Riding the Roller Coaster: Managing Capital Flows to Emerging Markets
This presentation by IIF Managing Director and Chief Economist Charles Collyns at the International Finance Forum hosted by the George Washington University Elliot School of International Affairs discusses the swings in foreign capital inflows to emerging markets over the past twenty years. While access to foreign capital has important benefits for recipient economies, boom-bust cycles in capital inflows have often amplified economic volatility and elicited a variety of policy responses, including resort to capital controls. The presentation analyzes the different approaches that have been taken, and argues that increasing financial market depth should over time increase resilience to capital flow shocks and reduce the need for unorthodox measures.
Weekly Insight: Jittery Markets as Growth Picks Up
- Bonds suffer as U.S. data come in strong, ECB signals no rate move
- Manufacturing PMIs continue their rise
- U.S. Q3 GDP revised up to 3.6%, Q4 looks closer to 1%
- Mature economy central banks on hold amid tepid inflation
- Investor demand for securitized products remains weak despite a pickup in CMBS market
December 2013 Global Economic Chartbook Update
The December edition of the Global Economic Chartbook summarizes our current views on the global economy, including sections on capital flows and challenges for emerging economies. This Chartbook is also available in PowerPoint format—you are encouraged to use the charts and data in your own work.
Quantifying the Fed’s Impact on Capital Flows to EMs
We present evidence suggesting that the Fed’s impact on portfolio inflows to emerging markets may be more nuanced than widely assumed. We estimate a simple econometric model indicating that the recent retrenchment episode was primarily driven by a shift in market expectations towards an earlier tightening of Fed policy, rather than a markdown in expectations about EM economic performance. Looking ahead, our model suggests that the Fed’s impact on EM portfolio inflows depends on the pace of Fed exit relative to market expectations and the volatility of market expectations over time. A slower than expected Fed exit and stable market expectations would tend to boost portfolio inflows, while a more rapid exit than anticipated could result in renewed retrenchment, particularly if market expectations were to fluctuate widely.
Hungary: Near-Term Upside, Medium-Term Challenges
The near-term growth outlook has improved due to markedly expansionary policies. Sharp fiscal tightening last year and record low inflation leave scope for further moderate policy easing ahead of twin elections due next year. Sustaining growth over the medium-term would be much more difficult and would require major structural reforms to boost investment.
IIF Teleconference on Argentina's Economic Outlook: Light at the End of the Tunnel?
December 3, 2013 — In this members-only teleconference, Ramón Aracena, IIF Chief Economist for Latin America, and Martin Castellano, Senior Economist, share insights from their recent visit to Buenos Aires, including an overview of the Argentine outlook and the impact of the midterm election results.
Greece: Déjà Vu All Over Again?
Recovery should be on the horizon for Greece with improvements in tourism, stable employment and restored competitiveness. Fiscal targets are likely to be met for the second year, and banks have been recapitalized. Political, economic and financial uncertainties cloud these prospects, however, given the renewed tensions with the troika, tight credit conditions and likely delay on a decision on further debt relief.
China: President Xi Sets out His Vision
The decision document for the third plenum lays out President Xi’s vision for economic reform in China. If implemented vigorously over the next 5-10 years, these reforms could lead to the transformation to the market-oriented economy needed to achieve more sustained and better balanced growth. The reforms would at the same time promote the market-based allocation of resources and credit, overhaul relations between the central and local governments, and address concerns about distribution of income between city and countryside. State-owned enterprises would retain a core role but would be required to be more efficient and market oriented. Much work will be needed to develop and implement the policy agenda, and no doubt there will be resistance from state owned-entities and other entrenched interests. However, President Xi’s position looks increasingly strong and the reform agenda includes steps to further centralize power.
Financial Stability Issues in the MENA Region
In a presentation on Financial Stability Issues in the MENA Region delivered at the FSI-AMF Ninth High Level Meeting for the Middle East & North Africa Region held in Abu Dhabi, George T. Abed, Senior Counselor and Director for the Middle East and Africa, sets out key issues in financial stability in the MENA Region.
IIF Teleconference: China's Third Plenum Reform Blueprint
November 26, 2013 — In this members-only teleconference, Charles Collyns, IIF Managing Director and Chief Economist, provides a briefing on the insights gained during his meetings with officials and the private sector in China, and discusses China’s Third Plenum reform blueprint.
