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Global Macro Outlook 2014-15 Subdued Growth, Tail Risks Diminishing SEPTEMBER, 2014ALASTAIR WILSON, HEAD OF SOVEREIGN RATINGS.

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Presentation on theme: "Global Macro Outlook 2014-15 Subdued Growth, Tail Risks Diminishing SEPTEMBER, 2014ALASTAIR WILSON, HEAD OF SOVEREIGN RATINGS."— Presentation transcript:

1 Global Macro Outlook 2014-15 Subdued Growth, Tail Risks Diminishing SEPTEMBER, 2014ALASTAIR WILSON, HEAD OF SOVEREIGN RATINGS

2 2 Agenda 1.Economic Strength: o Global Growth Lower, But EMs Approaching The Bottom? o US : A Surprisingly Haltering Recovery o China: Gradual And Protracted Rebalancing 2.Fiscal and Institutional Strength: o Broad Stasis in LatAm Contrasts With European Recovery 3.Exposure to Event Risk: o External Resilience Persists in LatAm

3 3 Global Growth Lower, But EMs Approaching The Bottom? 1

4 4 »Downward revisions dominate our recent outlook, in both developed and emerging markets »G20 growth 2014 forecast unchanged at 2.8%, similar to 2013. »2015 GDP growth will still be below pre-crisis averages Downward Revisions Dominate Global Outlook Source: MIS. Orange (green) shading denotes recent negative (positive) revision Forecasts for GDP growth, % 20132014F2015F Argentina3.0-2.5/-1.5-0.5/0.5 Brazil2.50.5/1.5 China7.76.5/7.5 France0.20.0/1.01.0/2.0 Germany0.41.5/2.51.0/2.0 Italy-1.9-0.5/0.50.5/1.5 Mexico1.31.5/2.52.5/3.5 Russia3.8-1.5/-0.5-0.5/0.5 South Africa1.91.0/2.02.5/3.5 Turkey4.02.5/3.5 UK1.72.5/3.52.0/3.0 US1.91.5/2.52.5/3.5 Euro Area-0.40.5/1.51.0/2.0 LatAm 82.51.0/2.01.5/2.5 G-20 All2.72.5/3.53.0/4.0 G-20 Advanced1.41.5/2.52.0/3.0 G-20 Emerging5.14.0/5.04.5/5.5

5 5 Low Yield Environment Expected to Continue Fed funds rates % »Tapering likely to complete in Q4 this year. First rate rise expected mid-2015 »Rate increases relatively slow initially (200 basis points in 2 years) Source: MIS Macroboard, August 2014

6 6 Emerging Markets’ Growth Outlook Revised Down »Weak data on economic activity at the beginning of the year… »…and no indication that the drivers of growth are improving… »…led to further downward revisions in the growth outlook for EMs Source: MIS Macroboard, August 2014 GDP growth EMs ex China, % year 2002-07 annual average growth

7 7 As Have Been LatAm Forecasts »While capital inflows have been unexpectedly robust, the focus of concern has shifted towards domestic imbalances »Exports and industrial production been weak, leading to downward revisions for a number of countries Source: CEPAL. LATAM GDP growth revision for 2014

8 8 With Lower Growth Expected to Prevail Through 2015 »While growth is expected to pick up in 2015, it will rise only slowly towards potential levels. Source: Moody ’ s Investors Service. GDP Annual Growth (%) Country20132014*2015* Difference 2014-15 vs 2013 Argentina2.9-2.00.0 -3.9 Brazil2.50.71.0 -1.6 Chile4.13.03.7 -0.7 Colombia4.7 4.8 0.1 Mexico1.12.23.2 1.6 Panama8.45.56.5 -2.4 Peru5.84.15.8 -0.9 Venezuela1.4-0.71.2-1.2 LATAM 8 *Moody's Forecasts

9 9 Source: Moody’s Investors Service. Continuing a Medium-Term Trend »LATAM-8 GDP actual vs. potential growth

