Jordan: Fuel Import Costs and Ambitious Long-Term Plans
Regional turmoil and the subsequent interruptions of Egyptian gas supply, along with high oil prices, provided impetus to plans to switch to local resources. The Jordanian authorities have developed a long-term vision for energy sustainability, which relies on shale oil-fueled power plants, nuclear power generation and renewable energy. However, those remain long-term solutions. In the short term, the additional cost has been met by a growing dependence on foreign assistance.
China: Market Misfortune
The tightening in monetary policy, moderation in economic activity and uncertain global outlook weighed heavily on the equity markets last year. While the domestic market followed global markets higher in early 2012, the rebound was modest.
Thailand: On the Mend
Manufacturing is leading the revival from the worst floods in over 50 years, which adversely affected the economy last October and November, while inflation has declined with a moderation in food prices.
EMLC Survey Results: Sub-Saharan Africa
For the first nine editions of our IIF Emerging Markets Lending Conditions (EMLC) survey, we aggregated the results from banks in the Middle East, North Africa, and Sub-Saharan AFRICA in a single group. In the latest survey, however, we expanded our sample of banks in Sub-Saharan AFRICA and now have sufficient participation to construct a separate Sub-Saharan index. According to the first version of this index, the current grim mood has not spared banks in Sub-Saharan AFRICA. The overall Sub-Saharan Bank Lending Conditions Index was 42.9 in the fourth quarter of 2011, signaling that bank lending conditions in Sub-Saharan AFRICA are deteriorating.
Portugal: Market Worries Intensify
The S&P downgrade and delays finalizing the Greek debt deal have triggered a sharp increase in government bond yields, reinforcing concerns about public debt sustainability. A voluntary Greek debt deal should help contain yields, but a sharper reduction consistent with renewed market access would require meeting the fiscal targets without one-off measures.
India: Alleviating Tight Liquidity Conditions
In an effort to alleviate tight liquidity conditions, the central bank cut the cash reserve ratio by 50 basis points to 5.5%, with effect from January 28, 2012 to initiate the easing cycle.
Nigeria: Cutting Fuel Subsidies Signals Structural Reforms
The removal of subsidies on petrol at the beginning of the year was met with stiff resistance from labor unions and civil society, resulting in a scaling-back of the price increase to about 50%. Despite the partial climb-down, it is nonetheless an important first step in the reform of the energy sector and will enable oil revenues to be channeled more effectively toward badly-needed infrastructure investment and for job creation and growth.
2012 January Capital Flows to Emerging Market Economies
Net private capital flows to our sample of 30 major emerging market economies have faltered in recent months. Net flows are now estimated to have been $910 billion in 2011, and are projected to be $746 billion in 2012. Our latest estimate for 2011 is $143 billion below the full year forecast made in September 2011. Although our dataset is annual rather than quarterly, this would be consistent with a sharp drop-off in capital flows beginning late in the third quarter of 2011 and extending through Q4. This weakness has persisted into 2012. Our lower projection for 2012 ($338 billion less than in September 2011) essentially extrapolates the weakness evident in flows in the last few months of 2011 through the first half of 2012.
Emerging Markets Bank Lending Conditions Survey - 2011Q4
The December 2011 IIF EM Bank Lending Conditions (EMLC) survey showed a significant deterioration in the economic outlook, with global banking conditions weakening substantially over the past 3 months in all major regions. Most importantly, international funding conditions have tightened appreciably further across all regions. The rapid deleveraging of European banks has continued to adversely affect Emerging Europe. All indices for Emerging Europe, especially the credit standards index, declined to worrying levels. The brightest aspect of the downbeat survey is that the demand for credit in emerging economies is generally holding up quite well (with the exception of Emerging Europe).
January 2012 Global Regulatory Update
January 24, 2012 — This month’s Global Regulatory Update addresses the January 2012 GHOS statement on liquidity and Basel implementation, as well as IIF responses to releases by the FSB on resolution and data collection and the BCBS on CCPs and trade finance. There are also updates on new releases by the Basel Committee, and materials from the IIF’s most recent regional CRO Fora.
Argentina: Monetary Policy Blues
The 2012 monetary program is designed to fuel growth and maximize central government financing by the central bank. In our view, it reinforces already high inflation and exacerbates macroeconomic imbalances. Despite monetary stimulus, we expect growth to slow sharply this year under the weight of a tightening external constraint.
India: Navigating Fiscal Challenges
The central government budget deficit will be greater than planned in the current fiscal year ending March 2012 due to revenue slippage and rising subsidies, but fiscal adjustment should be reinstated in 2012/13. While lower inflation and growth concerns are poised to prompt the authorities to shift to monetary easing, a likely tighter fiscal stance in the upcoming budget would be supportive.
