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Perspectives on Emerging
Economies Growth
Vincenzo D’Apice
Observatory on Emerging Economies, Luiss 22-Feb-2011
Agenda
1. A framework for Boom & Bust Cycles: The Minsky
Model
2. Perspectives on Emerging Market Economies Growth
Vincenzo D’Apice
Observatory on Emerging
Economies,
Luiss, 22 Febbraio 2011
The Minsky model
Boom stage
Starting Point:
-Low inflation
-Low unemployment
Positive Shocks:
-Deregulation
-Financial innovation
-Capital inflows
Politicians & economists
theorize the beginning
of a new Era
(e.g. New Economy)
Banking Sector:
-Demand for credit rises
-Risk underestimation
-Supply of credit rises
Balance sheet channel
Lending channel
Financial accelerator
(Bernanke-Gertler,’95)
Financial Markets:
-Asset prices rise
(shares & real estate)
-Wealth increases
-Debt increases
Animal spirits
(Keynes 1937)
Vincenzo D’Apice
The Great Moderation
(Bernanke ’04)
-Covered
-Speculative
-Ponzi
Real Economy:
-Consumption rises
-Investment raises
-Lower savings
-Rising current account deficit
Boom:
-Economy overheats
-Real and/or financial imbalances grow
-Financial structure becomes fragile
Global Imbalances
(Bernanke ’07)
Observatory on Emerging
Economies,
Luiss, 22 Febbraio 2011
Minsky model
Bust stage
Starting Point:
-Rising interest rates
-Sudden change in expectations
Default of Ponzi units
Negative Shocks:
-Capital flows away from more
speculative investment
Banking Sector:
-Pessimistic evaluation of risk
-Demand for credit falls
-Supply of credit falls (crunch)
Financial Markets:
-Asset prices fall
-Wealth falls
-Debt deflation
-Real debt increases
Debt Spiral
a la Fisher 1933
Vincenzo D’Apice
-Central Bank
-Government
-Regulation
Real Economy:
-Consumption falls
-Investment falls
-Rising savings
-Lower current account deficit
Bust:
-Banking crisis (bank runs)
-Recession
Deflationary Spiral
Observatory on Emerging
Economies,
Luiss, 22 Febbraio 2011
What is the Outlook for the Global Economy?
• The outlook is:
• U-shaped recovery in advanced economies
• V-shaped recovery in emerging-market countries
Output Growth (% )
World
Advanced Economies
Emerging Economies
Vincenzo D’Apice
2010
5.0
3.0
7.1
Observatory on Emerging
Economies,
Luiss, 22 Febbraio 2011
2011
4.4
2.5
6.5
2012
4.5
2.5
6.5
What Will Be the Role of Emerging Economies?
•The role of EEs will be even stronger in the next decade (BRICs + N-11):
$37t
45%
$27t
30%
$10t
Vincenzo D’Apice
Observatory on Emerging
Economies,
Luiss, 22 Febbraio 2011
30%
What Will Be the Role of Emerging Economies?
•One of the more striking story will be the rise of the new BRICs middle
class:
2010 middle-class consumers
purchasing power $7 trillion
2020 middle-class consumers
purchasing power $20 trillion*
Import
goods
of
low
value
added
Import of high value added
goods (car, technology)
Vincenzo D’Apice
Observatory on Emerging
Economies,
Luiss, 22 Febbraio 2011
What Are the Downside Risks in This Scenario?
• The first risk is further financial contagion in Europe:
Spread over German Jan-2010 Jan-2011
(A)
(B)
10y-bunds
Greece
2.1%
8.0%
Ireland
1.3%
6.0%
Portugal
0.8%
4.0%
Spain
0.8%
2.2%
Italy
0.8%
1.8%
Vincenzo D’Apice
Observatory on Emerging
Economies,
Luiss, 22 Febbraio 2011
Diff.
(B-A)
5.9%
4.7%
3.2%
1.4%
1.0%
What Are the Downside Risks in This Scenario?
• The second risk is the negative effects of Fed QE:
• FED QE* is subjecting the emerging economies to a flood of capital,
rising commodity prices, inflation, and (possibly) asset bubbles:
Fed Total Assets (trillion)
Stock
Growth
Aug-2007 Feb-2011
0.9
2.5
1.6 178%
Memo
Vincenzo D’Apice
US GDP 14.6 trillion
Observatory on Emerging
Economies,
Luiss, 22 Febbraio 2011
What Are the Downside Risks in This Scenario?
• The
third risk is that capital inflows to emerging markets will be
mismanaged, thus fueling credit and asset bubbles:
Capital Flows to Emerging Markets
(% of world GDP)
Capital Flows to Emerging Markets
(% of world GDP)
Net liabilities
2006
2008
2010
6,5%
1%
4%
• Drivers:
• Asset allocations
• Carry trades
Vincenzo D’Apice
Observatory on Emerging
Economies,
Luiss, 22 Febbraio 2011
What Are the Downside Risks in This Scenario?
• Flows into debt and equity mutual funds have been strong:
Annual Retail Flows to Emerging Market
Debt and Equity Mutual Funds
($ billion)
• Risk of asset price bubbles
• So, back to the twin crises
of 90s? Yes & No
• Yes,
b/c the bust of the
bubble can trigger a banking
crisis
• No, b/c the risk of currency
crisis is low thanks to the
accumulation
of
intl.
reserves
Vincenzo D’Apice
Observatory on Emerging
Economies,
Luiss, 22 Febbraio 2011
What Are the Downside Risks in This Scenario?
•The fourth risk is inflation in emerging markets:
Vincenzo D’Apice
Observatory on Emerging
Economies,
Luiss, 22 Febbraio 2011
What Are the Downside Risks in This Scenario?
•The fifth risk is currency tensions (currency war):
• Global imbalances will remain large
• Deficit countries need a currency depreciation
• But, surplus countries don’t want to accept a currency appreciation
Global Imbalances (% of world GDP)
• Deflation
in
deficit
countries
• Higher risk of debt default
(via Fisher spiral)
Vincenzo D’Apice
Observatory on Emerging
Economies,
Luiss, 22 Febbraio 2011
What Are the Downside Risks in This Scenario?
•The sixth risk is geopolitical (Korea, Pakistan, Tunisia, Egypt, Libya).
• This risk is putting pressure on the price of commodities:
• This,
further
inflation
Vincenzo D’Apice
in
turn, will
pressure
put
on
Observatory on Emerging
Economies,
Luiss, 22 Febbraio 2011
By the Way, Don’t Forget the Causes of the Recent Crisis
• For example, the shadow banking system is still “shadow”:
$16t
$13t
Vincenzo D’Apice
Observatory on Emerging
Economies,
Luiss, 22 Febbraio 2011
Why Do We Need Monitoring the Emerging Banking Systems?
Global
Imbalances
EEs Strong
Growth
Rising MiddleClass
Emerging
Banking
System
Inflation
GeoPolitical
EU Debt
Crisis
Fed QE
Capital
Inflows
Vincenzo D’Apice
Observatory on Emerging
Economies,
Luiss, 22 Febbraio 2011
Thank You
Contacts:
Vincenzo D’Apice
[email protected]
[email protected]
[email protected]
Vincenzo D’Apice
Observatory on Emerging
Economies,
Luiss, 22 Febbraio 2011