Russia: Sanctions Begin to Bite
The sanctions imposed by the U.S. on July 16 represent a further escalation and for the first time target major Russian entities. Even though their immediate impact on the sanctioned entities should be manageable, the broader impact on the Russian economy is likely to be much stronger and longer lasting. The mere threat of sanctions has already caused foreign capital inflows to reverse, for the first time since the 2008 global financial crisis. With sanctions likely to escalate and broaden further, capital outflows look set to accelerate, pushing Russia into recession and intensifying the already significant financial pressures in domestic banks and corporations.
Weekly Insight: Sunny Markets, Despite Geopolitics
- Global equities supported by strong U.S. earnings reports
- Divergence in risk-on assets: high-yield sector falters
- Flash PMIs—overall, a positive glimpse into Q3
- Increased activity in the auto loan ABS market
- Markets remain short euro; many EM currencies rally
Morocco: Political Stability, Challenges for Higher Growth
The policy environment has improved since the formation of the coalition government. Reform of the subsidy system will help to ensure fiscal sustainability. Looking forward, the gradual recovery in the European economy should raise demand for Moroccan goods and support the tourism sector. However, deeper reforms will be needed to achieve sustained higher growth in order to address the high urban unemployment and reduce poverty.
Colombia: A Second Chance for Peace
The reelection of President Juan Manuel Santos has raised hopes for a conclusion to the peace negotiations with the FARC guerrillas. Success would lift the economy’s trend growth and strengthen the country’s social fabric. The road to peace, however, will not be easy amid increased opposition in Congress, which could stall laws needed for the implementation of an accord. While growth momentum remains strong, rising social demands are bound to increase pressure on fiscal policy, testing compliance to the cyclically adjusted fiscal target.
Teleconference: Russia & U.S. Sanctions
July 18, 2014 — Mr. Lubomir Mitov, IIF Chief Economist for Emerging Europe, and Mr. Hung Tran, IIF Executive Managing Director, lead a discussion on the latest round of sanctions imposed on Russia by the U.S. and their likely impacts.
Teleconference: Colombia's Policy Challenges and Outlook
July 17, 2014 — Mr. Ramón Aracena, Chief Economist for Latin America, and Ms. Maria Paola Figueroa, Economist, share their views on Colombia’s policy challenges and outlook following the reelection of President Juan Manual Santos.
Bulgaria: Road To Nowhere
Economic performance has remained lackluster amid growing political tensions and sharply deteriorated policies. Near-term risks should be contained thanks to still-large buffers, and the October 5 election is likely to produce a more prudent government. However, the lack of reforms and the recent sharp fiscal deterioration raise concerns for the medium term. The economy will continue to languish and financial stability will eventually be undermined, unless reforms advance and the political culture plagued by pervasive cronyism, red tape and corruption is changed.
European Banking Authority (EBA) Issues Opinion on virtual currencies
The EBA has produced an analytical report on Virtual Currencies and the potential risks that they create (PDF at www.eba.europa.eu). The EBA has identified more than seventy risks of various types that VCs could originate: risks to users; risks to non-user market participants; risks to financial integrity, such as money laundering and other financial crime; risks to existing payment systems in conventional FCs, and risks to regulatory authorities.
July 2014 Global Economic Chartbook
The July edition of the IIF Global Economic Chartbook summarizes our current views on the global economy, including updates on our latest assessment of capital flows to emerging economies as well as bank lending conditions in EMs. This update includes a new section on emerging market vulnerabilities, drawing on the analysis in our latest Global Economic Monitor, and also revises sections on the G3 economies. 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.
2014 July Japan Economic Forecast
The inter-temporal effects of the consumption tax hike on economic activity have been broadly in line with expectations. Improving investment and labor market conditions are likely to help revive GDP growth in 2014H2. The BoJ is unlikely to ease further unless the recent improvements in domestic demand and inflation begin to falter.
2014 July Euro Area Economic Forecast
Five quarters after the Euro Area pulled out of recession, the pace of recovery remains modest. While we have penciled in a pickup in real GDP growth in Q2, this mainly reflects an expected positive payback after the weather-related drag in Q1. With the remaining large slack in the economy and the persistent strength of the euro, the prolonged period of low inflation remains a big concern. The measures announced by the ECB in June demonstrate its increased willingness to take steps to avoid very low inflation, but it is hard to make a definite judgment about their effectiveness.
