Economic Research

Weekly Insight: Emerging Market Spring

  • Renewed appetite for emerging market assets, high-yield bonds and carry trades
  • Greece returns to the markets
  • More moderate tone in FOMC minutes
  • Normalization in the spotlight—selected Spring Meeting takeaways
  • China—exports are not that bad
  • Nigeria’s economy overtakes South Africa … if only in dollar terms

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April 2014 Global Economic ChartbookMember only content

The April edition of the IIF Global Economic Chartbook summarizes our current views on the global economy, including a section on downside risks. It also focuses on our latest assessment of capital flows to emerging economies as well as the structural challenges for many EMs. The underlying data for the charts presented are available for download in PowerPoint format—you are encouraged to use the charts and data in your own work.

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Romania: Better Fundamentals, Political Uncertainty LingersMember only content

Growth has recovered thanks to resurgent exports, but it is likely to remain modest at around 2-3% in the near term, constrained by lingering structural rigidities. Diminished imbalances provide greater resilience to external shocks, leaving scope for growth-supportive policies without jeopardizing financial stability. Liberalizing and deregulating energy and transportation, reforming the ailing SOEs and bolstering the banking sector remain the main medium-term challenges.

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2014 April Euro Area Economic ForecastMember only content

Growth looks to have accelerated slightly in Q1, helped by mild weather conditions, and solid business confidence suggests that the growth momentum should be sustained. However, the recovery remains too weak to noticeably reduce unemployment and significant slack is keeping inflation at very low levels. This is putting more pressure on the ECB, which has opened the door wider to more unconventional measures in its April meeting. The ECB Governing Council is clearly concerned that a long period of low inflation – in particular as it affects the core countries as well – will feed through to lower inflation expectations over the medium term.

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2014 April Japan Economic ForecastMember only content

Economic activity accelerated ahead of the tax hike in April 2014, but will reverse in 2014Q2. The outlook for the second quarter and beyond is challenging amidst fiscal contraction and weak growth in labor income, but further progress with reforms in the coming months could boost business and consumer confidence. We project that a weaker-than-expected recovery post-tax hike will lead the BoJ to announce additional asset purchases in 2014H2 as it strives to achieve its 2% inflation target for FY2015.

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2014 April U.S. Economic ForecastMember only content

Several favorable developments have raised widespread hopes for a strong U.S. expansion over the next 12-18 months, despite quite soft data in Q1. Last year’s large fiscal consolidation has been absorbed, policy uncertainty has declined after the February budget deal, and markets seem to have become more comfortable with the prospect of a post-QE world. Q1 is tracking at a subpar 1% q/q, saar, but recent data have already started to improve, and the economy should bounce back as conditions normalize in Q2.

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China: Seeking to Curb Shadow Banking RisksMember only content

While the government recognized the positive role of shadow banking in the economy, it has become increasingly concerned by the growing risks and has sought to progressively tighten prudential regulations. The gradual actions to curb shadow banking are positive, but the government needs to establish a process to deal with the stock of potential bad credits without destabilizing the market, ensure appropriate market incentives for new credits and sustain economic growth at a reasonable pace by utilizing other policy instruments.

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Weekly Insight: Is QE Coming to Europe?

  • Bund-Treasury yield gap continues to widen
  • Sharply lower flows to equity ETFs in Q1
  • ECB ready to use QE … if needed
  • Global PMIs again underscore the divide between mature and emerging markets
  • “Still Bumps in the Road for the Global Economy” – summary of our Global Economics Monitor
  • Hurdles ahead for Chinese banks

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April 2014 Global Economic Monitor and Teleconference

The global economy continues to be affected by bumps in the road that together are contributing to softer growth in the first half of the year. We have marked down our global GDP forecast slightly, but we have not shifted our basic assessment that activity should gather pace as the year proceeds. The major mature economies experienced a volatile first quarter, partly related to weather conditions. China had a disappointing first quarter, but additional policy support should boost growth during the year to meet the annual target. Emerging economies outside China are being affected by the cross currents from these developments. The evolving situation in Ukraine provides an important geopolitical risk to the outlook, notwithstanding the sanguine reaction of risk assets so far.

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IIF Teleconference on Ukraine: Economic Impact of Crimea’s SecessionMember only content

March 27, 2014 — Following the rapid developments in Ukraine and its ripple effects into the region, Lubomir Mitov, IIF Chief Economist for Emerging Europe, provides a briefing on his insights into the situation, and discusses the impacts of Crimea’s secession and what it means for the economy of the rest of Ukraine. This conference call discusses developments since and delves deeper into the topics covered in our recent report “Emerging Europe: Ukraine Crisis and Its Economic Impact,” published March 18.

