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Global Economic Prospects 2013

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Emerging Markets

Prospects Weekly: First trade data released for September are not promising

First trade data released for September are not promising, with most countries reporting lower import volumes, suggesting that the risk of a worldwide deceleration in demand is real. Meanwhile with all three major rating agencies downgrading Spain’s long-term sovereign debt rating in the past few days, the sovereign credit quality-gap between developing and developed countries continued to narrow. The risk of a Euro area banking crisis still lingers, exposing financial vulnerabilities for emerging markets with large exposures to Euro area banks.
 
First data releases on international trade for September are not promising. After the financial stress caused global contagion in August, the risk of worldwide deceleration in demand has increased. While import volumes increased in August over July in 45 of the 52 countries with available data, import volumes declined in September month-on-month in 6 of the 9 countries with available data. On the export side, all 11 countries that have reported data for September show declines in export volumes. The trade data are however very volatile and the weak September data could merely reflect a pay-back for relatively strong August data, but the first signs of the impact of financial turmoil are not good.

 
The credit quality gap between mature and emerging markets sovereigns is narrowing. The wave of sovereign rating downgrades across Europe, the United States, and Japan stands in sharp contrast with the improved creditworthiness in emerging market as measured by sovereign credit ratings. The ratio of EM rating upgrades to downgrades is 6 to 1 this year. Since the 2008 financial crisis 47 developing countries have received 117 upgrades by major rating agencies, while the last rating upgrade for developed country occurred in 2007, when Japan’s sovereign debt was upgraded. Many EM countries currently have a positive outlook assigned to their sovereign debt signaling that additional upgrades are possible.

 
Vulnerabilities to a banking crisis in the Euro area are concentrated in Emerging Europe and Latin America. In the event of a banking crisis in the Euro area European banks would most likely need to deleverage at home and reduce exposure to emerging markets. Foreign claims of Euro area banks have recovered and are now exceeding the pre-crisis levels, amounting to almost 40% of the Central and Eastern Europe’s GDP, and to more than 13% in the case of Latin America. Another important source of financial vulnerability is the rapid expansion of domestic credit in emerging markets since H1 2009, with the ratio of domestic credit to GDP exceeding pre-crisis levels in Europe and Central Asia, Latin America and the Caribbean, and East Asia and Pacific.

 

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Treasuries continue to tumble; US inventories rise by the highest in 2 years

Important developments today:

1.  Treasuries continue to tumble following last week’s sell-off

2.  U.S. inventories rise by the highest in two years

 

Treasuries continue to tumble following last week’s sell-off. U.S. Treasury prices fell for a fourth day on Monday, pushing 30-year bond yields to a one-month high. Higher-than-forecasted industrial production in China and a slower phase-in of bank capital requirements boosted investor sentiment for riskier assets, undermining demand for perceived safe-haven government debt. Treasury prices are likely to fall further in the days ahead as analysts speculate tomorrow’s report will show U.S. retail sales advanced for a second month, an indication of the economic recovery taking hold.

Yields on 30-year bonds climbed 3 basis points (bps) to as high as 3.93% this morning, the highest since August 13, while the 10-year note yield was little changed at 2.8%. Supply concerns have also fueled an increase in U.S. Treasury yields after last week’s $67 billion worth of government bond auctions as well as a strong corporate bond issuance.

 

U.S. inventories rise by the highest in two years. U.S. wholesale inventories increased by 1.3% in July, the highest since July 2008 [see chart]. The increase was broad-based (durable and non-durable goods), reflecting confidence by wholesalers in the economic recovery.

Wholesalers account for about 30% of all business inventories in the United States, with manufacturers and retailers making up the rest. In Q1 and Q2, the change in real private inventories added 0.63% and 2.64% to U.S. GDP growth. The continued rise in business inventories augurs well for growth in Q3. However, given the fast replenishments of stocks, the ability of inventories to contribute to growth will be limited. A pick-up in the labor market, which should boost consumer spending, will create a more sustainable growth path.

 

Source:  World Bank DEC Prospects Group and Thomson Reuters.

 

Among emerging markets:

In East Asia and the Pacific, China’s industrial production growth increased by 13.9% y/y in August with a 0.5% increase m/m. Chinese retail sales also increased 18.4% y/y and 0.5% m/m, while the accumulated growth YTD compared to 2009 for the same period is 18.2% higher. The Consumer Price Index (CPI) grew 3.5% y/y and 0.2% m/m in August while Producer Prices for manufactured goods reached 4.3% y/y and 0.5% m/m.

In Latin America and the Caribbean, Peru’s central bank increased its reserve requirement for short-overseas loans to 75% of borrowings abroad from a previous 65%. This measure was put in place to limit credit growth from driving inflation.

In the Middle East and North Africa, Jordan’s inflation decreased to 3.2% from 4.8%, according to a release by the Jordan Department of Statistics.