2014 July U.S. Economic Forecast
Real GDP data in the U.S. have continued to disappoint, even though forward-looking indicators remain buoyant and labor market data show continued improvement. We are still expecting a significant GDP rebound in Q2 and subsequent quarters. For 2014 as a whole, we now project growth of 1.5% y/y, followed by 2.8% in 2015.
Global Economic Monitor Teleconference: Where is the global economy heading in 2014H2?
July 10, 2014 — Charles Collyns, Managing Director and Chief Economist, and Felix Huefner, Deputy Director, Global Macroeconomic Analysis, discuss the implications of the weak 2014H1 growth outcomes and the macroeconomic implications of a potential reversal of risk appetite on emerging markets (“What could a Taper Tantrum 2.0 look like?”), drawing on the July Global Economic Monitor.
Kuwait: Improved Prospects for Reform
Growth in nonoil economic activity is improving modestly after a period during which Kuwait has lagged behind peers as the implementation of the 2010-2014 development plan fell short of targets. The country remains one of the most dependent in the region on oil receipts and lags behind in global competitiveness and ease of doing business rankings. Inertia persists in key areas such as fiscal policy where subsidies and social benefits remain high and inefficiently targeted, capital expenditures lag, and nonoil revenues remain low. There is a recognition of structural challenges, but it remains to be seen how successful recent measures to tackle these will be given the decisive changes required.
Uruguay: Time to Swap Band-Aids for Structural Medicine
Growth has slowed to a below-trend pace, reflecting rising external headwinds, structural shortcomings, and a weakening policy mix. High inflation has become endemic, sapping international competitiveness, while modest monetary tightening is coming into conflict with expansionary fiscal policy. Following elections in October, we believe the next administration must rebalance the policy mix and adopt a proactive reform agenda to bolster investment and trend growth. However, there are risks that a changing political landscape might get in the way of the required course correction, raising the likelihood of further policy slippage and under-deliverance on structural reforms.
Catching Up with the Renminbi
As China’s weight in the world economy continues to rise, international use of the renminbi (RMB) has grown. While true internationalization would require much greater capital account liberalization, the Chinese government continues to take measured steps towards opening China’s financial markets. These steps include encouraging the use of RMB to invoice and settle foreign trade, facilitating the development of offshore RMB centers, supporting the dim sum bond markets, and reducing restrictions on access to China’s capital markets for foreign investors. Further gradual steps to widen the currency trading band—and a more market-determined exchange rate—will help this process.
July 2014 Global Economic Monitor and Teleconference
The first half of 2014 provided growth disappointments but financial market buoyancy. We continue to expect global growth to accelerate in 2014H2, underpinned by policy support, the unwinding of temporary factors, and the lagged impact of easier financial conditions. A reversal of risk appetite is a key downside risk. A number of emerging markets are vulnerable to a tightening in external financial conditions.
Overview of IIF Capital Flows Data
This one-pager provides a compact summary of our various proprietary capital flows databases. IIF members have access to all our capital flows data, while a few selected datasets are also made available to the public. All datasets are updated regularly and cover the IIF group of 30 emerging markets.
Bulgaria: A Self-Inflicted Banking Crisis
Deposit runs on the two largest domestically-owned banks have stirred concerns about the banking system and financial stability. However, these pressures appear to have been caused by a spat between politically-connected business interests rather genuine financial problems. A well-capitalized and liquid banking system should keep risks of a broader disruption limited, yet the bank runs highlight the threats pervasive cronyism presents to the economy and financial stability.
China: Targeted Policy Easing Supporting the Economy
Policymakers are clearly intent on maintaining GDP growth in 2014 around the 7.5% official target while continuing to moderate the credit excesses of recent years. The “mini-stimulus” approach in recent months has so far utilized mainly fiscal measures along with some targeted monetary steps, and helped to support a strengthening of activity in the second quarter. With the major downside risks emanating from the rapidly cooling property market, the government is likely to introduce further measures to achieve growth objectives in the months ahead.
June 2014 Portfolio Flows Tracker
Portfolio inflows to emerging economies continued at a rapid pace in June, with portfolio bond flows in particular rising to the highest level since April 2013, according to our Portfolio Flows Tracker. In June, EMs are estimated to have received $36 billion in portfolio inflows from global investors, after $38 billion in May and $28 billion in April.
IIF Teleconference on Turkey
June 26, 2014 — Having recently concluded travel in Turkey, Mr. Lubomir Mitov, IIF Chief Economist for Europe, and Mr. Ugras Ulku, Senior Economist for the European Department, provide a briefing on the insights gained through their visit to Istanbul and Ankara.
