Download The situation of Emerging Market Economies

The International Economy and
the situation of Emerging Markets
José Viñals
Banco de España
Contents

A globalised, interdependent world.

The global economy: where is it and where is it
going?

The economic situation in emerging markets.

Economic perspectives for emerging markets.
2
Aggregate Shares in World GDP
Emerging markets gaining share in world output.
Developing Asia is the biggest area by far, and increasing, thanks
to push of China and, to a lesser extent, India
The World in areas
Shares in Aggregate W orld GDP, 2003
Percent of W orld
GDP
Advanced economies
55.5
of which:
United States
Euro area
Japan
Other advanced economies
21.1
15.9
7.0
11.6
of which:
Newly industrialized countries
Developing countries
3.3
44.5
of which
Africa
Developing Asia
3.2
23.8
of which:
China
India
Middle East and Europe
W estern Hemisphere
Central and Eastern Europe
Commomwealth of independent states
12.6
5.7
2.8
7.6
3.3
3.7
Source: IMF
3
The smaller share of the Western Hemisphere is not new and to
some extent it is the outcome of a long downward trend in per
capita income coupled with the emergence of Asia.
DEVELOPING ECONOMIES: GDP PER CAPITA IN PPP
(USA=100)
60
Transition countries (c)
NICs (a)
60
50
40
50
40
Western Hemisphere
30
20
30
20
China
New NICs (b)
10
10
0
0
1900 1913 1938 1950 1973 1980 1985 1992 1998 1999 2000 2001 2002 2003 2004
Soource: IMF (april 2000), Maddisson (1995) and WEO database.
(a) South Korea and Taiwan up to 1992, adding Hong Kong and Singapore from 1992 onwards
(b) Indonesia, Phillippines and Thailand up to 1992, adding Malaysia from 1992 onwards.
(c) Eastern and Central Europe and Commonwealth of Independent States.
4
A global, interdependent world

Links between advanced economies and emerging
markets.
•
•

Financial channels (flows of capitals: increasing trend, volatile)
Commercial channels (flows of trade; increasing, sustained trend,
extending beyond tradables)
Link among emerging markets
•
•
Financial contagion
Trade competition, integration…
5
The global economy.
The global economy: Where is it now?

The current recovery exhibits the following features:
•
•
•
•
•
•
Broadening and consolidation
•
•
exception Euro area, but including, remarkably Japan
Awareness of new global player: China
Lack of inflation pressures
Expansionary policies (sometimes in excess)
Global imbalances non corrected in downturn
Higher oil and commodities prices
Ample liquidity in financial markets, caution in equites
7
Summary of World Output
Real GDP. Annual percent growth
Advanced economies, recovery gaining strength
5
4
3
Summary of World Output
2
Real GDP. Annual percent change
1
0
-1
Average 95-04
Advanced economies
2,8
United States
3,4
Japan
1,5
Euro area
2,0
-2
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Source: IMF.
8
United States
Strong recovery, sustained by policy stimulus, strong productivity. However,
weakness of the job market generates some concern
Reasons: Lags in recovery, structural change, high price of labour relative to K or
productivity
6
%
'000
200
5
150
4
3
100
2
50
1
0
0
Nam
Cod
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Average 2002-2003
-1
Productivity growth (left axis)
4.7
-50
-2
Change in employment (right axis)
-4.1
-3
-100
Q1 2002
Q2 2002
Q3 2002
Q4 2002
Q1 2003
Q2 2003
Q3 2003
Q4 2003
Q1 2004
Source: IMF, US Bureau
9
prom
United States
Growing fiscal and current account imbalances: Twin deficits
2
%
General government fiscal balance
Average 1995-2003
-1.3
Balance of payments on Current Account
%
2
-3.1
1
1
0
0
-1
-1
-2
-2
-3
-3
-4
-4
-5
-5
1995
1996
1997
1998
1999
2000
2001
2002
2003
Source: IMF
10
United States
Adjustment of external imbalances through exchange rate
correction, but asymmetric so far: falls mainly on the euro.
160
160
1-ene-90 = 100
150
150
US Dollar to Euro
140
140
US Dollar nominal effective exchange rate
130
130
120
120
110
110
100
100
90
90
80
80
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Source: IMF
11
N
C
Financial developments




