South Africa and Mexico face significant fiscal risks from struggling SOEs. Both Eskom and Pemex are receiving sizable support from governments. Such risks prompt SARB and BANXICO to keep real rates above EM peers. A downgrade of sovereign credit ratings could lead to large portfolio outflows. However, risks to debt sustainability are higher in South Africa than Mexico.

The January 2020 IIF Global Regulatory Update provides updates on current work streams.

Argentina introduced capital controls last summer. We draw lessons from the 2011-15 controls episode. Capital flight fell and the central bank bought FX, but reserves were spent absent nonresident inflows. Capital controls will only buy temporary respite.

The formation of a government based on a "cabinet of experts" raises the chances of reforms that could arrest the country’s downward economic spiral and facilitate access to already-pledged concessional loans. However, restoring growth will require additional capital inflows from official sources. 

This month's topics include:

• IIF response to IAIS Consultation on Liquidity Risk Management
• IIF IRC Meeting - February 26 

Fiscal consolidation has been tempered by political reality. Revenue shortfalls and rigid spending could raise funding needs. Financing relies heavily on timely disbursement by official creditors.

As the “decade of sustainability” gets underway, calls for action on climate change will become increasingly strident; With electricity demand soaring, a rapid shift to low-carbon alternatives is needed to achieve net zero emissions by 2050… …but in the EU (and beyond) nuclear power remains contentious, as growth in renewables can't keep up with demand
 

Government debt in Sub-Saharan Africa has risen markedly in recent years. This is partly due to issuance of Eurobonds in a low interest rate environment. Debt amortization will peak in 2024-25, while financing needs remain high. As a result, these countries will need to attract significant non-resident capital. Tightening of global financial conditions could increase debt costs substantially.

Equity valuations soared in 2019, as loose financial conditions drove price/earnings ratios higher; By sector, tech and consumer discretionary have seen the biggest valuation gains, health care, banks and utilities have lagged; Early U.S. bank earnings have largely beat expectations, with particular strength in trading revenues, upbeat guidance; Global debt hits record of 322% of GDP in Q319; refinancing this year will top $19 trillion across mature and EMs; Electric vehicle sales growing rapidly alongside declining input costs; market share seen rising to 30% by 2030

Sub-Saharan Africa continues to display stronger growth than other EMs. However, this has not resulted in meaningful real convergence for most. Continued high, though declining, population growth is partly responsible. Higher productivity growth is necessary to improve living standards quicker. Rising indebtedness represents the key risk to the medium-term outlook.

China’s SOEs are often criticized for being inefficient and highly leveraged, but the performance gap between SOEs and privately-owned companies is smaller than many think. SOEs gained advantages during the Supply-side Reform, while private companies have lost more to the trade war. 

U.S. sanctions have almost wiped out Iran’s ability to sell crude oil, pushing the economy into recession for a second year and spurring the authorities to increase taxes and cut subsidies. While they are reluctant to renegotiate the nuclear deal, the country's medium-term potential is considerable.