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Weekly Insight: Hedging Bets

  • Early 2014 sees demand for both safe havens and risk assets
  • IIF Portfolio Flows Tracker indicates pick-up in flows to emerging markets
  • Flash PMIs mixed
  • Crunch time for Japanese consumption
  • Early 2014 sees robust high-yield bond issuance

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International Expansion of Chinese BanksMember only content

Chinese bank assets have grown more than five-fold over the last decade, dwarfing the 40-50% increase in U.S., Euro Area and Japanese bank assets. This strong growth in Chinese bank balance sheets reflects not only domestic lending, but a notable expansion in Chinese banks’ lending to companies active and/or domiciled overseas. Chinese activity in international syndicated loan markets has almost doubled since 2011, and the customer base for Chinese banks overseas includes a growing number of major international firms in both mature and emerging markets. Increased activity by Chinese banks abroad helps facilitate the rising use of the renminbi (RMB) in international transactions.

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March 2014 Portfolio Flows Tracker

Our EM portfolio flows tracker indicates that portfolio inflows to emerging economies have rebounded in the last two months, following the EM stress in early 2014. In March, EMs are estimated to have received $39 billion in portfolio inflows from global investors, up from $25 billion in February and $5 billion in January. The March figure reflects $24 billion going into EM bond markets and $15 billion into EM stock markets.

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Tunisia: Political Consensus Paves Way to Economic Recovery / Tunisie: Reprise économique suite au consensus politiqueMember only content

The smooth transition to more democratic rule is improving economic prospects and growth is expected to accelerate in 2014, driven by rising investment. Large current account and fiscal deficits remain a challenge but the debt service is manageable. The banking system, however, is in need of modernization and, more generally, deeper economic reforms are needed to achieve and sustain higher growth and to significantly reduce unemployment.

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Weekly Insight: Looking for Signs of Spring

  • Bond markets move to price in earlier Fed tightening, developed market equities resilient
  • Fed surprises on the hawkish side
  • Renminbi drops sharply as PBoC widens the trading band
  • EM monetary policy—diversity of challenges
  • Greece contemplates a return to the markets as 5th IMF program review nears completion

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Latin America: We’re Not In Kansas Anymore

Exit from quantitative monetary easing in the U.S. and lower commodity prices induced by slowing Chinese growth are putting increased stress on policy frameworks. Policy responses to evolving global conditions have varied, reflecting differences in policy quality, underlying macro fundamentals and economies’ overall degree of preparedness for leaner times. We expect regional real GDP growth to weaken to 2.1% this year from 2.4% in 2013 due to a slowdown in Brazil and stagflation in Argentina and Venezuela. Mexico and Chile are poised to implement game-changing reforms; however, reform fervor has not spread to Brazil, Argentina and Venezuela. Increased social tension is a clear and present danger as living standards decline in some countries and social demands become more sophisticated in others.

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Emerging Europe: Ukraine Crisis and Its Economic Impact

The escalating standoff over Crimea has further exacerbated Ukraine’s already acute financial and economic crisis, and sharply increased downside risks across Emerging Europe. A major adjustment supported by large-scale official financing is needed to avert a collapse in Ukraine. Crimea secession will deepen the recession in Ukraine and have significant but still sizable adverse impact on the rest of the region. However, should the conflict spread to the Eastern and Southeastern regions, the fallout would be nearly catastrophic for Ukraine. Russia would suffer a major recession, too, with the rest of Emerging Europe likely to be strongly affected due to its high dependence on energy supplies via Ukraine.

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Mexico: On the Brink of a Strong RecoveryMember only content

Following below-trend economic growth in 2013, the economy is poised for a strong rebound this year and next propelled by expansionary policies, a strengthening U.S. economy and implementation of structural reforms. Expeditious execution of confidence-boosting reforms will support the recovery, lift trend growth and enhance macroeconomic resilience. By contrast, a protracted recovery could unduly erode political and social support for reforms.

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Greece: Fourth Time Lucky on the Fifth Review?

Greece and the troika have been unable in three attempts to complete the fifth review of the EU-IMF program. Progress is evident but red lines remain on both sides. Bond payments due in May are likely to be made even if the review is not completed, assuming the temporary refinancing of EFSF notes that have not yet been used for bank recapitalization. Agreement will have to be reached later in the year, however, for debt service to continue without interruption.

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Weekly Insight: Taking a more sober view

  • Softer Chinese growth indicators, focus on deflationary pressures chip away at risk appetite
  • China — activity slips over the new year
  • Emerging market industrial production weakens more broadly
  • Volatile data flow continues in U.S. and Euro Area
  • Emerging market bond issuance wanes, but European borrowers venture forth
  • New IIF Portfolio Flows Tracker shows pickup in EM Flows

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Egypt: Sustaining Economic Recovery Hinges on ReformsMember only content

The large fiscal deficit and the high and persistent inflation are key macroeconomic challenges facing Egypt. Growth could accelerate to 4% in 2014/15, mainly reflecting the impact of the stimulus packages. The prospects beyond the near term could deteriorate if a new government following the presidential election fails to undertake the difficult but needed reforms.