Argentina: The Time of Reckoning
The U.S. Supreme Court’s decision not to hear Argentina’s petition to review a ruling by the Second Circuit Court of Appeals on the pari passu clause has raised concerns about a possible default. Following several days of charged political rhetoric, on June 20, President Cristina Fernández de Kirchner announced that Argentina will negotiate with holdout creditors. Negotiations could pave the way to a mutually acceptable solution and provide the basis for an orderly path to the October 2015 presidential elections. A default would be deeply damaging to an economy already in stagflation. Despite short-term risks, we remain cautiously optimistic that the outlook could improve beyond 2015 as all presidential candidates are advocating pro-business policies.
Thailand: Military Government Likely to Revive Economy
Concerned by the deteriorating political situation, the military mounted a peaceful coup in late May. The return to a functioning government should spur growth, as the economy is supported by public expenditure programs along with low interest rates, pickup in private spending and gradual recovery in exports and tourism. While the coup is a temporary solution to the political impasse, the recent history of adversarial politics suggests that compromise and reforms are essential for the restoration of democratic governance.
IIF Teleconference on Russia and Ukraine: The Simmering Conflict and Its Impact on Emerging Europe
June 19, 2014 — After visiting Moscow and Kiev, Lubomir Mitov, IIF Chief Economist for Emerging Europe, and Ondrej Schneider, Senior Economist, provide a briefing on their insights into the situation, drawing on their discussions with authorities in Russia and Ukraine. They also discuss the impacts of the crisis in Ukraine on the Emerging Europe region, as summarized in the report “Emerging Europe: Diverging Challenges”.
Restoring Financing and Growth to Greek SMEs
SMEs in Greece have been hit hard by the crisis, suffering from sharp declines in output and a marked fall in new lending from banks compared with the pre-crisis period. Restoring financing and growth will require addressing the same four sets of impediments identified elsewhere in Europe in the joint IIF-Bain & Company report published last October: Restoring Financing and Growth to Europe’s SMEs. In Greece’s particular circumstances, however, stronger and better coordinated efforts by the EU will be needed to resolve ongoing barriers to the effective use of EU funds. More effective action will be needed, too, by the Greek authorities and their Troika partners to deliver the steadier macroeconomic and financial environment and more secure creditor rights needed to moderate loss expectations on new lending.
Qatar: Managing a Surge in Investment and Growth
Qatar’s economy is continuing to grow rapidly following a smooth leadership transition in mid-2013. 2015 will mark the completion of major hydrocarbon projects and a review of the moratorium on further exploitation of the North field. Development in the nonhydrocarbon sector is brisk as Qatar races to prepare for the FIFA World Cup 2022, but inflationary pressures are emerging. Risks include potential supply bottlenecks, asset bubbles, geopolitical challenges, volatility in energy prices, and uncertainty over the ongoing investigation into the World Cup award process.
Oil: Market Volatility: How Serious?
Slightly tighter market fundamentals and an overlay of increased geopolitical risks have led us to raise our forecast for the average Brent benchmark to $110/bbl for the year. Demand in 2014 will be firmer and supply tighter than we had expected as OPEC production holds steady and new U.S. output remains home. The “fear premium” has come back into play as headline risk from events unfolding in Iraq is exerting upward pressure on oil prices. A significant disruption to supplies by insurgents, albeit a very low probability event, would have far reaching consequences on the region and global economy.
Algeria: Time for Change / Algérie: L’heure du changement
Algeria’s growth model based on hydrocarbon-financed fiscal spending and heavy-handed government intervention in the economy is not sustainable. Softening energy prices combined with a persistent decline in hydrocarbon exports in volume terms will undermine economic performance over the coming years. Key immediate challenges include boosting production of oil and gas and decelerating the pace of rapid growth in the consumption of fuel. Wide-ranging reforms are needed to diversify the economy and raise growth potential.
Venezuela: Social Crisis Slowly Unfolding
Persistent social protests are threatening political stability and weighing on the economy’s performance. Although the government has induced a 60% de facto devaluation of the bolivar this year in order to stabilize the economy, the policy response has been clearly insufficient to bolster confidence and restore growth. With stagflation likely to further fuel popular dissatisfaction, downside risks are significant, the most prominent being increasing social and political turmoil.