Extremely ample liquidity conditions, sustained by lack of
inflationary pressures
Interest rates at record low levels, both in the short and
long run
Certain anomaly at this phase of the cycle and given US
expansionary fiscal stance. Explained by low inflation
expectations (Fed stance) + Asian central banks
Equity markets recovery, after correction of overvaluation
in past three years.
•
Caution remains, although higher appetite for risk is reflected in
evolution of high-yield and emerging markets bond markets
12
Main equity indexes
320
1-ene-1998 = 100
280
240
Max 1990-2004
Level
Date
NASDAQ COMPOSIT E 10-mar-00 319.2
S&P 500 COMPOSIT E 24-mar-00 156.7
4-sep-00 169.3
FT SE E300
1-ene-90 255.0
NIKKEI225 ST OCK
320
280
240
200
200
160
160
120
120
80
80
40
ene-98 jul-98 ene-99 jul-99 ene-00 jul-00 ene-01 jul-01 ene-02 jul-02 ene-03 jul-03 ene-04
40
Source: Bloomberg
13
Public and Corporate Bond Markets.
For how long will low yields remain, and how sharply will
they rebound?
12
Junk Bond
12
Corporate Bond AAA
Ten Year Treasury Bond
10
10
8
8
6
6
4
4
2
02/04/2001
30/07/2002
26/11/2002
25/03/2003
22/07/2003
18/11/2003
2
16/03/2004
Source: Bloomberg
14
The global economy: where is it going in 2004?

Central scenario:
•
•

strengthening of recovery in 2004, stabilising in 2005
•
World output forecasts: ’03:3,8; ’04:4,6%; ’05:4,4%
Containment of inflationary pressures (doubts in some EMEs)
Risks remain
•
•
•
Economic factors: regionally unbalanced growth
•
US persistent imbalances, EU fragile recovery, Japan uncertainty,
Emerging markets underlying vulnerabilities
…impinging on financial variables
•
Disorderly dollar adjustment, sudden peaking of interest rates
Persistence of geopolitical uncertainty
15
The economic situation in emerging markets
Summary of Developing Countries Output
Real GDP. Annual percent change
Average 95-02
10
8
Developing countries
5,1
Accession countries
3,6
Developing Asia
6,8
Western Hemisphere
2,3
6
4
2
0
-2
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Source: IMF.
17
The situation in emerging markets


Economic growth in EMEs has been strong
•
•
Pushed by external sectors: high global demand, recovery of
commodity prices.
•


EMEs output forecast: ’03:5,9; ’04:6,0%; ’05:5,9%
NB: China systematically contributes to around 2.5 p.p (40%) to GDP growth
Protecting external competitiveness through exchange rate intervention
Recovery of financial flows, but remaining vulnerabilities
Economic performance in the Western Hemisphere lags behind, due to
turbulences, already overcome
18
Developments in non Japan Asia



Highest growing region in the world (7,5% in 2003)
Broadly based
•
•
China factor
•
•
•

Domestic + external demand
Most countries grow at over 4%
Strong domestic demand
•
risks of unbalanced growth, structural weaknesses
Pulls external demand in rest of the regions
OMC entry underpins export growth (4th largest world exporter)
Importance of external sector robustness
•
Underscored by proactive intervention policies
•
Reinforces global imbalances (asymmetric adjustment of dollar, demand of
US securities)
19
Developing Asia
Reserve accumulation and exchange rate variation
12
FIXED REGIMES
MANAGED FLOATING
FLOATING REGIMES
6
4
10
2
Exchange rate appreciation () or deppreciation (+) against
$ (right scale)
8
Variation of
international
reserves (%
GDP) (left scale)
.
6
0
-2
-4
-6
4
-8
2
-10
-12
0
-14
-2
-16
2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003
Malaysia
China
India
Thailand
Indonesia
South
Korea
Japan
Phillippines
Source: IIF, IMF and Datastream.
20
Developments in Central and Eastern
European countries



Growth remains robust (4,1% in 2003) after resilience in past years.
Strong domestic demand
Integration in the EU plays a key role as umbrella to the international
environment
However, some relevant problems in terms of nominal convergence
•
•
•
•