Tunisia: Headwinds Impede a Strong Rebound in 2012
Real GDP in 2011 may have contracted by 0.5% due to a sharp decline in tourism and mining on the production side, and investment and net exports on the expenditure side. The recession in the Euro Area, Tunisia’s main trading partner, could limit the rebound in output. We expect real GDP growth around 3% in 2012 and 4% in 2013. Tunisia needs to grow by 6-7% to reduce unemployment rate (18% in 2011) to upper single-digit levels by 2017. This would require structural reforms and larger external financial support from donors.
Oil Market Update: Geopolitical Risks Keep Oil Prices Firm
Political tensions surrounding the Strait of Hormuz have raised the risk premium on oil and will support Brent prices of around $110-$115 over the short run. Reduced oil supplies from Iran will likely be counterbalanced by higher production from Libya and Iraq, but OPEC spare capacity will remain low and could decline if sanctions against Iran sharply reduce it exports. As the year progresses, however, and if sanctions-related tensions dissipate, prices could begin to trend lower.
Czech Republic: Risks Remain Well Contained
Growth slowed this year in line with recession abroad and weak domestic demand. Moderate and easing macroeconomic imbalances should leave risks well contained.
Hungary: Checks, Balances And Risk Premia
Legislation enacted in December has weakened market confidence, sending the forint to historic lows and spreads and bond yields to worrisome highs. As much as €15 billion will be needed in new financing from the IMF and EU to allay market worry. The money may matter less, however, than the conditionality required to secure it.
Iraq: Internal Friction Could Constrain Oil Ambitions
The withdrawal of the bulk of U.S. forces ushers in a new era for Iraq. It has also brought forth formidable challenges: the security situation remains precarious, albeit improved compared to the violence in 2006-07; internal political feuds are threatening a paralysis of government and parliamentary functions; and the extent of regional autonomy is still unresolved. Despite these difficulties, Iraq is pressing ahead to develop the petroleum sector, with oil production in 2011 reaching 2.67 million bpd.
Euro Briefing: Crunch Time
Euro Briefing is a new IIF publication designed to provide our membership with a comprehensive, but manageable survey of the Euro Area crisis and its likely evolution. This Briefing will be maintained on the IIF website and updated periodically, as appropriate. The Euro Briefing is the result of the collective effort of the IIF Economics and Capital Markets departments.
Portugal: Difficult Adjustment Ahead
The fiscal deficit appears to have been reduced more than targeted in 2011, thanks to large transfers of pension assets from domestic banks. Underlying adjustment was less than planned, however. This will necessitate a larger adjustment in 2012 that will contribute to a sharper contraction of real GDP than the 1.5-2 percent likely last year.
The Middle East: Revolutionary Change and the Rise of Geopolitical Risks
January 11, 2012 — A year into the ‘Arab Spring’ and the political landscape of the Middle East has been fundamentally transformed. Regime changes in Tunisia, Egypt and Libya; continued violence in Syria and Yemen; and uncertainties and rising tensions elsewhere in the region, all have combined to raise the level of geopolitical risks with far reaching implications for the global energy and financial markets. The spreading uncertainties have been further aggravated by rising tensions around the tightening sanctions against Iran and the threat of countermeasures by the country’s authorities, by the mounting sectarian tensions within Iraq with implications for oil and regional security, and by the escalating violence and repression in Syria with implications for regional stability. Meanwhile, the economic situation of transition countries, notably Egypt, continues to deteriorate while the long term challenges of structural reform, growth recovery and job creation mount in these countries.
These and related issues are the subject of an IIF teleconference conducted by George T. Abed, Senior Counselor and Director for Africa and the Middle East and his colleagues.
Listen to the teleconference
Chile: The Local Market Stabilizer
A well functioning local capital market has mitigated contagion from external shocks by enhancing financing flexibility and supporting countercyclical capital flow shifts. Countercyclical capital movements by large institutional investors have helped to stabilize net capital flows and eased dollar liquidity pressures.
India: Inflation Turns the Corner
The 12-month increase in weekly wholesale prices of primary articles dropped progressively through December, heralding a significant decline in headline inflation for the month as a whole. Lower inflation and slower growth may prompt the authorities to bring forward monetary easing.
January 2012 Capital Markets Monitor
Five Years On, Credit Risk Remains Acute
- The defining feature of the global financial crisis has been sharply elevated credit risk (including counterparty risk) causing substantial declines in the market prices of many financial assets.
