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

Global Macroeconomics Team's picture
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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