Brazil, China, Commodities, Corporate Finance, Economics, Emerging Markets, Emerging markets, global economy, International Trade, Latin America, Long term finance, Shadow Banking, Uncategorized

2016 Retrospect – with links



Global Macro-Economy

Financial markets seem to believe that president-elect Trump can deliver higher growth and inflation, as manifested in the rotation from bonds to equities. At the same time, the shock waves already felt by assets abroad may be a harbinger of the bumpy and treacherous journey ahead. No wonder Mr. Trump’s softening of statements — and campaign promises — after the election has been taken with sighs of relief.

Discussions around large current account imbalances among systemically relevant economies as a threat to the stability of the global economy faded out in the aftermath of the global financial crisis. More recently, some signs of a possible resurgence of rising imbalances have brought back attention to the issue. We argue here that, while not a threat to global financial stability, the resurgence of these imbalances reveals a sub-par performance of the global economy in terms of foregone product and employment.

Huffington Post, Roubini EconoMonitor (with Aleksandr V. Gevorkyan)

Capital outflows from emerging market economies have substantially accelerated since last year. The cycle of intense debt leveraging that took place in those economies after the 2008 global financial crisis has also started to reverse. Furthermore, 2015 was also a fifth consecutive year of growth deceleration in emerging markets. Some analysts have taken those features as pointing to a high likelihood of a “third wave” of the global financial crisis, this time centered on emerging markets. While arguably their combination may acquire a disorderly nature and materialize systemic risks to those economies as a group – and therefore to the global economy going forward – there are also reasons to expect the significant portfolio rebalancing at play not to lead to a disruptive break.

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.


Global Trade

Prospects for growth in global trade in 2016 and 2017 have been downgraded again. The World Trade Organization (WTO) now expects that trade this year will increase at its slowest pace since the post-2008 global recession. What is going on?

World trade suffered another disappointing year in 2015, experiencing a contraction in merchandise trade volumes during the first half and only a low recovery during the second half (Figure 1). While last year’s trade performance can be associated to the ongoing growth transition in China and its reflections on other non-advanced economies, the fact is that last year’s performance came after a period since the 2000s in which world trade volumes have lagged behind GDP growth, a trend accentuated since the onset of the global financial crisis and in sharp contrast to global trade increases at a higher pace than world GDP prior to the new millennium.

For better or worse, TPP and TTIP could redefine global trade in the 21st century. At the moment, a Latin America perspective is largely lacking in the negotiation process; in TTIP, it is excluded by definition. But Latin American countries can move unilaterally to ensure that tariffs and regulations match what could become the new global standard. Of course, alternatively, they could rebuild protective economic walls. But if they do, later on down the road, they just might have to pay for it.

Trade has been a key driver of global growth, income convergence, and poverty reduction. Both developing countries and emerging market economies have benefited from opportunities to transfer technology from abroad and to undergo domestic structural transformation via trade integration in the last decades. Yet, more recently, concerns have been raised over whether the current pace and direction of world trade lead towards a lesser development-boosting potential.


In recent years Brazil has experienced significant depreciation of its nominal exchange rate. Compared with its average in 2013, the Brazilian real lost 38 per cent of its value against the US dollar in 2016. At its weakest, in January 2016, it lost as much as 47 per cent. A year ago, we saw that depreciation as a silver liningfor Brazil amid its deep recession, as a source of support for exports. But Brazil’s recent GDP data (particularly for the second quarter of 2016) show a negative contribution of net exports to growth.

Brazil’s GDP is poised to decline by close to 7% in 2015-2016. Per capita GDP in 2016 is likely to shrink by more than 10% as compared to three years ago. We argue here that a double malaise has been ailing the Brazilian economy: given an anaemia of productivity increases, an appetite for public spending without prioritisation has led to a condition of fiscal obesity. We further approach why market reactions to the Brazilian government’s proposal of crisis response have been positive.

Now that impeached Brazilian President Dilma Rousseff is out of office, it is up to the newly empowered administration of President Michel Temer to clean up Brazil’s macroeconomic mess. Can Temer’s government save Brazil’s crumbling economy?

Brazil has been suffering from anemic productivity growth. This is a major challenge because in the long run, sustained productivity increases are necessary to underpin inclusive economic growth. Without them, increases in real labor earnings tend to conflict with global competitiveness; collecting taxes in order to fund government expenditures on infrastructure and social policies becomes a heavy burden; returns to private investment becomes harder to achieve; and ultimately citizens will have less access to high-quality goods and services at affordable prices. The focus on urgent fiscal reforms adopted by the new government- public spending cap, social security reform – must be accompanied by action on the productivity front.

Brazil’s GDP contraction since mid-2014 has multiple non-fiscal roots – Canuto (2016a; 2014) – but it has morphed into an unsustainable fiscal trajectory (Canuto, 2016b). Dealing with the latter has become a precondition for full economic recovery and the Brazilian government has submitted to Congress a constitutional amendment bill mandating a public spending cap for the next 20 years. This piece considers how the Brazilian landscape evolved toward such a precipice and why additional reforms – particularly on pensions – will have to be implemented to make the spending cap feasible.

With the impeachment of President Dilma Roussseff being sent to the Senate on April 17, Brazil continues a period of turmoil that has lasted for more than a year now. With images of protests, counter-protests and the minutia of the country’s legal proceedings blasted by media outlets around the world, it seems important to take a step back and remember that a lot more lies beyond the headlines.

Emerging Markets

This collection empirically and conceptually advances our understanding of the intricacies of emerging markets’ financial and macroeconomic development in the post-2008 crisis context. Covering a vast geography and a broad range of economic viewpoints, this study serves as an informed guide in the unchartered waters of fundamental uncertainty as it has been redefined in the post-crisis period. Contributors to the collection go beyond risks-opportunities analyses, looking deeper into the nuanced interpretations of data and economic categories as interplay of developing world characteristics in the context of redefined fundamental uncertainty. Those concerns relate to the issues of small country finance, the industrialization of the developing world, the role of commodity cycles in the global economy, sovereign debt, speculative financial flows and currency pressures, and connections between financial markets and real markets. Compact and comprehensive, this collection offers unique perspectives into contemporary issues of financial deepening and real macroeconomic development in small developing economies that rarely surface in the larger policy and development debates.

The Chinese economy is rebalancing while softening its growth pace. China’s spillovers on the global economy have operated through trade, commodity prices, and financial channels. The global reach of the effects from China’s transition have recently been illustrated in risk scenarios simulated for Latin American and the Caribbean economies.

A propensity to undergo periodic episodes of instability and volatility of emerging markets in global finance will persist. Get ready for a continuous dispute between the two financial tales about emerging markets, as well as to increasing efforts of differentiation among their assets.

Turkey’s economy is at a crossroads, and how the country emerges from the current period of political crisis could dictate its ability to meet its challenges. Will power consolidation and purges render a compromised central bank? Will truculence with major partners such as the EU and Russia lead to deceleration in real-sector growth? Will human rights abuses and risk aversion lead investors to steer clear of Istanbul? And how will a population on edge react to what many expect to be a miserable summer in tourism receipts?

Suriname is facing twin – external and fiscal – deficits that originated in the commodity price slump of recent years. In response, the Surinamese government started a four-pronged adjustment program in August 2015 to adapt to new circumstances.