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.

View more videos Eco TV

On the Same Theme

Foreign versus domestic drivers of weaker sentiment 2/15/2019
 Since early 2018, based on the purchasing manager indices, a large number of countries have witnessed a decline in the assessment of new export orders which was bigger than the decline of the general climate in manufacturing. This suggests a dominance of foreign demand shocks, rather than domestic shocks, in explaining slower overall growth. The drop in new export orders echoes the significant slowdown in world trade growth. This is probably related to slower Chinese growth and, in many countries, slower growth in capital expenditures, which have a higher import content than consumption. Trade-related uncertainty may also play a role. 
Getting to a low carbon economy 2/7/2019
The Paris climate deal, concluded at the COP21 in 2015, pleads for keeping global warming below 1.5°C above pre-industrial levels. However, in its latest report, the IPCC (Intergovernmental Panel on Climate Change) warns that current mitigation policies are insufficient to obtain this objective. Investments in renewable energy and electricity infrastructure have to be stepped up. The power sector has to be decarbonised, the use of electricity increased, and energy efficiency improved. Low carbon policies are difficult to implement because of commercial interests and social impact, in particular concerning the increase in carbon prices. Nevertheless, to achieve substantial reductions in greenhouse gas emissions, a different approach is needed, including carbon pricing and trade sanctions.
Why recessions trigger fear 1/29/2019
A significant growth slowdown triggers anxiety that worse is to come. Households and companies hate uncertainty, confidence drops and a negative spiral develops. Although central banks may adopt a more dovish tone, the minds will still be dominated by a feeling that growth is missing.
Slowdowns, households, companies and banks 1/29/2019
Slower growth will raise the concern of households that unemployment will increase. Greater caution means less spending. Companies will scale back investments because they represent a long horizon commitment which moreover is irreversible. Reduced visibility means companies will be reluctant to commit for the long run. Banks will also become more cautious in extending credit, being concerned that the balance sheet quality of customer will suffer from a period of negative growth.
“When the tide goes out”. Market psychology during economic downturns 1/29/2019
The stylised facts of a recession (considerable drop in equity prices, widening of the spread between corporate and government bonds) imply that during a slowdown, investors will focus their attention on the likelihood of entering a recession. The sensitivity to bad news increases, the investment horizon shortens and volatility rises, with a detrimental impact on growth.
When environmental, trade and social policies meet 1/25/2019
The recent “economists’ statement on carbon dividends” offers important policy prescriptions for the US to address global warming. It explicitly refers to the need for a border carbon adjustment system so as to maintain competitiveness versus countries that would not have introduced a carbon tax. The authors recommend that the carbon tax proceeds be equally distributed to US citizens. It could be envisaged to use these proceeds in a way which takes into account the distributional aspects of environmental taxes whilst promoting energy efficiency investments.
Uncertainty overshadows the cyclical environment 1/24/2019
The slowdown is spreading widely. Although it is reasonable to expect growth to normalise, several sources of uncertainty (fears of a trade war, Brexit, the US government shutdown, etc.) are acting as headwinds. China has already announced new measures, and in the United States, the Federal Reserve is insisting on its patience (concerning inflation) and flexibility when it comes to adapting monetary policy.
Lack of progress in climate talks 1/24/2019
The COP24 only succeed in agreeing on rules on measuring, reporting and verifying carbon emissions. In the meantime, the world is falling behind the objective to limit global warming to 1.5°C. CO2 emissions are set to rise to 2030, whereas they should peak by 2020. Countries are underestimating the urgency for action or held back by commercial interests. Moreover, environmental legislation is met by growing public resistance. It demands a better framing of climate policies. Moreover, the climate change discussion should be broadened to the WTO.
Uncertainty on the rise 1/18/2019
The economic policy uncertainty index, which is based on media coverage of this topic, has seen a huge increase since the middle of last year, even surpassing the previous high reached at the end of 2016. Measures of business uncertainty in Germany and the US have also risen. The dispersion of individual stock returns, a third measure of uncertainty, has also increased in the US and to a lesser extent in the eurozone.
In the grip of growth fears 12/21/2018
The new projections of the FOMC show a downward revision to growth in 2019, a slower pace of Fed tightening and a lower cyclical peak level of the federal funds rate. Lower bond yields, a weaker dollar and a global decline in equity markets show that investors are in the grip of a growth scare. This is also echoed in a survey of US CFOs but this is at odds with the outlook for the drivers of economic growth. Growth worries probably reflect a focus on tail risk (rather than on the mean forecast) which may be explained by rising uncertainty.

ABOUT US Three teams of economists (OECD countries research, emerging economies and country risk, banking economics) make up BNP Paribas Economic Research Department.
This website presents their analyses.
The website contains 2027 articles and 558 videos