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

 

2016

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.

Brazil

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.

 

 

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Calibrating 2014

The global economy looks poised to display better growth performance in 2014. Leading indicators are pointing upward – or at least to stability – in major growth poles. However, for this to translate into reality policymakers will need to be nimble enough to calibrate responses to idiosyncratic challenges.

Consider the United States. Job creation has accelerated since last August. Household debt is now US$800 billion less than at the end of 2008, due to liquidation or refinance at lower interest rates. The current housing recovery does not seem exhausted as demand is expected to outstrip the pipeline of housing starts this year. Non-financial corporations have plenty of cash, empowering them to respond to improved prospects. Finally, the agreement in Congress on the federal budget for 2014-15, together with the political weakening of the opposition to adjustments of the public debt ceiling, point to an easing of the fiscal drag that harmed the US recovery last year.

But even with these positive factors there is a challenge as the Federal Reserve starts unwinding  its “quantitative easing” (QE), beginning this month with a reduction of US$10 billion in its monthly asset purchases (currently at US$85 billion). Notwithstanding the limited size of this change – when matched with the US$2 trillion of assets currently held by the Fed – as well as Fed’s “forward guidance” signaling that basic interest rates will remain low for an extended period, the initially muted reaction in bond markets was followed by 10-year Treasury yields crossing the 3% mark at the end of 2013. As 2-year yields also climbed, markets seem to believe that the Fed will be obliged to speed up the unwinding. The Fed thus must be sure to strike the right balance of actions and communication so as to avoid precocious interest rate hikes which could harm the recovery.

In the Euro-area, perceived risks of a currency breakdown and a financial and economic collapse have receded substantially. Despite sticky high levels of unemployment in crisis-ridden countries, the European Central Bank (ECB) forecast of 1.1% (GDP growth) plus 1.1% (inflation) for 2014 has been taken as a signal that the bottom of the crisis has been left behind.

The crisis still casts some shadows, however. The implementation of structural reforms in several member countries has fallen short. The public and private debt legacy in those countries still remains tall. Furthermore, the Euro-area institutional framework, which has now been fully recognized as essential, has not yet been refurbished enough. While the time horizon for tackling these issues will necessarily be long, there is a major immediate task to be faced by policymakers: the health check and prescriptions to which their banks will be submitted this year.

The vicious circle between fiscal fragility and national banks’ balance-sheet deterioration that plagued crisis-ridden member countries has been broken, thanks to fiscal adjustment programs and, especially, the ECB’s promise “to do what it takes” to impede a collapse. Nevertheless, the resurgence of bank credit to the private sector – particularly to small and medium enterprises – will be fundamental to consolidate the recovery. Such resurgence will only take place when banks are once again able to be funded and create credit at interest rates much lower than currently available. Therefore the Euro-area major policy challenge will be to calibrate the “asset quality review”, stress tests, and new capital requirements making them tough enough to ensure that the exercise is credible, while simultaneously avoiding spooking markets.

China will also face the challenge of appropriately calibrating the implementation of its structural reform package. Higher penetration of non-state firms in several sectors, including the banking system, will require some slackening of regulation and phasing out interest-rate controls. Prior to that, however, the central government will need to rein in subnational finance and the “shadow banking” through which local governments have splurged on infrastructure and real estate spending in the last few years. Results from a public debt audit were released last month, showing that the debt of localities had risen 67% from the end of 2010 to June 2013.  In that context, another important consideration when looking ahead is to remember the interbank market turmoil of December, which only ended when the Central Bank of China conceded to providing liquidity.  This illustrated that authorities will have to step cautiously— a stone at a time— to cross the transition river, if an economic growth collapse is to be avoided.

Meanwhile, tax policy will be a key policy challenge in the case of Japan. Aggressive fiscal and monetary stimuli implemented during Prime Minister Abe’s government have jolted Japan’s economy out of its deflationary lethargy.  However, Japan’s public debt has climbed to levels around 250% of GDP. As part of the solution, the consumption tax will be hiked to 8% from 5% in April. There is also a scheduled decision in next November on whether to additionally increase it to 10% as of October 2015. It will be crucial that such a higher tax burden does not countervail the overall anti-deflationary direction of macroeconomic policy.