10 10 In Brazil, Imbalances Persist, Growth below Potential Sources: Haver Analytics, Official National Sources, Moody’s »Persistent below-potential GDP growth, worsening debt metrics »High government debt ratio (60%+ of GDP), missed primary balance targets »High gross financing needs (15% of GDP) and interest burden, »Low investment ratios (<20% of GDP), weak growth (< 2%) »Large FX reserves (around $350 billion) »Limited FC exposure (5%) and participation by non-residents (18%) »Large, diversified economy driven by domestic demand (exports =12.5% of GDP)

11 11 Argentina’s prospects are worsening »Default will exacerbate long downward trend in growth »Inflation expected at or above 40% »Significant deterioration in macroeconomic and credit conditions GDP growth, % year Source: Moody’s Investors Service

12 12 Source: Moody’s Investors Service. Reforms Strengthen Mexico’s Outlook »The approval of wide-ranging structural reforms reflects political will to address longstanding structural issues. »We expect that potential GDP growth will gradually shift to the 3%-4% range, from 2%- 3% prior to the reforms. »We expect that after an increase to 3.5% of GDP in 2014, fiscal deficit will report a declining trend supporting a sustained debt to GDP ratio. GDP growth, % year

13 13 US: A Surprisingly Haltering Recovery 2

14 14 US Deficits Under CBO Baseline Scenario and Administration Proposal Sources: US Congressional Budget Office, The Budget and Economic Outlook: 2014 to 2024 and Budget of the United States Government, Fiscal Year 2015The Budget and Economic Outlook: 2014 to 2024 U.S. Rating Outlook Moved to ‘Stable’ in July 2013 »Budget deficits expected to continue to decline, Growth picking up and resilient to reductions in growth of government spending. »Debt-to-GDP ratio will decline by more than Moody's expected when we assigned the negative outlook in August 2011 »Though without further fiscal consolidation, deficits will increase once again over the longer term, which could put the rating again under pressure

15 15 »Strong employment growth signals corporates’ confidence in the recovery »Positive wealth effects to boost consumption »Strong corporate balance sheets to foster investment Growth around 3% (‘old normal’) in H2 2014 and 2015 Source: Haver Analytics Non-farm payrolls, 3-month averageHousehold and corporate wealth, % of GDP Source: Haver Analytics

16 16 »This recovery phase is much weaker than average. Possible reasons: –Underestimating the negative effects of demographic changes? –Previous recoveries involved financial deepening/credit booms? –Private sector still deleveraging? But weak recovery could indicate lower potential growth Source: Haver Analytics, Moody’s Investors Service US GDP Trough=100

17 17 China: Gradual And Protracted Rebalancing 3

18 18 China: Credit Strengths Offset by Latent Risks »World’s second largest economy, high domestic savings, rising GDP per capita »Net International Investment Position at about 21% of GDP at the end of 2013, including considerable official FX reserves ($3.95 trillion) »Very strong government finances, high capacity to absorb shocks even once off- balance sheet activities are taken into account »But upward rating pressure eased because less progress than expected in: –Containing local government contingent liabilities –Containing rapid credit growth to the private sector and SOEs intermediated by the shadow banking system »Credit-positive structural reforms announced by the 18 th Central Committee’s Third Plenum in October 2013. But success will take time to assess.

19 19 Economy Largely /Credit Debt Driven Since 2008 Debt-to-GDP Ratio, % Source: Moody’s Investors Service, Bank for International Settlements, International Monetary Fund, Haver Analytics »Corporations slow to adjust to the new domestic and external economic realities »Though households remain lightly leveraged, with ample financial buffers Source: BIS, Moody’s Investors Service Private credit vs. Income levels, % of GDP and US$ per person

20 20 Growth is stabilising »Targeted stimulus measures seem to have had a positive impact already »Although investment has slowed markedly »And property slowdown shows no sign of abating China: Manufacturing PMI, Index, average of HSBC and CFLP PMIs Source: Haver Analytics, Moody’s Investors Service China: Fixed assets investment, % year Source: Haver Analytics

21 21 »GDP stabilised in Q2 but property slowdown shows no signs of abating. Building activity not reduced in line. Inventories building to high levels. »Deep property downturn could shave between 1.5ppt and 2.25ppt from growth, mainly through supply chain linkages. Though policy space exists to mute the impact. Marked Slowdown in Property Sector Underway Property Transactions, % year Source: Haver Analytics