IIF Teleconference: Ukraine's Growing Risk of Disorderly Adjustment
November 26, 2013 — In this members-only teleconference, Lubomir Mitov, Chief Economist for Europe and Ondrej Schneider, IIF Senior Economist of the European Department, discuss the recent marked deterioration of the macroeconomic situation in Ukraine, as well as the policy options and growing risks of a disorderly adjustment which could gravely impact growth, financial stability, and debt servicing.
IIF Teleconference: India's Economic Policies and Near-Term Outlook
November 25, 2013 — In this members-only teleconference, Dr. Bejoy Das Gupta, IIF Deputy Director of the Asia/Pacific Department, shares insights gained during his meetings with officials and the private sector in India.
Weekly Insight: Policy in the Spotlight—Focus on U.S., China
- Will higher bond yields dent the risk rally?
- China’s third plenum blueprint beats expectations
- Chinese domestic bond market—ready to open up?
- Slow but steady manufacturing expansion in China and the Euro Area
- Fed to markets: “tapering is not tightening!”
- Strong IPO activity in mature markets, but not in emerging markets
Cyprus: Program on Track—What is Behind the Headlines?
Cyprus’ second program review is likely to be completed by mid-December, pending the implementation of a range of prior actions. This note goes behind headline developments and assesses the political commitment to reform, the underlying reasons for the less than feared output contraction in 2013, the outlook for subsequent years, and the prospects for restoring depositor confidence. It is essential to continue to monitor policy implementation and outcomes—and stand ready to take additional measures if needed—while reinforcing political commitment to reform and resisting pressures from vested interests.
IIF Teleconference on Greece: Economic Performance and Relationships with the Troika
November 20, 2013 — In this members-only teleconference, Jeffrey Anderson, IIF Senior Director for European Affairs, provides a briefing on the insights gained during his meetings with officials and the private sector in Athens, discussing the performance of the economy and the relationships with the troika—one of the major headwinds going forward.
Ecuador: Public Spending-Led Growth is Losing Steam
Ecuador’s economic growth has become heavily dependent on public spending, which remains elevated despite declining oil revenue. Seeking to sustain growth, the government is increasing its liabilities. This strategy, however, is unsustainable over the medium term, which augurs increasing pressure on the dollarization regime. Meanwhile, attempts to attract foreign investment are being hindered by anti-business policies.
2013 November U.S. Economic Forecast
After a solid growth rate of 2.8% q/q, saar, in Q3, the U.S. economic expansion is likely to slow in the fourth quarter, mainly due to temporary factors. The outlook for 2014 is more upbeat, in part thanks to a fading fiscal drag. We project GDP growth of 2.5% y/y next year. This acceleration should set the stage for a turning point of monetary policy. Under Janet Yellen as FOMC chair, the Fed is likely to be cautious in slowing the pace of asset purchases and ultimately normalizing monetary policy.
2013 November Euro Area Economic Forecast
The growth recovery in the Euro Area is proceeding slowly but there are increasing signs that it is becoming more broad-based and balanced across countries. Trade balances continue to improve in the periphery, and a strong export performance pulled Spain out of its two-year recession in Q3. Meanwhile, domestic demand remained a key growth driver in Germany.
2013 November Japan Economic Forecast
GDP growth has weakened somewhat in Q3 but is set to accelerate as private demand rises in anticipation of the April 2014 consumption tax hike. Additional fiscal stimulus will only partly offset the growth drag from the tax hike in FY2014. Some progress on structural reforms is being made in the ongoing Diet, but more wide-ranging measures are needed to improve confidence and support demand.
Weekly Insight: Risk Rally Still Running
- Mature markets continue to rise, although emerging markets less buoyant
- Yellen remarks seen as dovish, and Fed policy normalization still seen distant
- Slowing Q3 growth in Japan and Euro Area likely to be temporary
- New IIF global forecast calls for rising growth momentum in 2014, but highlights risks
- China’s Third Plenary promises a greater role for market competition, but lacks specifcs
- Large Euro Area corporates increasingly turn to bond markets for funding
November 2013 Global Economic Monitor
Recent data in both mature and emerging markets have been consistent with the global economy achieving a significant pick-up in growth in 2014, with a particular increase in momentum in mature economies (notwithstanding some temporary weakening in Q3 in Japan and the Euro Area). Nevertheless, concerns remain whether this acceleration will materialize and central banks have continued to take out insurance against disinflation risks.