Fiscal deterioration: increase in deficits plus deviations from targets
•
Hungary, Check Republic,…higher than 6%
Dilemma: expenditure control in the face of social demands
Widening of current account deficits
•
•
Not alarming as long as supporting investment and productivity convergence
But not always so, in particular, domestic demand
Exchange rate pressures and inflation deterioration in certain countries
Feasibility of smooth transition into EMU? Fast track vs Gradualism
21
Central and Eastern Europe
Nominal convergence indicators
Economic Growth
%
Inflation, CPI
%
General Government
Net Lending (+) / Borrowing (-)
% GDP
Long Term
Interest Rates
Short Term
Interest Rates
2001
2002
2003
2001
2002
2003
2001
2002
2003 (f)
2001
2002
2003
2001
2002
2003
Czech Republic
Hungary
Poland
Slovakia
Slovenia
Estonia
Latvia
Lithuania
Malta
Cyprus
3.1
3.9
1.1
3.3
2.9
6.5
7.9
6.5
-1.2
4.0
2.0
3.5
2.3
4.4
3.0
6.0
6.1
6.8
1.7
2.0
2.9
2.9
3.7
5.6
2.3
4.7
7.4
8.9
0.4 (f)
1.9
4.5
9.1
5.3
7.4
8.6
5.6
2.5
1.3
-2.0
1.4
5.2
1.9
3.5
7.5
3.6
2.0
0.4
-2.8
-0.1
4.7
0.7
8.5
5.7
1.4
2.9
-1.1
1.3
4.0
-6.4
-4.4
-3.5
-6.0
-2.7
0.3
-1.6
-2.1
-6.4
-2.4
-6.4
-9.3
-3.6
-5.7
-1.9
1.8
-2.7
-1.4
-5.7
-4.6
-12.9
-5.9
-4.1
-3.6
-1.8
2.6
-1.8
-1.7
-9.7
-6.3
6.3
7.9
10.7
8.1
----6.1
7.7
4.9
7.1
7.3
6.9
---6.0
5.7
5.4
3.9
6.6
5.6
5.0
5.5
4.3
4.9
5.3
5.0
4.7
5.2
10.9
16.1
7.8
10.9
4.5
6.1
5.9
4.9
5.9
3.5
9.2
9.0
7.8
8.0
3.4
3.3
3.7
4.4
4.4
2.3
8.1
5.7
6.2
6.8
2.9
3.0
2.9
3.3
3.9
Average (non weighted)
3.8
3.8
4.5
5.1
3.1
2.8
-3.5
-4.0
-4.5
7.8
6.2
5.1
7.8
5.7
4.5
Source: National statistics (for GDP growth) and European Comission.
(f): European Comission Spring 2004 Economic Forecasts
Source: ECB and European Commission
22
Developments in Latin America


Latin America is hardly recovering from economic turbulences in 2001
and 2002
Sharp improvement in financing conditions contrasts with delays in
growth reactivation
•
•


