. Yet tensions with its neighbouring giant could make it harder for the government to negotiate trade agreements with new partners, and even risks slowing the development of very high value-added sectors, at a time when Taiwan must deal with its decelerating growth potential and reduce its dependence on Chinese demand.
    The vote in favour of the draft constitution proposed by the military junta, in power since May 2014, is not good news. It does not resolve any of the political or social conflicts, while anti-democratic measures in the draft text suggest that the new constitution will not last much longer than the previous ones. Political uncertainty was clearly exacerbated by the king’s recent death, and is bound to last several more years. In the meantime, economic growth is picking up feebly, buoyed by tourism revenues and public spending. Yet Thailand’s competitiveness and attractiveness continue to erode, while competition with other countries in the region is increasingly straining FDI inflows.
    Malaysia’s economic situation has deteriorated. Growth has slowed, the current account surplus is shrinking, and the 1MDB corruption scandal has sparked a domestic political crisis and the loss of confidence of international investors. The political situation could remain muddled for several more years. Yet Malaysia’s medium-term prospects are still favourable. If the country’s political situation stabilises and the business climate improves, Malaysia’s integration in the regional economy and its upmarket shift in global supply chains could make it one of the main beneficiaries of the new Trans-Pacific Partnership (TPP) free trade agreement.
    Culminating a series of (geo) political shocks over the past three years, the aborted military coup of 15 July triggered a spontaneous outpouring of national support for President Erdogan. Yet the massive repression of institutions and the private sector that followed has created a growing sense of unease. Although the financial markets reacted relatively mildly, political tensions have severely strained economic growth in Q3, after a sharp slowdown in Q2 driven by a contraction in private consumption. Several support factors should keep the economy from collapsing, but there are growing concerns about the medium-term deterioration in public finances, which are rather healthy for the time being.
    Squeezed by the reduction in European transfers, investment growth is slowing. Consumption, in contrast, is holding up well, bolstered by public spending, which is paving the way for a soft landing. Solid exports have brought the current account into positive territory for the first time in 20 years. The increase in public spending has not fuelled inflation. The government has launched a family allowance programme as part of efforts to boost the birth rate, expecting to lift the country’s long-term growth potential. The cost of these policies will be covered by higher taxes on banks, large retailers and state-owned energy companies. There is also a big temptation to increase debt in the current environment of very low interest rates. 
    The Egyptian pound needs to be devalued due to the deterioration in the country’s export competitiveness and the squeeze on foreign-currency liquidity. As previous devaluations show, not only in Egypt but also in Argentina, it is necessary to have a sufficient liquidity shield to maintain control over the forex market. Past devaluations also show that improvements in external accounts depend on numerous factors that are not directly linked to exchange rates. Thanks to external financial support, the Central Bank of Egypt (CBE) should have enough liquidity to successfully carry out the devaluation. Yet external accounts are unlikely to improve before the energy deficit has been significantly reduced from 2018.
    Although the economy is hitting hard, it has not contracted, at least not yet. By the end of the year, the oil stabilisation fund will be likely depleted, while the upturn in oil prices – assuming it is confirmed – will be not sufficient to restore the sustainability of public finances. Public debt is low, which leaves some manoeuvring room. Yet there are still concerns about the government’s future investment capacity. Reforms are advancing, but very gradually. In the midst of a sustained shock, more will have to be done to remove the constraints on private sector development. Although the financial system’s stability is not threatened, liquidity is coming under greater pressure.
    The Q2 rebound is likely to be short lived since the economy still lacks a powerful growth engine. Recent political tensions could trigger renewed volatility in the financial markets and reduce the availability of external financing, especially if South Africa’s foreign currency sovereign rating is downgraded to speculative grade. This would have a particularly negative impact on growth given the country’s substantial financing needs and apparently limited adjustment mechanisms.
    13 July 2016
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    A few commodity exporting countries are in a truly alarming financial situation. Although commodity prices have rebounded since February, there is still room for a downward correction. An emerging market sovereign debt crisis similar in nature and size to the Latin American crisis of the 1980s seems unlikely. Yet the financial buffers (foreign reserves and assets of sovereign funds that can be rapidly converted into hard currency) are eroding much faster than previously expected.
    After two years of economic-political turmoil, social discontent and public fatigue are widespread. Beyond the core sovereign perimeter, quasi-sovereign/peripheral public entities and contingent liabilities must be monitored carefully. And numerous corporates’ and households’ balance sheets are in trouble. In this context, the new pro-business government faces the challenge of preserving national cohesion by maintaining some emblematic social programmes and implementing large-scale structural reforms. Even though uncertainty remains, markets and investors have reacted positively to recent political developments. The economy could be on the verge of stabilising, and the banking system appears to be relatively healthy.
    The Russian economy could emerge from recession in the second half of the year. Economic growth contracted by only 1.2% in Q1 2016 and the industrial sector has shown signs of recovery in the last few months. But the economy is not out of the woods yet. The government must somehow ‘invent’ a new growth model in order to adapt to an environment of relatively low commodity prices, otherwise Russian growth may go no higher than 1% or 1.5%. Yet the government has very little room for manoeuvre in its attempts to transform the economy, and this could be the case for as long as international sanctions remain in place.
