eco TV
EcoTV - February 2019 2/7/2019

TRANSCRIPT // EcoTV - February 2019 : February 2019

Hello and welcome to our February 2019 edition of EcoTV, the video magazine of BNP Paribas’ economists.

At the top of this edition, we will look at economic forecasters, who seem to have the blues. Both the IMF and the contributors to the ECB survey have lowered their growth forecasts. We will ask our Chief Economist William De Vijlder to explain these downward revisions. We will also ask William whether he has lowered his own forecasts.

Next, the Chart of the Month will take us to the emerging countries. François Faure will talk about the upcoming economic slowdown and its impact on the emerging countries. We will also examine the debt question. We will conclude with Three Questions on Mexico for Hélène Drouot. A few weeks after Andrés Manuel López Obrador was sworn in as Mexico’s new president, we will review how investors perceive his first decisions.

Enjoy the show.

 

FOCUS

François Doux

Economic forecasters have the blues. Their growth forecasts are increasingly pessimistic for the months ahead. ECB economists are looking for eurozone growth only 1.5% in 2019, down from 1.8% previously.

William De Vijlder, hello.

William De Vijlder

Hello François.

François Doux

Do you share their pessimism? A little more so than before?

William De Vijlder

We are less optimistic, and less confident. We have lowered our eurozone growth estimate to 1.0% this year, from 1.4%.

François Doux

You are not the only ones. In addition to the ECB survey, the IMF is also more pessimistic, as we can see in these figures. The IMF has lowered its growth forecast. It lowered its global growth outlook by 0.2% to 3.5%, but held its US forecast unchanged at 2.5%. As to the eurozone, the IMF is more optimistic than you are, with a growth forecast of 1.6%. How do you explain this excessive pessimism?

William De Vijlder

I don’t know if you can call it excessive pessimism. Let’s say that we are being much more cautious, and that we are associating several different factors.

Looking back at last year’s forecasts, or the ones just six months ago, we can see they were a bit too optimistic. I think we all got carried away by the robust growth figures and very high confidence indicators.

What seems even more important, however, is that the world we live in today has changed tremendously. A year ago, for example, money market funds were focused on the risk of higher US interest rates and a rebound in inflation.

Today, everyone is worried about US-China trade negotiations, and the outcome of Brexit. In the end, the world has changed a lot.

François Doux

Risks have evolved. There are even a few more risks now. Doesn’t this make forecasting harder? Isn’t there less visibility?

William De Vijlder

Visibility is low. But this is also due to some temporary factors. Take for example the events that have swept France in recent weeks. Grasping the impact of these events, which a priori should be only temporary, is a real challenge. They might have a more lasting impact on growth momentum. In our opinion, they will only have a temporary impact however. In Germany, several factors are also playing a very temporary role, notably the application of new anti-pollution standards, which has hit the automobile sector.

These factors effectively create a more opaque environment that is hard to analyse. Reduced visibility also influences household and corporate behaviour. Household confidence has eroded. I think this can be attributed to lower visibility. When companies have less visibility, they become less confident and tend to scale back investment.

François Doux

Greater uncertainty can also be seen in the financial markets. In the eurozone, economic statistics were not as robust as expected, and as a result the markets reacted even more strongly. But don’t you see any signs of hope, William De Vijlder?

William De Vijlder

Yes, of course. Psychologically, we risk switching from excessive optimism to excessive pessimism. This is a very well-known phenomenon.

A second, even more important point, is that there is a good chance that the US-China trade talks will eventually result in an agreement. Brexit is a different matter: the outcome is totally opaque. Yet there is still talk about the possibility of avoiding a no-deal Brexit. That at least should boost morale.

A third, very important factor concerns China. It has announced a series of fiscal measures which should begin to pay off as of the second quarter.

Under the combined impact of these three factors, confidence indicators should at least level off. As a result, growth prospects could be a little more optimistic for the rest of the year.

François Doux

William De Vijlder, thank you. We will now look at how these growth expectations will affect the emerging markets and their debt. We will be back in a moment with François Faure and our Chart of the Month.

 

CHART OF THE MONTH

The economic slowdown that William De Vijlder just spoke about will also hit the emerging countries. We will look at debt in particular, the Achilles’ heel of the emerging economies.

