Brazil, China, Commodities, Corporate Finance, Economics, Emerging Markets, Emerging markets, Latin America, Long term finance, Small States, Uncategorized

2015 Retrospect – with links

2015 cover photo

Emerging Market Economies

After a exponential rise in foreign exchange reserves accumulation by emerging markets from 2000 onwards, the tide seems to have turned south since mid-2014. Changes in capital flows and commodity prices have been major factors behind the inflection, with the new direction expected to remain, given the context of the global economy going forward. Although it is too early to gauge whether the on-going relative unwinding of such reserves defenses will lead to vulnerability in specific emerging markets, the payoff from strengthening domestic policies has broadly increased.

China’s shadow banking system thrived in the years after the global financial crisis, until reined in by regulators since 2013. Nevertheless, new forms of shadow banking are emerging.

Industrialized and developing countries have differing fiscal strategies for dealing with the business cycle. But are countries’ strategies different according to whether they are industrialized? This column presents new evidence suggesting that the picture is complex. Procyclical fiscal policies remain the norm amongst most non-industrialized developing countries, but some key developing countries have recently moved toward a counter-cyclical stance as a result of strengthening institutions.

Labor migration and remittances may bring positive economic effects to developing countries. This is the case particularly in countries like those in Eastern Europe and Former Soviet Union members where remittances constitute high shares of foreign-currency revenues and GDP. There is nevertheless clear evidence of an untapped development potential associated with those flows of labor and remittances, especially because of a lack of appropriate institutions. We argue here in favor of a creation of a migration development bank as part of efforts to fill such a gap.

Since last year there has been much talk of possible financial stress stemming from increased debt leverage in non-financial corporates of emerging markets economies. A recent study has brought to light some key evidence on the Latin American case

I am among those economists who have argued that expansive fiscal policy has been missing as a lever to support recovery in advanced economies, especially in the Eurozone. At the same time, I have cast doubts on recent attempts of using it to prop up growth in some emerging markets. Instead of “double standards”, the asymmetrical stance of fiscal policies that I have been preconizing may rather be seen as standards appropriate according to different conditions in terms of economic slack and fiscal space.

Commodity Prices

The end of the upswing phase of the commodity price super-cycle, after its peak in 2011, has lowered economic growth prospects in most of Latin America. While that broad statement can hardly be disputed, Chapter 3 of the latest IMF Western Hemisphere Regional Economic Outlook calls attention to underlying significant differences among countries in the region. Growth implications of the commodity price evolution have varied substantially as a result of commodity-specific price patterns and country-specific exposures and composition of commodity specialization.

The oil price plunge since last June has been deemed, overall, as a boon for the global economy. However, that depends on where one stands as a producer or user, as illustrated here with the divergence of impacts on BRICS economies.

Brazil (esp. Foreign Trade)

Brazil is undergoing its most severe recession in decades, with GDP expected to contract more than 3 per cent this year. Policy adjustments and the fallout from the Petrobras corruption scandal have eroded confidence and resulted in a collapse of investment, while the deterioration of fiscal accounts in the last few years has cost the country its investment grade rating. Not surprisingly, the Brazilian real has depreciated dramatically over the past year, losing about half of its value against the US dollar. However, amid all the gloom, the depreciation of the real also provides a silver lining, as it is supporting the recovery of the trade balance and stimulating growth through increased net exports. Much of this positive effect has so far been overshadowed by weak commodity prices. However, when looking at quantities, an adjustment is clearly under way which should help Brazil restore its external balance.

Brazil’s macroeconomic management faces four major immediate challenges. The response to them will be strengthened if economic agents could have some indication of how the Brazilian economy will be steered back to a growth route.

International trade has undergone a radical transformation in the past decades as production processes have fragmented along cross-border value chains. The Brazilian economy has remained on the fringes of this production revolution, maintaining a very high density of local supply chains, the flipside of which has been low levels of trade integration with the rest of the world. Such option has meant opportunity costs in terms of foregone productivity gains and a reversal might contribute to restoring economic growth in that country.

Although Brazil has become one of the largest economies in the world, it remains among the most closed economies as measured by the share of exports and imports in gross domestic product. This feature cannot be explained simply by the size of Brazil’s economy. Rather, it is due to an economic structure reliant on domestic value chain integration as opposed to participation in global production networking. It also reflects more generally an export base that shows lack of dynamism. Opening up and moving toward integration into global value chains could produce efficiency gains and help Brazil address its productivity and competitiveness challenges.

Trade Negotiations

Even if gradually, the trade facilitation diplomatic architecture seems to be evolving toward one with a higher presence of signed-off deals. Independent efforts by individual countries to facilitate trade should therefore keep a close eye on standards being shaped in order to minimize adjustments when it (finally) comes the moment of cross-border harmonization.