22 22 Rebalancing Will Be Gradual and Protracted »2014 growth close to 7.5% target, 6.5%-7.5% in 2015. Deep property downturn could shave 1%-2% off growth, mainly through supply chain linkages. Even then, policy space exists to mute the impact. »Strong fiscal and external position. Government has demonstrated willingness to exercise control over key policy levers – interest rate, exchange rate, credit. »But deleveraging and rebalancing will be gradual and protracted. Leading to more volatile growth than in the recent past China: GDP growth, % year Source: Moody’s Investors Service

23 23 Fiscal and Institutional Strength: Broad Stasis in LatAm Contrasts with European Recovery 4

24 24 EMs Carrying Lower Debt Loads Post-Crisis Mean Debt:GDP Ratios, 2013, % Source: World Bank, Moody’s »Euro Area sovereigns carry higher debt loads, particularly in the periphery. EMs (including LatAm) face pressures but are in a stronger fiscal position. »Reversals of previous downgrades in Euro Area partly reflects forward view on reversal of debt trajectory. View carries risks given low growth and inflation.

25 25 And Euro Area Countries Have a Hard Road Ahead »15 years of surpluses needed to return to debt level of 60% of GDP. »In the meantime, debt trends vulnerable to demographics and shocks in a low growth environment. CAPB: Cyclically Adjusted Primary Balance, % of GDP, Sources: IMF, Moody‘s Fiscal Adjustment Needs Are Significant Change in cyclically-adjusted primary balance needed to reduce public debt to 60% of GDP by 2030 versus current position

26 26 But Institutional Strength Is Also Lower in EMs Source: World Bank, Moody’s »Advanced Economy (incl. EA) institutions are much stronger, supporting higher ratings per unit of debt. »Though the crisis exposed institutional weaknesses in the euro area overall. Ratings will not return to pre-crisis levels in the foreseeable future »And positive institutional developments in train in Lat Am, eg Mexican structural reforms which will enhance both economic and institutional strength

27 27 Event Risk: External Resilience Persists in LatAm 5

28 28 »Volatility and currency pressures in early 2014 showed the vulnerability of some EM sovereigns to an extended period of uncertainty/volatility Nominal Exchange Rate to US$ (1 Jan 2013=100) Equity Markets Sources: Bloomberg, Moody’sSources: Haver Analytics, Moody’s ‘Taper Tantrum’ – Overblown, Blown Over?

29 29 But Capital Flows Have Held Up * Net flows for Mexico, Brazil, Chile, Colombia Source: Institute of International Finance, Moody’s Investors Service Capital flows in largest emerging markets, $ billion Fixed-Income and Equity Flows LATAM 4*, $ US Billions

30 30 External Vulnerability? Mixed, but No Alarm Bells Basic Balance (Current Account Net of FDI, % of GDP) FX Reserves / (Maturing Long-Term External Debt + Short-Term External Debt)

31 31 Though Argentina is One Pressure Point Official Foreign Exchange Reserves (US$ Bil.) Source: Moody’s Investors Service »Reserves have diminished rapidly, though stabilised recently with decision to allow depreciation »But negative market reaction to the recent default could trigger a balance of payments crisis

32 32 Overall, Risks Remain. But Not a Broad ‘EM’ problem. Sources: Haver Analytics, Moody’s »Vulnerability specific and dispersed. High external imbalances, reliance on external funding, weak policy frameworks are most vulnerable to monetary normalisation. Vulnerability IndicatorsPolicy Space Issuer Current Account Balance, % of GDP (2014F) External Vulnerability Indicator* (2014F) Gross Borrowing Requirement, % of GDP (2014F) Govt. FC Debt/Total Govt. Debt, % (2014F) CPI Inflation, % (2014F) General Govt. Debt, % of GDP (2014F) Chile China Poland Malaysia Mexico Russia Thailand South Africa Peru Brazil Colombia Philippines India Indonesia Turkey Hungary Argentina Venezuela Ukraine

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