Finally, there is the case of emerging economies coping with the actual unwinding of QE. Last summer – in between Ben Bernanke’s testimony to the US Congress in May, when he alluded to the eventual unwinding of the currently third round of QE, and the Fed meeting in September postponing its beginning – the so-called “fragile 5” (Brazil, India, Turkey, Indonesia, and South Africa) underwent massive capital outflows and large currency depreciation. Some analysts referred to that turmoil as a potential revival of the emerging-market crises of the 1990s. Those countries shared in common the presence of large, liquid, and integrated financial systems, as well as current-account deficits associated with substantial capital inflows and currency appreciation since the beginning of the US “unconventional monetary policies.”

Now that the unwinding is really starting, the baseline scenario is not one of a repetition of the turbulence, since changes in asset values, exchange rates, and investors’ positions have not reverted. The unwinding is to some degree already priced in. On the other hand, four of the “fragile 5” (Brazil, India, Turkey, and Indonesia) will have major elections in 2014. As they still remain vulnerable to sudden stops in capital flows, their macroeconomic performance will depend on the calibration of their macroeconomic policies and on political risks.

The bottom line is this: there is room for optimism about the global economy in 2014. The key is to temper this with caution given that the success of the global economy will hinge on policymakers’ ability to strike the right balance in several key parts of the world.

Otaviano Canuto is Senior Adviser and a former Vice-President of the World Bank Group.

(Posted on Huffington Post, Roubini Global Economics, Seeking Alpha, and Growth and Crisis blog – World Bank)

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My published works (2009-2013) – with links

Books, Chapters, Articles, Policy Papers and Blog Posts (by Themes)

1. Emerging Market Economies and the Crisis

ü  How to Ascend After Declining?

ü  The Day After Tomorrow: Growth Switchover

ü  Moving past the commodity supercycle: are we there yet?

ü  QE tapering as a wake-up call for emerging markets

ü  Emerging markets sell-off – what’s next?

ü  Development Banks and Post-Crisis Blues in Investment Finance

ü  China – The Morphing Dragon

ü  Growing After the Crisis: Boosting Productivity in Developing Countries

ü  Euro Area Sovereign Debt Crisis: Putting the House in Order

ü  Managing Economic Policy in a Multipolar World

ü  Whither the U.S. Dollar

ü  Growing After the Crisis: Boosting Productivity in Developing Countries

ü  Recoupling or Switchover June 2nd, 2010

ü  Decoupling, Reverse Coupling and All That Jazz September 2nd, 2009

ü  The Developing World in a Post-Bubble Economy April 9th, 2009

 

2. Middle-Income Growth Trap

ü  The East Asian Miracle 2.0

 

3. Natural Resource-Led Development

ü  Resource-backed investment finance in LDCs (w/ Havard Halland)

ü  Diamonds May Be Forever, Natural Resource Wealth Is Not

ü  The Day After Tomorrow: Commodities And Uncomfortable Natural Riches

ü  ·  Don’t Blame Mother Nature January 12th, 2010

4. Monetary Policy and Prudential Regulation

ü  Brazil, Korea: two tales of a macroprudential regulation

ü  Elephants and macro-financial linkages

ü  Finance as an economic cholesterol

ü  Marrying Monetary Policy and Financial Regulation

ü  Goodbye Financial Engineers, Hello Political Wonks

ü  Capital Account Liberalization: Are There Lessons to be Learned?

ü  Is Shadow Banking Dangerous for You?

ü  Shifting Tectonic Plates Under Global Banking

ü  A Marriage of Convenience

ü  The Cost of Financial Reform for Emerging Markets

ü  The Day After Tomorrow: Macro-Financial Policy Catches Up With Reality

ü  What Can We Learn From Islamic Finance?

