Presentation on theme: "The Advance of Emerging Economies Presented by: Carlos M. Asilis, PhD PRS LatAm “Business in Times of Economic Uncertainty” Conference IE Business School."— Presentation transcript:
The Advance of Emerging Economies Presented by: Carlos M. Asilis, PhD PRS LatAm “Business in Times of Economic Uncertainty” Conference IE Business School Madrid Spain November 21, 2008
2 The Advance of Emerging Economies Asset-Based Economy in Crisis. Vicious Deleveraging Cycle in Progress… Crisis Fueled by Imbalances Triggered by Overly Lax Monetary Conditions and lack of Prudent Financial Sector Supervision Asset Deflation in Progress…leading to Goods and Services Price Deflation Bullish Long-term, Secular Dynamics Facing the Emerging Economies Largely Intact Though Signs of Policy Slippage and Macro Imbalances Increasingly Evident (e.g. Venezuela, Ecuador, Argentina, CEE, Property Sector in Asia) Global Financial Crisis Already Morphing into Severe World Economic Crisis. Emerging Economies’ Vulnerabilities Largely Tied to Exposure to World Trade and Growing Reliance on Cross-Border Capital Inflows Going Forward, Cross-country Dispersion in Credit Fundamentals and Business Attractiveness Will Rise Sharply.
3 Emerging Economies’ Fundamentals Have Strengthened Steadily Since 2002 Source: Fitch Ratings, as of 12th Nov 2008; Fitch Sovereign Rating History, July 2006 Fitch Long Term Credit Ratings 2002 2008 Foreign Currency Local Currency Foreign Currency Local Currency BrazilB+ BBB- ChinaA-A A+AA- Czech Rep.BBB+A A+AA- IndiaBBBB+ BBB- IsraelA-A AA+ KoreaAAA- A+AA MalaysiaBBB+A A-A+ MexicoBBB-BBB BBB+A- RussiaBB- BBB+ TaiwanA+AA A+AA ThailandBBB-BBB+ A TurkeyBB BB-BB South AfricaBBB-BBB+ A Higher GDP Growth, Lower Inflation, Stronger Fiscal Positions, Higher International Reserves
4 Emerging Economies Have Commanded a Growing Share of World GDP Through International Trade and Finance Source: World Bank World Development Indicators, As of 17th December 2007; Bloomberg These Dynamics Have Been Reflected in the Sharp Out-performance of Emerging Equity Markets Versus World
5 Reality Shock to Many in the Markets Cross-border and domestic credit in emerging markets Cross-border claims of BIS reporting banks vis-à-vis emerging markets 1 Domestic credit to the private sector 2 In billions of US dollarsAs a percentage of GDP 200220072002200720022007 Emerging markets 3 1043263116.619.150.966.4 Claims on banks647160410.311.6.. Asia4604137418.620.697.995.2 Claims on banks486101014.915.1.. Latin America 5 23335015.111.132.239.5 Claims on banks7713754.3.. CEE 6 12159916.532.225.754.7 Claims on banks492996.716.1.. 1 External positions of reporting banks vis-à-vis individual countries on a residence basis; amounts outstanding. GDP data are IMF-WEO estimates. 2 The economies cited excluding Colombia, Israel, Peru and Venezuela. 3 The economies cited plus Israel, Russia, Saudi Arabia and South Africa. 4 China, Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand. 5 Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. 6 Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, Slovenia and Turkey. Source: IMF; National Data; BIS Banking Statistics. Much of the Emerging Economies’ Impressive Performance since 2002 Has Been Externally Driven. Favorable Terms of Trade Shocks (LatAm, S. Africa,Russia); Sharp Acceleration of Cross Border Flows (CEE) and Above Trend World GDP Growth (Asia) Favorable world financial conditions fueled large Cross-border flows into Emerging Economies, contributing to sharp expansion in macro imbalances and domestic credit
6 Source: IMF; CEIC; BIS; National Data. Government Debt 2 Household credit 3 Corporate Debt 4 2001 2007 Asia = China, Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan (China) and Thailand; CE = the Czech Republic, Hungary and Poland; LatAm = Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela; Other = Russia, South Africa and Turkey. 1 As a percentage of GDP; weighted average of the economies listed, based on 2005 GDP and PPP exchange rates. 2 Gross (for China, net) debt. 3 Bank credit to households. 4 Debt securities issued by financial and other corporate issuers. 5 Argentina, Brazil, Chile and Mexico. The Potent Combination of Favorable Terms of Trade Shocks/Benign Financial Conditions/Partial Sterilization of Capital Inflows Led to Sharp Real Exchange Rate Appreciation, Financial Intermediation and GDP Growth. Since 2001, EM Countries’ Public Sector Savings have strengthened while Private Sector Leverage has increased. In CEE, both Public and Private Sector Savings have deteriorated sharply, making those Economies increasingly vulnerable to External Shocks. Public and Private Sector Savings and Leverage
7 The World Financial Crisis Has Fueled Sharp Downward Revisions to World GDP Growth. Source: JP Morgan The Combination of Lower Growth Expectations and Higher Cost of Capital Has Triggered a “Sudden Stop”-Like Adjustment in EM.
