Emerging - 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.
    Emerging - 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.

On the Same Theme

Between comfort and unease 4/16/2018
High confidence levels, a global economic upswing, cautious central banks, sustained job creation and companies’ stepped up investments: enough reasons to feel comfortable when assessing the outlook for world economic growth. Yet a feeling of unease has been on the rise in recent weeks. The softening of sentiment indicators confronts us with the question of what happens after the peak. Is the flattening of the yield curve in the US a harbinger of bad weather to come? Should the share price decline of certain tech companies be read with the experience of TMT stocks in 2000 in mind? Will US inflation end up overshooting the Fed’s objective? And last but not least, to what level will the trade disputes escalate?
Tensions flare up 1/25/2018
It looks like 2018 will be a year of strong growth across the globe, with very few countries left behind. In the United States and the eurozone, business climate indicators are close to the peaks last seen in the mid-2000s. Although pressure on production capacity has been rather mild so far, business leaders are beginning to feel it more acutely. Asset prices – both financial and real estate – continue to rise, and some now fear the emergence of bubbles. The time is ripe for the normalisation of monetary policies. The central banks are cautiously pulling out of the government bond market, which is likely to spark an upturn in interest rates. This risks placing a damper on activity as of 2019.
The recovery continues, but… 7/11/2017
A wave of optimism is sweeping the economy, especially in the eurozone, where growth is accelerating and spreading to all member countries. As we enter summer 2017, all economic indicators are looking upbeat, job creations are picking up, and unemployment is declining at a faster pace. The horizon looks bright, with just one exception, China, where a few clouds are forming. Beijing is taking action to curb credit growth again, which is bound to strain activity, notably in the real estate sector. Heavy industry is already showing a few signs of relapsing, and global commodity prices are easing.
Stronger momentum 4/25/2017
Economic indicators are picking up in most of the developed countries. Eurozone growth is more robust, at an annualised rate of nearly 2% in first-quarter 2017. The rebound is also better distributed, as the economic cycles of the 19 eurozone member countries are tending to move more in sync. The United States reported an upturn in oil and shale gas- related activities, and corporate investment in this sector probably rebounded at the beginning of the year. Inflation rebounds, approaching or overshooting the official 2% target. The central banks keep calm, however.

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