May 2014 Capital Flows to Emerging Market Economies
Private capital inflows to emerging markets are benefiting from a supportive global environment, including an improving macro outlook and strong risk appetite. The crisis in Ukraine is weighing heavily on flows to Russia, however, which is likely to result in a decline in aggregate capital flows to EMs in 2014. This projected decline also reflects reduced inflows to China, given the government’s efforts to discourage short-term capital inflows. Capital flows to EMs remain vulnerable to a possible escalation of the Ukraine crisis and surprises in the timing, pace and magnitude of eventual Fed policy tightening.
Following the publication of the May 2014 Capital Flows Report, Charles Collyns hosted a teleconference on May 29, 2014. The recording of the briefing and the Q & A session is now available for replay.
June 2014 Global Economic Chartbook
The June edition of the IIF Global Economic Chartbook summarizes our current views on the global economy, including updates on our latest assessment of capital flows to emerging economies as well as bank lending conditions in 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.
Bahrain: No Easy Solutions To Fiscal Vulnerabilities
Bahrain’s fiscal situation is coming under increasing strain, with the government debt-to-GDP ratio having soared over the past five years due to persistent budget deficits. This has come about mainly as a result of large wage increases and higher social transfers following the outbreak of political and social unrest in 2011. Subsidies have also continued to rise, adding to spending pressures. While diversifying the revenue base and reducing dependence on oil are goals for the authorities, options are limited at present. The more immediate focus will thus have to be on spending restraint.
IIF Teleconference on India: After the Elections
May 29, 2014 — Dr. Bejoy Das Gupta, Chief Economist for Asia/Pacific, discusses the Bharatiya Janata Party’s stunning victory in parliamentary elections and the likely path forward for incoming Prime Minister Narendra Modi, who has pledged to revive growth by advancing lagging structural reforms.
May 2014 Portfolio Flows Tracker
Our EM portfolio flows tracker indicates that portfolio inflows to emerging economies continued their upward trend of the last several months in May, reaching the highest level since September 2012, when the Fed launched QE3. In May, EMs are estimated to have received $45 billion in portfolio inflows from global investors, up from $28 billion in April and $27 billion in March. The May figure reflects $28 billion going into EM bonds and $17 billion into EM stocks.
Emerging Europe: Diverging Challenges
Economic performance, policies and the near-term outlook have become increasingly divergent across Emerging Europe despite the improving external environment. The five Central European EU members (EU5) look set for a sustainable recovery, but growth will be slow in Turkey, with Russia and Ukraine likely to slip into recessions. Low inflation and the lack of macroeconomic imbalances should leave scope for the authorities in the EU5 to pursue pro-growth policies. Financial pressures and political tensions will constrain policy options elsewhere, though weaker growth has intensified political pressure to ease policies in Russia and Turkey. The Russia/Ukraine standoff presents the biggest risk to the region, especially if tensions escalate further.
Saudi Arabia: Giving Diversification A Boost
Saudi Arabia’s economy is undergoing an important shift as oil surpluses—while still large—gradually decline and the government makes a new, big push for diversification and undertakes important changes in the regulatory and institutional framework to meet social challenges arising from rapid population growth.
Chile: A Paradigm-Shifting Tax Reform
President Michelle Bachelet is seeking the largest overhaul of the tax code in decades, aimed at raising revenues for greater education spending and improving income redistribution. The reform increases the corporate tax rate from 20% to 25% over four years and shifts taxation from a cash to an accrual basis, which has raised concerns over its impact on fixed investment. The greatest risk is that increased tax revenue fails to substantively improve education quality, thereby lowering potential growth.
Fed Policy Expectations and Portfolio Flows to Emerging Markets
The Federal Reserve’s unconventional monetary stimulus measures have revived a controversial policy debate about the impact of U.S. monetary policy on capital flows to emerging markets. This paper presents evidence of an important transmission channel that has not explicitly been considered in the existing literature: a market expectations channel. When market participants adjust their expectations of future U.S. monetary policy, they respond by changing their portfolio allocations to emerging markets. Shifts in expectations towards easier monetary policy result in greater foreign portfolio inflows and vice versa.
UAE: Set for Sustained Growth
The current macroeconomic performance and near-term outlook remain favorable. Nonoil growth will remain slightly above 5% in 2014 and 2015, led by the preparations to host the World Expo 2020 and robust private sector activity. Monetary and macroprudential policy settings are appropriate. Equity and real estate prices have risen sharply over the past year and should be carefully monitored in the period ahead.