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South Africa: Consolidating The Fiscal PositionMember only content

South Africa’s budget was drawn up in a particularly challenging macroeconomic environment against a background of intensified global financial market volatility. Despite continued sluggish growth, there was no scope for fiscal stimulus through lower taxes or higher spending. Instead the government stuck to its plans, outlined in last October’s Medium Term Budget Policy Statement, to consolidate public finances, lower the budget deficit and stabilize the government debt-to-GDP ratio. It was framed to advance the aims of the National Development Plan and continued to focus on infrastructure development and improvement in service delivery.

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IIF Teleconference on Indonesia: Focusing on Macro Stability Member only content

March 13, 2014 — Following his recent mission to Jakarta, IIF Chief Economist for Asia/Pacific Dr. Bejoy Das Gupta discusses economic policies and prospects for Indonesia, including insights on the upcoming parliamentary and presidential elections.

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Introducing the IIF Portfolio Flows Tracker

Emerging market external vulnerabilities have come to the fore in recent months, underscoring the importance of monitoring international portfolio flows. To help analysts track portfolio flows in real time, we are introducing a comprehensive and timely estimate of total non-resident portfolio debt and equity inflows to emerging economies. Our indicator tracks historical flows closely and is available on a monthly basis. Our latest estimates show weak equity flows in early 2014, but a recovery of debt flows in January and February.

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Indonesia: Focusing On Macro StabilizationMember only content

The government is persevering with measures to mitigate vulnerabilities and put the economy on a firmer macroeconomic footing. Monetary policy is being kept tight to lower the elevated current account deficit and inflation, with possibly more rate increases later this year. Further fiscal restraint and subsidy reform is planned. While macro stabilization should take hold, there is a need for strong political leadership to tackle the structural challenges and reinvigorate growth after the upcoming elections.

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March 2014 Global Economic ChartbookMember only content

The March edition of the IIF Global Economic Chartbook summarizes our current views on the global economy, including a section on downside risks. It also focuses on our latest assessment of capital flows to emerging economies as well as the structural challenges for many EMs. The underlying data for the charts presented are available for download in PowerPoint format—you are encouraged to use the charts and data in your own work.

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Weekly Insight: Living With EM Uncertainty

  • More risk appetite, but strains in a number of EM countries still evident
  • Manufacturing PMIs—up in mature economies, down in EMs
  • ECB on hold—improving growth amidst subdued inflation
  • Ukraine—sharp escalation of the standoff with Russia has further intensified the already acute financing pressures
  • China—keep up the growth
  • India—off to the polls as Modi meets markets

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Kenya: Poised For Stronger GrowthMember only content

Kenya looks set to enter a phase of higher growth and smaller deficits, but many challenges and risks remain. Reforms under the recently completed IMF program have put the economy on a firmer financial footing, and investment in infrastructure and the discovery of oil and coal have enhanced prospects further out. The large current account and fiscal deficits remain a challenge, however. The move to a devolved fiscal structure will add to costs initially and will need careful management, but revenue enhancing reforms should help consolidate public finances going forward. The upcoming maiden Eurobond issue will fund a significant portion of this year’s large borrowing requirement.

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Brazil: Stuck in a Growth Rut

Brazil is entering its fourth consecutive year of below-trend economic growth. Tightening global financing conditions find the country with a strong external balance sheet, but also a complicated policy position. Above-target inflation has limited its capacity to rely on real depreciation as a shock absorber and prompted forceful monetary tightening. Elections in October are likely to delay a highly needed confidence-boosting policy realignment and/or initiation of major structural reforms, preconditions for lifting trend growth. Without these, growth will remain subpar, thereby increasing the risk of social tensions.

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IIF Teleconference: China/Japan UpdateMember only content

March 4, 2014 — Charles Collyns, Managing Director and Chief Economist, and Sonja Gibbs, Director of Capital Markets and Emerging Markets Policy Department, share their insights following recent meetings with officials and the private sector in Beijing and Tokyo.

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Weekly Insight: A Better Week to be in Bonds

  • Strains in a number of emerging markets prompt a move to safe havens
  • Domestic political factors drive greater divergence in EM performance
  • Weaker U.S. data – temporary, but not all weather-related
  • Bank lending continues to decline in the Euro Area
  • Chinese central bank to markets: currency appreciation is not a one-way bet

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IIF Teleconference on Greece: Another Try at Completing the Program ReviewMember only content

February 27, 2014 — Jeffrey Anderson, IIF Senior Director for European Affairs, discusses his impressions following recent meetings in Athens, Frankfurt, Berlin and Brussels regarding outstanding issues between Greece and the troika and their implications for financing going forward.