In sub-Saharan Africa, South Africa’s consumer confidence index increased from 14 to 15, the highest level since 2007. This was released in a report by the First National Bank and the Bureau for Economic Research.

Prospects Weekly: Record high auto sales, G-20 face sharp fiscal adjustment, emerging market bond spreads down but yields up

The rebound in global output during the second half of 2009 was buoyed by “cash-for-clunker” incentive programs that propelled global car sales to a record high. As these programs have begun to expire, the pace of industrial production growth is expected to moderate in the coming months. High levels of public debt will require large—although not unprecedented—fiscal adjustments in many high-income countries over the next 20-years. Emerging market bond yields have climbed since late-2009, due to higher yields on benchmark U.S. Treasuries, although their spreads have remained broadly stable during the period. As U.S. bond yields increase further with the reversal of the Federal Reserve’s monetary stimulus measures, emerging market bond yields are likely to rise as well. 
 

Auto sale incentive programs supported record high global auto sales and a rebound in industrial production. Some countries that witnessed a marked revival in manufacturing activity in the second half of 2009 had car sale incentive programs. As these programs have recently expired in the U.S., Korea, Australia, and in most Euro Zone countries—or are about to in Brazil, India, and the U.K.—momentum growth in industrial production is expected to slow in the months ahead. This, alongside adverse weather conditions, appears to have been a contributing factor in the recent loss of momentum in industrial output in Germany. By effectively front-loading demand, these programs pushed global car sales to an all-time high of 54.3mn units in January 2010 (seasonally adjusted annualized rate, JP Morgan).

 

Many G-20 countries face significant fiscal adjustment. High government debt and aging populations will force many high-income countries (HICs) to undergo sharp fiscal consolidation over the next 20-years. The IMF estimates that—to regain a sustainable 60% debt-to-GDP ratio—the HIC G-20 will need to adjust primary fiscal balances (excluding interest payments) from a deficit of 3.5% of GDP in 2010 to a surplus of 4.5% by 2020 and then maintain a 4.5% surplus through 2030 (i.e., cut spending or raise revenues by an average of about 6% over a 20-year period). While challenging, such large adjustments are not unprecedented. For most developing countries (LMICs) no such adjustment will be required, as their debt ratios are much lower—40% in 2010 for the LMIC G-20 vs. 107% for the HIC G-20.

 
Emerging market bond spreads have declined from recent peaks in October 2008, although they remain about 80 basis points above the level posted during the 18-month period ending in June 2007. While bond spreads have been broadly stable since October 2009, benchmark U.S. Treasury yields have increased 50 basis points since end-November, pushing up the cost of capital for developing countries. Looking ahead, as non-traditional monetary stimulus measures (which have kept down medium-term interest rates in the U.S.) are withdrawn, developing country bond yields are expected to rise further—although perhaps not on a one-to-one basis with the rise in the cost of U.S. bonds.

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Two Distinct Windows for Recent Emerging Market Currency Movements

Jamus Lim's picture

Two distinct phases have characterized the recent movement of emerging market currencies. The first phase was a sharp decline when the crisis first occurred, as capital flight into the safety of the dollar led to a significant depreciation of emerging market currencies vis-à-vis the dollar. This was led by Latin American economies, especially Brazil and Chile, but also to a lesser extent East Asian economies (the Singapore dollar, for example, depreciated 12 percent between September 2008 and March 2009, and the Korean won fell by a massive 35 percent). In the second phase, however, EM currencies reversed direction as the risk trade returned and capital flowed into emerging markets in search of yield. This has led to a steady appreciation of most emerging market currencies---an ironic "reward," if you will, for their pursuit of prudent macroeconomic policies both before and after the crisis, since appreciation has had the undesired effect of reducing their export competitiveness in a time when their economies are trying to recover from the aftermath of the crisis. The two distinct phases can be seen across a broad range of EM currencies, as detailed in the figure below.

Although this exchange rate pressure has led some countries respond with the limited imposition of capital controls (Brazil imposed a 2% tax on portfolio inflows in October 2009, Taiwan introduced limited controls in November 2009 and is thinking of more, and India hinted at the possibility), EM governments have by and large resisted such controls, having experienced the real benefits of floating rates during the crisis period (most notably in the absence of speculative attacks). However, such foreign exchange pressure is not entirely benign: EM central banks concerned about the export competitiveness of their economies may hesitate to move toward greater policy normalization through raising their interest rates, for fear of encouraging further portfolio capital inflows (which would lead to more currency appreciation). This can complicate the execution of an already difficult balancing act for these central banks, which are looking to both keep a lid on inflation, while keeping their respective economies humming along.

What do readers think? Is our concern with the policy complications overblown? Or are the benefits of avoiding currency crises sufficiently great to merit a little short-term adjustment pain?