Burden of required adjustment after sudden stops
•
•
Restrictive fiscal policies to recover confidence
Restrictive monetary policies to tame pass-through of large previous
depreciations
Large deterioration of purchasing power of consumers (increase in
unemployment, adjustment of real wages) hinders recovery
Vulnerability remains, mainly in the fiscal side
•
•
Increase in debt and sensibility to deterioration of financing costs
Fiscal discipline to stay
Reform fatigue and disenchantment
•
•
Challenges to economic policy.
NO shortcuts to growth, though
23
Summary of Latin American Output
Real GDP. Annual percent change
Volatility and divergence in cyclical position
Average 2001-2003
5
4
3
Mexico
0,6
Brazil
1,0
Latin America
0,5
Average 2001-2003
20
Argentina
-2,2
Venezuela
-4,9
Uruguay
-3,8
15
10
5
2
0
-5
1
-10
0
-15
-1
-20
-2
-25
-3
-30
2001q1 2001q2 2001q3 2001q4 2002q1 2002q2 2002q3 2002q4 2003q1 2003q2 2003q3 2003q4
2001q1 2001q2 2001q3 2001q4 2002q1 2002q2 2002q3 2002q4 2003q1 2003q2 2003q3 2003q4
Source: national statistics.
24
Sovereign spreads against US
Generalized reversion…end of correction?
8000
3100
Latin America
Mexico
7000
Venezuela
2600
Brazil
Argentina (right scale)
6000
2100
5000
4000
1600
3000
1100
2000
600
1000
0
100
ene-98
jul-98
ene-99
jul-99
ene-00
jul-00
ene-01
jul-01
ene-02
jul-02
ene-03
jul-03
ene-04
Source: JP Morgan.
25
Public debt (% of GDP)
Vulnerabilities remain. Debt dynamics cause of concern
25
20
15
Change in interest
payments 2003/2002
(% fiscal revenues)
Level of public debt (% GDP)
and interest payments (%
fiscal revenues) in 2003
77,6
10
22,3
5
26,1
58,2
8,5
0
-5
-10
13,3
47,8
3,1
51,9
13,8
7,6
12,0
17,0
-15
Change in public debt 2003/2002 (%
GDP)
-20
122,7
-25
BRAZIL
ARGENTINA
MEXICO
VENEZUELA
PERU
CHILE
LATIN
AMERICA
Source: national statistics.
26
Capital flows to emerging markets
Net capital flows to emerging markets economies.
Nominal values in billion of US dollars
CAPITAL FLOWS TO EMERGING ECONOMIES: TOTAL
280
230
Start of "globalisation"
180
130
Private flows
Total flows
80
Official flows
30
-20
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
CAPITAL FLOWS TO EMERGING ECONOMIES: WESTERN HEMISPHERE
120
Total flows
100
Start of "globalisation"
80
60
40
Private flows
20
Official flows
0
-20
1971
1973
1975
1977
1979
Source: own calculations from IMF's data (
1981
1983
1985
1987
1989
1991
WEO database september 2001
1993
1995
1997
1999
2001
28
2003
Capital flows to emerging markets

Recovery of net capital inflows to levels prior to 1998,
reaching 140 m.m.$ (vs. 60 m.m. in 2002)
•
•
Very favourable factors
•
•
•
global recovery
ample liquidity, larger appetite for risk in context of low returns in
developed countries
Overcoming of financial turbulences in some emerging markets
China factor heavily weighs.
•
Main target of FDI
29
Capital flows to emerging markets
Looking at the geographical composition:
 Non-Japan East Asia: largest increase, from 6 m.m in 2001
to 85 m.m in 2003, due to reactivation of banking loans (95
m.m $)
 Latin America: remarkable recovery after overcoming
turbulences, from 22,5 in 2002 to 31,6 in 2003, but far from
levels prior to 1998. Mostly due to recovery of portfolio
flows (bonds and equity) and supported by official flows
 EU accession countries: stability of capital flows 38 m.m.$.
Pulling due to integration process might be petering out,a as
reduction in FDI suggests
30
Capital flows to emerging markets
By components:
 Direct investment continues a smoothly declining trend,
but continues to be the main engine of inflows due to its
resilience, averaging more than 150 m.m.$ since 1996
 Cross-border banking flows end their protracted
retrenchment initiated after the Asian crises. It is precisely
Asia which benefits most.
 Porfolio flows , on the contrary, continue their
retrenchment for the third consecutive year, due, again, to
outflows from Asia.
 Official flows are zero in net terms, due to offseting effects
among regions. Africa and Latin America net recipients
31
Economic perspectives for emerging
markets in 2004



Broad based recovery sustained by maintenance of favourable external
conditions
Start of restrictive cycle of monetary policies risks having important effects
•
But central scenario contemplates late and smooth tightening cycle
Regional differentiation:
•
•
•
Asia: autonomous recovery, but export led. China’s locomotive role and risks
within
Central and Eastern Europe: EU accesssion as some convergence indicators
deteriorate
Latin-America: recovery cycle based on maintenance of investor sentiment
•
•
•
•
Very favourable external position, price stability, fiscal discipline
Persistence of vulnerabilities
Domestic policies and reform require strenghtening in the face of disenchantment
Robust growth as diluter of problems….sustainable only with new leap in reforms
32