This paper analyzes the impacts of selected trade facilitation measures on international trade flows. A gravity model is used to estimate four equations: a pooled cross-section model; a fixed-effects model; a random effects model; and a Poisson maximum likelihood estimator. The contribution of the paper is twofold. First, the analysis uses a recent data set, a panel that includes trade data from 2011 and 2012 for 72 countries. Second, to measure the impacts of trade facilitation measures, the analysis includes dummy variables for the presence of an authorized economic operator program, the existence of a single-window program in the countries in the sample, and the existence of a mutual recognition arrangement between pairs of countries in the sample. The results show that the presence of an authorized economic operator program and the existence of a single-window program will improve countries’ trade performance. By contrast, the existence of a mutual recognition arrangement will not necessarily improve countries’ trade performance. These results suggest that, in general, trade facilitation measures as a whole will help countries improve their trade performance.

The potential impact of mega-trade agreements goes beyond how they affect trade, since exposure to increased competition at home, the impact of such a deals on export destinations and in third markets can boost productivity growth and improve competitiveness. This applies not only to tradable sectors, but also to non-tradable activities in participating economies. Second, and relatedly, Brazil might well review its prevailing trade negotiation strategy where efforts have focused on the multilateral track. Bilateral trade agendas with both US and EU may become a way to mitigate the negative potential impacts of TTIP and TTP.

Country Analyses

Colombia has averaged 4.6 percent annual growth over the last ten years, and it is neck and neck with Peru for Latin America’s fastest growing major economy. Colombia’s emergence has not been hindered by economic mismanagement or democratic instability. In Colombia, the problem has always been the violence. If the government can make peace with the political side of FARC, it believes it can undercut the gangster side. And if Colombia can achieve what has been an elusive peace, only then can it really begin to flex its economic muscles.

Nicaragua is far more than just the newest and swankiest destination for world travelers.  It is -and mark our words – on its way to becoming the latest success story in the western hemisphere. Let us just tell you why.

The Petrocaribe membership have many good reasons to appreciate Venezuela’s cooperation and solidarity over the past decade since this initiative has provided much needed financial relief to nations facing tough macro and environmental challenges. The agreement may manage to survive as the Venezuelan economy cope with the severe impact of low oil prices and a distressing outlook. However, the risks of an interruption of the financing mechanism continue to mount up. Consequently, countries should intensify their efforts in favor of energy diversification and, more importantly, seizing the opportunity to reduce their own indebtedness with Venezuela.

While many Cubans welcome change, any transition faces daunting challenges. Can Cuba liberalize commerce without inviting the staggering inequality endemic to Latin America? And can the state relinquish total power without sacrificing high quality, free public services? The Cuban transition will not be easy, and it will not happen overnight. But it has an exponentially greater chance of success if the United States joins the large group of countries that already supports Cuba’s transition through constructive engagement rather than embargo.

All three major candidates—the market-driven Mauricio Macri, the opposition-Peronist Sergio Massa, and even the PJ’s Daniel Scioli—have fronted reform-minded campaigns. The feeling of light at the end of the tunnel has pushed the blue dollar back towards the official rate. Argentine bonds have actually rallied despite the country’s ongoing default. But is this faith well placed? To address Argentina’s economic malaise—and to fully close the door on the 2001 crisis—the next government would need to address subsidies, return the keys to the Central Bank, and come to a solution with respect to debt holdout creditors.

Small States

Small states, like the Caribbean countries, have been negatively affected by recent “de-risking” policies implemented by international banks, with particularly damaging consequences on correspondent banking relationships. While recommendations from the Financial Action Task Force (FATF) to deal with risks of money laundering and terrorism financing have often been mentioned to justify those de-risking practices, a wide variety of factors seems to have been at play. Urgent action to address the issue is needed to avoid unintended potentially devastating effects on the economies of those countries.

Small states are special, not always in favorable ways. The income status of most small states conceals their tall financing challenges. Financial specificities of small states have started to be recognized… but just started!

Gender Equality and Economic Growth

This paper studies the long-run impact of policies aimed at fostering gender equality on economic growth in Brazil. The first part provides a brief review of gender issues in the country. The second part presents a gender-based, three-period OLG model that accounts for women’s time allocation between market work, child rearing, human capital accumulation, and home production. Bargaining between spouses depends on relative human capital stocks, and thus indirectly on access to infrastructure. The model is calibrated and various experiments are conducted, including investment in infrastructure, a reduction in gender bias in the market place, and a composite pro-growth, pro-gender reform program. The analysis showed that fostering gender equality, which may partly depend on the externalities that infrastructure creates in terms of women’s time allocation and bargaining power, may have a substantial impact on long-run growth in Brazil.

Otaviano Canuto is the executive director at the Board of the International Monetary Fund (IMF) for Brazil, Cabo Verde, Dominican Republic, Ecuador, Guyana, Haiti, Nicaragua, Panama, Suriname, Timor-Leste and Trinidad and Tobago. Views expressed in those articles are his own and do not necessarily reflect those of the IMF or any of the governments he represents.



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