ü  ·  The Arrival of Asset Prices in Monetary Policy October 20th, 2009

5. Fiscal Policy and Public Sector Management

  • Fiscal Policy for Growth and Development” with Milan Brahmbhatt. (PDF)
    Economic Premise No. 91. World Bank. Washington D.C. October 2012.
  • “Overview – Fiscal Policy for Growth and Development”, with Milan Brahmbhatt,In Moreno-Dodson, B. (ed.), Is Fiscal Policy the Answer? A Developing Country Perspective, Washington: World Bank, 2013 (p.1-22)
  • Corporate Finance International, Fiscal Policy Redux, Spring 2013

6. Subnational Debt, Debt Restructuring

ü  Bankrupt Sovereigns: Is There an Orderly Way Out?

ü  Until Subnational Debt Do Us Part

ü  Procrastination Is Costly, Action Is Priceless

 

 7. Sovereign Ratings

 

 8. Gender Equality and Economic Growth

ü  Gender Equality Pays Off in Brazil

ü  International Women’s Day: A Time for Concern, Not Complacency

ü  How Do Women Weather Economic Shocks?

ü  Gender and Trade

ü  My Own View on Women March 12th, 2010

 9. Brazil

ü  Brazil: Chasing Animal Spirits

ü  Brazilian Competitiveness: Folia and Hangover

ü  Vulnerability, Exchange Rate and International Reserves: Whither Brazil? With Bruno Saraiva, September 21st, 2009

 

10. Trade, Services, Technology, and Regional Integration

ü  South-South trade through value-added glasses

ü  What It Takes for Trade to Reduce Poverty in Africa

ü  Trade: The World Is Not Flat Yet

ü  Revolutionary Services

ü  Trade and Climate Change: Handle with Care

ü  Connecting Wagons: Why and How to Help Lagging Regions Catch Up

ü  Facilitating Trade, Facilitating Development

ü  Distorted Prices in Commodity Markets

ü  Collaborative Border Management: A New Approach to an Old Problem

ü  Connected to Compete? Not as Much as We Could Be

ü  The Doha Round: Much More Than Market Access

ü  Trade Finance and the Financial Crisis

ü  Economic Integration: A Quasi-Common Economy Approach

ü  Who SEZ One Size Fits All?

ü  Diversify, Diversify, Diversify

ü  Sophisticated Exports

ü  South-South Trade Is the Answer

ü  The Day After Tomorrow: A Different Kind of Trade

ü  The Day After Tomorrow: If You Want to Grow, Learn

ü  ·  The Doha Trade Round is Worth Fighting For December 1st, 2009

 11. Human Rights and Economics

ü  Freedom and Development: Something Worth Fighting For

ü  How Human Rights Have Contributed to Development

12. Jobs, Poverty and Equity, Migration

ü  Mobilizing Development via Mobile Phones

ü  It’s Jobs, Stupid!

ü  Jobs as a Gateway to Prosperity

ü  Jobs as a Scorecard

ü  Sewing Success: How Textile Jobs Help Reduce Poverty

ü  Emerging Markets Lead in Job Recovery

ü  Are Emerging Markets Leading the Way in Job Creation?

ü  Small Is Beautiful in Job Creation

ü  Jobs, Jobs, Jobs

ü  South Asia and the Geography of Poverty

ü  Is Europe as Unequal as the U.S.?

ü  Bucking the Trend: Poverty Reduction and Inequality in Latin America

ü  Less Poor but More Unequal

ü  Money Can’t Buy Equality

ü  The Day After Tomorrow: The Final Battle in the War Against Poverty

ü  Do the Poor Really Benefit From Labor Migration?

ü  Remittances Rebound But Pressures Persist

 

13. Development Aid

14. Food Prices

ü  Should We Still Worry About Food Prices?

ü  Food Prices and the 7 Billionth Baby

ü  Food Prices, Financial Crisis and Droughts

ü  The Food Price Threat to Poor Continues

ü  The Poor Are Paying the Price of the Food Cost Spike

 

15. Natural Disasters, Climate Change

ü  Climate Change: Get Ready to Adapt!

ü  An Inconvenient Truth for Latin America

ü  Macro-Disasters

ü  To Address Climate Change We Need to Measure Poverty Better

16. Others

ü  Drugging Development

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