Bahrain: Activity Picking Up, But Growth Constraints Remain
The economy is recovering and gaining traction after a series of shocks in recent years. Although we expect growth to slow to 4.4% in 2014 as oil production normalizes, nonoil activity is likely to strengthen, reflecting stronger growth in financial services and the start of GCC-funded projects. Prospects further out hinge on increased supplies of gas that are constraining the development of manufacturing, but which are being addressed by the construction of an LNG terminal. The biggest challenges are to contain the fiscal deficit and maintain financial sector stability in a still fragile political environment.
Ecuador: Policy Framework Under Pressure
Ecuador’s growth strategy based on oil-financed fiscal spending has been largely exhausted as oil prices have stabilized. Seeking to sustain it, the government has imposed controls on imports and ramped up external borrowing. These efforts will prove futile, in our view. A refocusing on fundamentals through increased fiscal discipline and implementation of productivity-enhancing reforms is needed. Without them, Ecuador risks falling into a dynamic of persistently low growth and escalating social tensions.
China: Navigating Property Market Challenges
After a series of measures aimed at checking soaring prices and credit expansion, the once red-hot property market is showing signs of cooling. While the government welcomes a mild correction, it is seeking to avoid any sharp plunge that could do serious damage to growth and bank balance sheets. Such concerns have recently prompted policy fine tuning. The government has also acknowledged the need to advance land reform, overhaul local government finances and promote urbanization to bolster the long term health of the property sector.
Czech Republic: Long Delayed Recovery Gaining Momentum
Rebounding industrial production, exports and business sentiment suggest that the recovery has gained momentum this year. The near-term outlook has improved with growth set to strengthen and vulnerability to external shocks well contained. Policies should remain growth-supportive, with the monetary stance set to remain extremely lax and fiscal policy set to ease substantially. The Russia-Ukraine conflict represents a major risk, however, with further escalation likely to cause trade and energy supply disruptions, with the ability to push the economy back into recession.
GCC: Strong Diversified Growth, Limited Risks
The Gulf Cooperation Council (GCC) member states registered an average growth of 4.2% in 2013, down from 5.5% in 2012 due to a leveling off in hydrocarbon production. Overall growth is projected to remain firm at 4.2% in 2014 driven by the non-hydrocarbon sector which is forecast to expand by a robust 5.4%. The external current account and fiscal balances are projected to, again, remain in large surpluses this year, but are expected to gradually come down. Net foreign assets are expected to rise to $2.3 trillion, equivalent to 138% of the aggregated GDP, by end-2014. The main downside risk to the GCC outlook stems from an unexpectedly sharp drop in oil prices for a sustained period of time. The rise in asset prices in specific areas bears monitoring, but is not a concern at this time.
UAE: How Sustainable is the Run-up in Asset Prices?
The sharp increase in residential sales prices in the UAE has revived concerns that another real estate bubble could be emerging. The IIF’s analysis suggests that the probability of a correction large enough to generate major macroeconomic and financial consequences seems fairly low in the near term. If house prices continue to rise at a rapid pace, the central bank will need to further tighten macroprudential policies.
Business Investment in the G7: Coming out of the Doldrums?
A striking feature in mature economies in recent years has been the weakness in business investment, especially given the favorable financial position of corporates and the low interest rate environment. The long-run decline in investment relative to GDP is partly explained by the relative decline in prices of investment goods and the slowing growth of the working age population. That said, current levels of investment seem below rates consistent with long-run estimates of potential growth, suggesting some room for upside. Improved business confidence and increasing capacity utilization also indicate that some cyclical recovery is on the cards. The recent pick-up in business investment is encouraging in this regard.
Emerging Markets Bank Lending Conditions Survey - 2014Q1
Bank lending conditions in emerging economies deteriorated in 2014Q1, as the overall IIF EM Bank Lending Conditions index dipped to its lowest level since 2011Q4. The deterioration reflected mainly weaker economic performance, as demand for loans declined and that for trade finance slowed, while nonperforming loans rose. On the supply side, banks continued to tighten credit standards for loans at about the same pace as in the previous quarter, as funding conditions were little changed.
India: A Turning Point
The Bharatiya Janata Party-led National Democratic Alliance looks increasingly likely to win the national elections with Mr. Narendra Modi becoming prime minister in mid-May. With little room for stimulus, the BJP has correctly pledged to advance lagging reforms and improve governance to bolster the economy. Downside risks stem from the possibility of an unfavorable election result leading to a weak coalition government, risking a selloff in financial markets and less positive growth and inflation outcomes.