François Doux

François Faure, hello.

François Faure

Hello.

François Doux

How is the debt situation in the emerging countries in early 2019?

François Faure

It all depends on whether China is included in the debt ratio. Including China, the debt ratio is much higher…

François Doux

That’s the blue curve.

François Faure

Exactly. And it has continued to rise throughout 2018. Excluding China, the debt ratio was more or less stable. Yet it is higher compared to the debt ratio just before the 2008-2009 financial crisis. This is why the IMF and other international financial institutions are saying that deleveraging did not occur.

François Doux

Let’s take a closer look. Which countries will face higher debt servicing?

François Faure

To measure the vulnerability of each country, we calculated the total amortization of bonds and syndicated loans as a share of foreign reserves. This chart shows the countries with the highest ratios. They can be divided into two groups. The first is comprised of countries with a rather strong macroeconomic situation and fundamentals. This is the case for South Korea, Mexico, Malaysia, and China. We are not really worried about these countries, despite relatively high ratios. The countries in the second group, in contrast, are much more fragile. They include Ukraine, South Africa, Turkey and Ghana, which have rather high ratios. Moreover, Ukraine’s debt burden has increased sharply over the past three years.

François Doux

To conclude, if a problem were to arise, could their heavier debt burden lead to a credit crisis?

François Faure

The answer is not really. ECB economists published a study recently. If we compare the current situation to the macroeconomic conditions that prevailed at the time of the big Asian financial crisis of the late 1990s, the probability of a crisis has only increased in very few countries, namely, Turkey, Ukraine and Argentina.

François Doux

François Faure, thank you. We will be back in a moment to talk about Mexico with Hélène Drouot.

 

3 QUESTIONS

François Doux

Three questions about Mexico, a couple months after Andrés Manuel López Obrador was sworn in as the new president, with an absolute majority in the two houses of Parliament.

Hélène Drouot, hello.

Hélène Drouot

Hello.

François Doux

First question, how has investor sentiment changed in the weeks after the new president took power?

Hélène Drouot

For the moment, AMLO, as the president is commonly known, has provided investors with some reassuring signals. He has pledged to maintain the central bank’s independence and to keep public finances from deteriorating during his mandate. He also approved the signing of the new trade agreement with the United States and Canada, even though he fiercely opposed trade agreements during his campaign. Lastly, he has announced major infrastructure projects designed to boost the country’s attractiveness and to improve productivity.

François Doux

He also made some very populist campaign promises. What about these promises?

Hélène Drouot

He has tried to advance on both fronts simultaneously. In other words, he has combined some reassuring measures for investors with some of his campaign promises, including raising the minimum wage and facilitating access to healthcare and education for low income households. Above all, he made fighting corruption the top priority of his presidency. As part of his anti-corruption campaign, he held a public referendum that resulted in the cancellation of the Mexico City airport project. In his eyes, this type of project is synonymous with corruption.

François Doux

Second question: as an economist, what are the risks of budget overruns in Mexico?

Hélène Drouot

In the very short term – for the year 2019 – the risk seems small. The budget proposal was in line with the budgets presented by the previous administration. In the medium term, in contrast, there are some risks. First, the budget overlooks several items, notably the costs associated with the cancellation of the Mexico City airport project. More importantly, the uncertainty surrounding energy sector reform could strain the public deficit. AMLO and his team have pledged to inject funds into Pemex, the national oil company. The company’s need for capital injections could become recurrent, especially if they were underestimated.

François Doux

We will find out in the months ahead. My third and last question: in general, what are the main risks facing Mexico?

Hélène Drouot

We will be monitoring the uncertainty surrounding the future of the energy sector reform. The previous president, Peña Nieto, opened the oil sector to investment from private investors. For the moment, AMLO’s position is not very clear, and we fear this policy could change during his mandate.

Looking beyond the oil sector, such a move risks driving investors away from the economy as a whole. So we will pay close attention to investor sentiment.

François Doux

In any case, the coming months and years promise to be very interesting as far as Mexico is concerned. Thank you Hélène Drouot. Tune in next month for another edition of EcoTV.

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