- As the crisis has spread from the financial sector to the sovereign sector, particularly in the Euro Area—and now connecting the two in a vicious circle—policy mistakes have aggravated the situation. Consequently, five years on, banking systems in Europe and the U.S. remain fragile, and even dysfunctional in some cases.
- This reinforces the deleveraging process which has kept the economic recovery feeble. The key question for 2012 is whether the resilient parts of the global economic and financial system––the emerging market economies and the non-financial corporate sectors––are robust enough to cushion the potential impact of high credit risk in the mature economies.
Following the monthly publication of the Capital Markets Monitor Hung Tran hosted a teleconference on January 5, 2012. The presentation and audio recording of the briefing are now available for viewing or download.
View Webconference
December 2011/January 2012 Global Economic Monitor
Our global growth forecasts for 2011-12 continue to edge down, although the overall reduction this month is a modest one: one tenth, to 3.2%, in 2011 and two tenths, to 2.8%, in 2012. Significantly, our downward revisions this month are concentrated in parts of Europe beyond the Euro Area, and in Asia. In both regions, the markdowns affect both mature and emerging economies. While there are many country-specific factors contributing to these revisions, one broad theme is the spread of negative ripples from the economic and financial disruptions in the Euro Area of recent months. An important near-term growth gap has opened up between the Euro Area, which has tipped into a mild recession, and the United States, which has ended 2011 on a strong note.
2011 December/2012 January Japan Economic Forecast
Weak exports have been a feature of Japan 2011. Indeed, it is most likely that Japan’s annual trade balance will be in deficit in 2011 for the first time since 1953. Export weakness in the first half of the year was related to supply problems resulting from the March earthquake. More recent weakness, however, reflects problems in Europe, the persistently strong yen and new disruptions caused by the Thai floods. Exports fell 2.6%m/m in November and 4.0% in October. Additionally, import volumes have increased in the second half of 2011, partly due to rising fossil fuel consumption. Following the March earthquake, nuclear electric power supply declined sharply, leading to a significant increase in the demand for fossil fuels from overseas. The volume of LNG imports was up 35%oya in November.
2011 December/2012 January U.S. Economic Forecast
The U.S. economy continues to show improvement relative to earlier in the year. Growth in 2011H2 is likely to average 2.7%, saar, almost a full point above H1. Demand indicators have been quite strong in recent months, pointing to a solid Q4 growth reading, which we now forecast at 3.5%, saar. Latest high frequency data also suggest that recovery of the labor market may be proceeding more rapidly than previously expected. Jobless claims fell to a 3-year low in December, an encouraging sign for near-term employment prospects. Nonetheless, a number of cyclical and structural drags are likely to stand in the way of a breakthrough in 2012.
Poland: PM Commits To Deeper Reforms and Deficit Reduction
The newly re-elected government will enact measures that should reduce the fiscal deficit to 3.5 percent of GDP next year from the 5.5 percent likely this year. This should be sufficient to enable Poland to exit the EU’s excessive deficit procedure in 2013, assuming the EU gives due consideration to pension reform costs.
Asia Regional: Vehicle Sales Shift into Low Gear
Growth in vehicles sales slowed during the past year, due partly to supply dislocations in Japan and Thailand. Although the auto sector helped revive growth in the aftermath of the global financial crisis, it would be hard to replicate another boom cycle like the one that occurred in 2010.
Hungary: Interest Rates Hiked Further
In response to the worsened inflation outlook sparked by forint depreciation since August, the rate-setting council hiked its key policy interest rate by 50 basis points to 7 percent on December 20. Further policy rate hikes look likely if the government fails to agree renewed funding with the IMF and EU.
India: Navigating Balance of Payments Turbulence
The heavy dependence on external financing has made the economy vulnerable to the renewed bout of global financial turmoil triggered by the debt crisis in Europe. Sharply diminished private capital inflows have undermined the rupee and induced a correction in equity prices.
Jordan: Turmoil Aggravates Fiscal Challenges
The onset of the global economic crisis (which raised oil prices) and then the regional turmoil (which necessitated additional spending) reversed earlier progress in Jordan’s fiscal position. In 2009, the deficit (including grants) spiked to 8.9% of GDP. The government in 2010 sharply reduced capital expenditures and was able to cut the deficit to 5.6% of GDP, where it hovered in 2011, through an exceptional amount in foreign grants.
Argentina Trip Notes: Mounting Economic Policy Challenges
Massive capital flight has weakened the balance of payments. In an attempt to arrest the deterioration, additional capital controls have been introduced. These have eased pressure on the foreign exchange market for now. Financial conditions have tightened and are likely to remain more restrictive with an adverse impact on economic activity.