    For the FY 2015/16, GDP growth reached officially 7.6%, although it was probably not as strong based on other economic indicators. Companies and banks continue to pursue consolidation strategies, and private investment remains sluggish. Although the overall corporate situation seems to be improving, some sectors are still particularly weak, and banks are experiencing a significant rise in stressed assets, while regulatory restrictions are on the rise. During the most recent elections in May and June, Narendra Modi’s party managed to win only one of the five States holding elections.
    Thanks to the government’s expansionist policy mix, economic growth has just barely levelled off since last March, principally lifted by an upturn in investment in public infrastructure projects and the real estate sector. In contrast, manufacturing investment and exports – the “traditional” components of growth – are still depressed, while private consumption and services – the “new” growth engines – have stalled since the beginning of the year. Medium-term prospects are becoming a little more uncertain given the difficult process of rebalancing between China’s growth sources, as well as due to the continued increase in credit risks in the financial sector and the numerous constraints that make it harder to manage economic policy.
    The Hong Kong economy is going through a difficult patch. Real GDP growth has slowed sharply under the effect of a weakening of all of its components. Exports of goods and services, retail sales and real estate prices are all down. In the short term, Hong Kong is likely to remain very vulnerable to slowing Chinese demand and weaker trade in the region. Moreover, monetary and credit conditions are likely to tighten gradually when US interest rates rise. To help support the economy, the government is banking on fiscal stimulus measures. It has considerable room for manoeuvre to implement these.
    Economic growth is likely to slow further in 2016. The impetus provided by the recently announced stimulus package will probably not be enough to kick-start the economy for the long term. More fundamentally, the reforms undertaken over the past three years in an attempt to rebalance the growth model have not worked. The country remains too dependent on its export sector and therefore vulnerable to fluctuations in global demand, whilst the level of household debt creates constraints for monetary policy. South Korea nevertheless has substantial room for manoeuvre on the fiscal front, but does not appear prepared to use it.
    Economic growth is likely to slow slightly as European transfers are set to decline from record levels in 2015. Macroeconomic conditions are good: low interest rates are boosting lending and reducing the cost of debt servicing. This provides an opportunity to tackle structural problems, particularly demographic ones. It will be hard to strike a balance: policies aimed at increasing the birth rate are costly, but if the problem is not solved, the cost in terms of pensions and healthcare could become unbearable in the long term. Although unemployment is falling in both countries, Slovakia's unemployment rate is twice that in the Czech Republic.
    In 2015, the economic situation improved in the western Balkans. Growth accelerated in a slightly inflationary environment, while macroeconomic indicators began to pick up. On the whole, this tendency should continue in 2016 despite the deterioration of growth prospects in Europe. Even so, there are still several sources of vulnerability: major political tensions, fragile public finances in certain countries undermined by the slow pace of reforms, and a high dependence on foreign investment. Slovenia boasts the healthiest situation; Croatia and Serbia are reporting encouraging trends; and Macedonia, Montenegro and Bosnia-Herzegovina still face significant weaknesses.
    In contrast with many developed and emerging economies facing economic and fiscal difficulties that have called into question the role of the state in the economy, Chile is attempting to create a welfare state, which has hitherto proved inadequate. Lauded for its macroeconomic stability, the Chilean liberal model has failed to ensure an equitable distribution of the fruits of growth. Economic development over the medium to long term is challenged by high levels of inequality, which have been targeted by the reforms adopted by the government since 2014 to maintain social cohesion. These reforms have been slow in coming, and have faced opposition, particularly from the business community, in a difficult domestic and international economic climate.
    The drop in oil revenue should have a major impact on economic activity in 2016. The economy is already contracting due to public spending cutbacks and the government’s cash management problems. The bank liquidity tightening is also expected to have an impact on private sector lending. The country’s liquidity and external solvency, as well as that of the government, should remain solid, unless oil prices plunge again. The outlook for the Saudi economy depends on the government’s capacity to implement the announced reforms, which are primarily designed to diversify the economy.
    The Tunisian economy continues to suffer. Real GDP growth has been only 0.8% in 2015, and prospects of recovery look slim. The tourism sector is struggling to recover from the attacks that took place in 2015, manufacturing has ground to a halt and the agricultural sector is contracting. In addition to security threats and social unrest, investors are suffering from a lack of visibility. Political tension has increased, whilst the economy needs reform more than ever to give it fresh impetus. In addition, macroeconomic weaknesses are building up, despite the support of the international financial community, and the banking sector still looks vulnerable
    Despite their slight recovery since February, low oil prices continue to hurt badly Nigeria’s economic activity, external accounts and public finances. The economy has also been affected by the decline in oil production levels in recent months and it is likely to have to contracted in the first half of 2016. The authorities have been forced to make major policy adjustments in response to lower oil receipts and deteriorating macroeconomic balances. On June 20th, they switched to a more flexible exchange rate regime, which led to an immediate 30% devaluation in the naira against the dollar. Political and social tensions remain significant, fuelled by the deterioration in real household income and unrest in the Niger Delta region.
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