8 Since the Onset of the Crisis, the Market Performance in EM Currencies, Equities and Credit Has Fallen Predominantly Across the Credit Fundamentals Divide For Example, the Accompanying Chart Illustrates the Close Positive Nexus Between Individual Countries’ Reliance on cross-border financing and cost of sovereign debt insurance. Source: IMF; DataStream; National Data. BR = Brazil; CL = Chile; CN = China; CO = Colombia; CZ = Czech Republic; HR = Croatia; HU = Hungary; ID = Indonesia; KR = Korea; MY = Malaysia; PE = Peru; PH = Philippines; PL = Poland; RO = Romania; RU = Russia; SK = Slovakia; TH = Thailand; TR = Turkey. Outlying observations (Argentina, Mexico, South Africa and Venezuela) are not shown. 1 Foreign liabilities as a percentage of total liabilities of banking institutions at end-2007. 2 Increase in CMA five-year credit default swap premia (in US dollars except as noted) between end-July 2007 and mid-March 2008, in basis points. 3 Bonds denominated in euros.
9 A Cursory Look at Selected External Vulnerability Indicators (2007A) Indicate the CEE Region’s Unique Vulnerability Source: IMF; BIS Banking and Securities Statistics. Current account balance 1 Net FDI inflows 1 Net portfolio investment inflows 1 Net other investment inflows 1,2 Short-term foreign debt 3 Cross- border claims 4 China184.108.40.206.68.04.1 India–220.127.116.11.329.321.1 Other emerging Asia 5,6 8.61.7-1.71.444.372.8 Brazil0.32.12.91.034.511.6 Colombia–3.85.00.21.349.317.7 Mexico–0.82.00.7–0.438.427.2 Other Latin America 6,7 4.22.0-2.0-0.356.432.1 Central Europe 6 -4.42.3-1.36.261.655.0 Other emerging Europe 6,9 -14.67.6-0.911.8119.275.8 Russia5.90.3–0.27.020.555.0 Middle East 6,10 14.90.9-3.8-1.852.661.4 South Africa–18.104.22.168.655.114.8 1 As a percentage of GDP. 2 Banks and other sectors. 3 As a percentage of foreign exchange reserves. 4 External positions of reporting banks vis-à-vis individual countries on a residence basis; amounts outstanding as a percentage of domestic credit. 5 Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand. 6 Simple averages of the ratios of the economies listed. 7 Argentina, Chile, Peru and Venezuela. 8 The Czech Republic, Hungary, Poland, Slovakia and Slovenia. 9 Bulgaria, Croatia, Estonia, Latvia, Lithuania, Romania and Turkey. 10 Israel and Saudi Arabia.
10 Summary Annual Statistics on EM Countries’ Output Growth, Inflation and Current Account Balance Since ‘03 Source: BIS, IMF, World Economic Outlook; Consensus Economics; National Data Real GDP 1 Consumer prices 1 Current account balance 2 2003–06200720082003–06200720082003–0620072008 Total EMEs 22.214.171.124.57439788803 Emerging Asia 126.96.36.199.34.25.8238522457 China10.511.9188.8.131.5231372348 India 3 184.108.40.206.54.66–2–15–23 Other Asia 4 220.127.116.11.735109166132 Latin America 18.104.22.168.36.16.63227–10 Brazil22.214.171.124.44.55.1113–22 Mexico126.96.36.199.13.84.2–6–7–11 Other Latin America 5 188.8.131.52.11010.6273123 Em er ging Europe 184.108.40.206.35.67.1–64–119–146 Poland220.127.116.11.92.44.2–8–16–24 Turkey7.54.54148.89.7–20–38–45 Other Emg. Europe 6 18.104.22.16856.7–37–65–78 Russia22.214.171.1241.7912.3698081 Africa 7 5.96.3 126.96.36.1991222 South Africa188.8.131.52.87.18.5–9–21 Middle East 7 184.108.40.206.610.411.5151275398 Memo: G7 220.127.116.11.1 3–478–457–433 Notes Estimates for 2008 are based mainly on May consensus forecasts, except for emerging Europe and Russia. Forecasts for Africa and the Middle East are from the IMF. 1 Annual changes, in per cent. Total and regional figures are weighted averages based on 2005 GDP and PPP exchange rates. Average of period, except Latin American inflation figures: end of period. 2 In billions of US dollars. Total and regional figures are the sum of the economies listed. 3 Data are for fiscal years beginning in April; inflation figures refer to wholesale prices. 4 Hong Kong SAR, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan (China) and Thailand. 5 Argentina, Chile, Colombia, Peru and Venezuela. 6 Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia (FYR), Romania, Slovakia and Slovenia. 7 IMF World Economic Outlook regional grouping.