Ghana: Oil, Handle with Care
Ghana extracted its first batch of oil from the Jubilee field in December 2010, and has since steadily ramped up production to around 85,000 bpd. The impact on the economy has been immediate and tangible with a growth rate forecast for 2011 of about 15%. Ghana needs to appropriately address the challenges that come with oil. Such challenges include an efficient and accountable management of oil revenue, the construction of the physical infrastructure that is necessary for the oil sector, and the proper macroeconomic policy.
Russia: Political Uncertainty Set to Increase
Political uncertainty has increased following the December parliamentary elections, causing capital outflows to accelerate, the ruble to weaken and equity prices to drop. With tensions likely to linger until at least the March presidential elections, the ruble will remain under pressure. Heavy losses in the elections are likely to prompt the government to adopt more populist policies.
United States: What to Expect from Labor Market in 2012
During the Great Recession, unemployment increased more than in any other post-war downturn. Since then, the recovery of the labor market has been painfully slow. The unemployment rate currently stands 3.6 percentage points above its pre-recession level, reflecting the worst cycle in post-war history. Although a broad array of labor market data have recently taken a turn for the better, a number of cyclical and structural drags are likely to stand in the way of a breakthrough in 2012. Recent declines notwithstanding, we project the unemployment rate to end 2012 around 8.5%.
Turkey: Q3 Growth Strengthens
Output growth accelerated in the third quarter and appears to have remained strong in the fourth. Strong growth has been accompanied both by rising inflation and a sharp widening of the current account deficit. Hikes in the policy interest rate by the central bank will likely be needed to help re-anchor inflation expectations.
UAE: Why Have Bank Deposits Declined?
The recent decline in UAE bank deposits and increase in the loan-to-deposit ratio are explained by a decline in nonresident deposits, a slowdown in project implementation in an uncertain regional and global environment, and by increased remittance outflows by Indian expatriates due to improved exchange and interest rate differentials. The UAE financial sector continues to strengthen its fundamentals but remains strong despite this liquidity squeeze.
Egypt: Fiscal Pressures Intensify
While the primary task of a new parliament will be to draw up a new constitution, the government will need to act quickly to address the worsening fiscal position. We expect the budget deficit to widen to over 11% of GDP in the current fiscal year and the government debt-to-GDP ratio to rise to about 83%. Financing is becoming increasingly difficult as funding costs have risen sharply and local lenders are approaching the maximum amount they are allowed to lend to the government. This suggests that Egypt is increasingly likely to resort to IMF borrowing.
Philippines: Trying to Spend More
While many governments are struggling to reduce their budget deficits, the government of the Philippines has far exceeded its deficit-reduction target set for this year. The government is now taking the opportunity of fiscal correction to boost public spending to help spur growth.
Brazil: New CPI Weights
Brazil’s statistical agency has updated the weights for the consumer price index (IPCA). We expect introduction of the new consumption basket to reduce reported inflation by a small amount due to greater weights for cyclical components being affected by the global downturn. Updating of the IPCA weights, however, does not affect the underlying inflation dynamics.
Greece: Recovery Remains Elusive
Rough seasonal adjustment suggests real output has been little changed since decreasing 2-3 percent a quarter from mid-2010 through the first quarter of 2011. Declines from a year before have slowed, as a result, but fiscal adjustment, weakened foreign demand and ongoing pressures on banks suggest that real GDP will weaken another 3 percent or more in 2012.
Hungary: Output Weakness Looms, Clouding Debt Outlook
Market concerns about debt sustainability will intensify with real GDP set to decline next year on the back of weaker foreign demand and the further contraction of bank credit. The deteriorated growth outlook notwithstanding, substantial forint weakening since mid-September has prompted the central bank to hike its key policy interest rate.
November 2011 Global Economic Monitor
The situation in the Euro Area has taken a serious turn for the worse in the past month. The economy has tipped into what we believe to be a recession, which will only serve to widen budget deficits and weaken bank asset quality further. Policy makers are floundering to deal with this situation, amid very challenging economic and political constraints. The rest of the world looks on anxiously. Managing the global fallout from abrupt shrinkage in European bank balance sheets will be critical if an untimely re-tightening in global credit conditions is to be avoided.
Brazil: Deploying the Countercyclical Arsenal
The policy arsenal is being geared to engineer a soft landing. The countercyclical effort is being spearheaded by easing of monetary and macroprudential policies, but it will likely be broadened to include fiscal and quasi-fiscal measures if global conditions deteriorate further. With inflation higher than in 2008, the scope for policy stimulus is more limited.