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Ukraine: A Step Back From the Brink?

The dramatic events that led to the formation of a new reformist majority in parliament have provided a second chance for Ukraine’s battered economy. However, this would require the prompt formation of a new government able to undertake the reforms needed to alleviate the acute macroeconomic imbalances, put the economy on sound footing and safeguard an external financial support. With the Russian bailout likely to be put on hold, this assistance should amount to at least $20 billion this year alone. Given the massive adjustment needed and the social and economic pain it would entail, this government would need to be inclusive, credible and enjoying broad-based popular support. Risks of prolonged political uncertainty still remain substantial, however, raising odds of delays in implementing reforms with potentially disastrous consequences for financial stability and growth.

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IIF Teleconference on Ukraine: Out of ControlMember only content

February 24, 2014 — Following the rapid developments in Ukraine, Lubomir Mitov, IIF Chief Economist for Emerging Europe, and Ondrej Schneider, IIF Senior Economist of the European Department, provide a briefing on their insights into the situation, and discuss the impacts of the political disorder and what options are left to limit the economic fallout. Mr. Alexander Valchyshen, Head of Research at Investment Capital Ukraine LLC, joins to provide a perspective from Kiev.

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Weekly Insight: U.S. Dollar Strengthens; G20 Pushes for Growth

  • Relative strength of U.S. data, G20 messages buoy the dollar
  • Highlights from the IIF G20 conference in Sydney
  • Flash PMIs—weaker China, softer Euro Area, better U.S.
  • BoJ moves again after soft GDP numbers
  • Ukraine—out of control
  • Emerging market corporate bonds: risks ahead?

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Venezuela: Social Unrest Shakes Political Stability

University students-led protests have escalated challenging the administration of President Nicolás Maduro. Social unrest is being fueled by rampant crime, acute hard-currency shortages, rising inflation, weakening economic activity and growing scarcity of basic goods. Increased social turmoil is making stagflation almost a certainty in 2014 and undermining governability, thereby raising the risk of a full-fledged political crisis.

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2014 February Japan Economic ForecastMember only content

After a disappointingly soft out-turn in 2013Q4, GDP growth is set to pick-up in 2014Q1 as consumption increases in anticipation of the April consumption tax hike. However, the outlook for the second quarter and beyond is challenging amidst fiscal contraction, slow progress on the structural reform agenda, and weak wage growth. We expect that these factors will lead the BoJ to step up its asset purchases in 2014.

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Ukraine: Out of ControlMember only content

The escalation of the political tensions into a full-blown violent conflict has caused the near-term outlook to deteriorate sharply. Policy inaction has led to escalation of financing pressures, prompting the central bank to impose capital controls, albeit with little effect thus far. Unless a negotiated solution to the political crisis is found soon and extensive official financial support is made available in exchange for major reforms, odds for a full-blown financial collapse will remain high and rising.

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2014 February U.S. Economic ForecastMember only content

The latest data out of the U.S. have disappointed a bit, after strong headline GDP growth in 2013H2. A somewhat weaker data flow, a temporary drag from net exports and a normalization of inventory building are likely to result in slower headline growth in 2014H1. Despite these bumps on the road, we expect underlying growth to continue on a solid trajectory in 2014 and beyond.

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2014 February Euro Area Economic ForecastMember only content

Growth has improved further in 2013Q4, but remains too feeble to boost employment noticeably, and to dispel concerns about low inflation. Meanwhile, bank lending rates to households and businesses remain fragmented, despite a broad-based improvement in bank funding conditions. The ECB stayed on hold this month, facing tensions between better growth and very low inflation.

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India: Seeking to Bolster Macro Fundamentals

The Indian economy is on the mend. The central bank is persevering with tight monetary policy, as well as launching an ambitious financial sector program. Gradual fiscal adjustment, the falling current account deficit and steps to attract capital inflows have reduced vulnerabilities. A moderate recovery in real GDP growth is underway, although for a stronger performance it is important that the next government step up the pace of structural reforms after national elections in May. The possibility of a less stable coalition of regional and left-leaning parties coming to power is a key downside risk.

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February 2014 Global Economic Monitor

A general sense of confidence in the global outlook at the turn of the year has quickly been replaced by rising nervousness and risk aversion as the data flow has been mixed, financial market conditions have turned volatile, and political developments have raised concerns in some vulnerable countries. While the fundamental drivers for an acceleration in the global economy remain in place, the expansion will continue to be uneven, and prospects for a group of EMs with macroeconomic vulnerabilities have clearly worsened.

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Weekly Insight: More optimism, calmer markets

  • Better sentiment prompts search for buying opportunities in equities, risk assets
  • Market signals suggest some EM currencies still under scrutiny
  • Tweaking our forecasts—mainly in emerging markets
  • Solid Euro Area growth in 2013Q4

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