11 Contributions to Real GDP Growth (%): Emerging Asia’s Growth increasingly tied to Domestic Consumption while continuing to benefit from Exports Source: BIS, JP Morgan Chase, World Financial Markets, National Data While All EM Regions Recorded Strong GDP Growth since 2002, the Quality of Such Growth Varied Across Regions…in Asia, External and Domestic Growth Balance Has Been Sustained… China 1 Other Asia 2,3 PCE 7,8 Investment 8 Net exports 8 GCE 8,9 GDP Growth 6 Comments 1 A breakdown of consumption is not available. 2 Weighted average of the economies listed, based on 2005 GDP and PPP exchange rates. 3 Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan (China) and Thailand. 4 Brazil, Chile, Colombia, Mexico and Peru. 5 The Czech Republic, Hungary and Poland. 6 In per cent. 7 Private consumption expenditure. 8 In percentage points. 9 Government consumption expenditure.
12 Latin America 2,4 Central Europe 2,5 Source: BIS, JP Morgan Chase, World Financial Markets, National Data PCE 7,8 Investment 8 Net exports 8 GCE 8,9 GDP Growth 6 Comments 1 A breakdown of consumption is not available. 2 Weighted average of the economies listed, based on 2005 GDP and PPP exchange rates. 3 Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan (China) and Thailand. 4 Brazil, Chile, Colombia, Mexico and Peru. 5 The Czech Republic, Hungary and Poland. 6 In per cent. 7 Private consumption expenditure. 8 In percentage points. 9 Government consumption expenditure...While in Latin America and Central Europe Growth is Increasingly Reliant on Domestic Consumption, while undergoing Slippage in Net Exports Growth - a Sign of Currency Overvaluation
13 Source: IMF; Bloomberg; BIS. Real exchange rates 1,2 1 In terms of consumer prices. 2 In effective terms; 2006 = 100; an increase indicates an appreciation. 3 Median of the economies in the group. 4 China, Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan (China) and Thailand. 5 Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela. 6 The Czech Republic, Hungary, Poland, Russia, Saudi Arabia, South Africa and Turkey. Asia 3,4 Latin America 3,5 Other Emerging Markets 3,6 Large Cross-Border Capital Inflows Fueled Lax Monetary Conditions, Incomplete Sterilization and Currency Strength
14 International Reserve Accumulation Courtesy of Strong World GDP Growth and Easy Financial Conditions Source: CEIC, DataStream, National Data, BIS calculations Foreign reserves 2 Bank credit to private sector 1 As a percentage of GDP. 2 Net of currency. 3 Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan (China) and Thailand. 4 Weighted average of the economies listed, based on 2005 GDP and PPP exchange rates. 5 Argentina, Chile, Colombia, Mexico and Peru. China Other Asia 3,4 BrazilOther Latin America 4,5 Russia Foreign Capital Inflows were Intermediated into Private Sector Credit Growth in a Significant Degree, especially in Non-Asia regions.
15 Emerging Economies’ Outlook ■ In the short-term, Priority Lies in Restoration of Global Financial and Macro Stability ■ Measures required for restoration of macro and financial stability ALREADY being applied include liquidity (interest rate cuts), capitalization (of financial institutions), forbearance (accounting standards). This process still ongoing ■ Measures required for restoration of macro stability YET TO BE applied include the fiscal arena, a la New Deal under Roosevelt. Areas to benefit from such stimuli include infrastructure, local governments. ■ Investors must realize that risks to the macro outlook include not only the potential errors of POLICY IMPLEMENTATION but also of POLICY DESIGN. After all, from our vantage point, one of the biggest surprises of 2008 consists of the succession of policy mistakes on the part of Paulson’s Treasury. There are NO guarantees other errors of commission will not occur in the coming months. ■ Other risks to the outlook include protectionism (e.g. recent examples out of India and Russia). ■ From our perspective, the endgame to the stabilization cycle will correspond to a recovery of commodity prices through the reflationary nature of the ongoing policy response. This is quite positive for the EM space.
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