Ukraine: Time Is Running Out
Inflexible economic policies have caused the recession to deepen and macroeconomic imbalances to swell as financing pressures have intensified with access to foreign markets lost. A major adjustment is unavoidable, but the government has chosen to delay it until after the 2015 presidential election. This strategy seems increasingly implausible, raising odds of a disorderly adjustment. The government can still avoid a financial collapse if it moves swiftly to agree on a new IMF agreement, but time is running out.
Sub-Saharan Africa: Reforms Needed For Higher Growth
With the exception of South Africa, global financial market volatility over the past few years has had little effect on growth in Sub-Saharan Africa. Although the waning of the commodity super cycle has dampened export earnings, growth for the IIF-7 countries remains solid and is forecast to be broadly unchanged in 2013, at 4.7%.
Weekly Insight: ECB Takes Action
- ECB cuts rates by 25bp — how much more ammunition do they have?
- Incoming real activity data for the Euro Area remained broadly positive
- U.S. Q3 GDP — strong headline due mainly to inventory buildup
- Emerging market manufacturing sector: regaining momentum
- Ongoing search for yield spurs high-yield debt issuance, currency pressures
Chile: Standing at a Turning Point
Chile stands at a turning point as it goes into presidential elections on November 17, 2013. Well-designed policies to address income inequality could catapult the country to full-fledged advanced-economy status. We expect Michelle Bachelet of the center-left Nueva Mayoría coalition to be Chile’s next president for the 2014-2018 term. Her ability to advance a demanding reform agenda through political cooperation is critical to preserving a stable, vibrant economy.
Panama: Shifting Out Of High Gear
Panama’s economy has achieved stellar growth in recent years. A key factor has been a large public capital investment program, which has coincided with a major expansion of the Panama Canal. As these projects finish up, the key challenge going forward will be unlocking new drivers of growth. This will require a shift in focus from physical capital investment to human capital and institution-building.
Indonesia: External Pressures- Induced Adjustment Underway
The limitations of dependence on commodity exports and domestic credit growth were evident in acute external pressures over the summer, exacerbated by the midyear sell-off in emerging markets. The tightening of macroeconomic policies and more difficult external conditions implies a significant slowing of growth momentum.
Weekly Insight: Can This Rally Be Spooked?
- Only slightly curbed market enthusiasm
- U.S. economy failing to gain momentum so far and Fed stands pat
- ECB next week – on hold with an easing bias
- Euro Area deleveraging could have several more years to run
- Focus on Chinese policy decisions ahead of the Third Plenary
MENA: Arab Spring Countries Struggle, GCC Prospects Favorable
After nearly three years of political turmoil and uncertainty, the Arab Spring countries are yet to see the light at the end of the tunnel. Popular uprisings against authoritarian rule and for human dignity have morphed into various forms of political, sectarian or armed conflicts, dimming the outlook for political stability and economic recovery. The divergence in economic performance between oil-exporting countries and oil-importing countries since the start of the uprisings has widened further. The outlook for oil-exporting countries remains favorable with robust nonhydrocarbon growth and large financial surpluses. Oil importing countries will continue to struggle to achieve even modest growth with high unemployment, persistent macroeconomic imbalances and challenging prospects. Building cooperative economic relationships between wealthy GCC countries and the Arab Spring countries could transform prospects for the region and bring vast benefits to both donors and recipients.
Weekly Insight: Return of the Punchbowl—Will the Buzz Last?
- “Taper-delay rally” highlights the renewed search for yield
- U.S. outlook: fiscal battles and weaker job growth suggest no taper until 2014
- Manufacturing continues to expand in China and the Euro Area
- ECB Asset Quality Review (AQR) highlights investor concerns
- UK banks to enjoy more support from the BoE; U.S. banks Q3 earnings reflect weaker mortgage activity
- EM bank lending conditions continue to tighten
Challenges Facing EM Banks in a New Global Environment
This research note looks at banking systems in 10 leading Emerging Market economies, gauging their inner strengths and their ability to raise the capital resources needed to fund the fast-growing needs of their economies in the next five years. In addition to the important role of EM banks, the note suggests that there is an urgent need to develop complementary corporate bond markets.
Emerging Markets Bank Lending Conditions Survey - 2013Q3
IIF’s Emerging Markets Bank Lending Conditions Index declined further in 2013Q3, indicating that overall bank lending conditions continued to tighten in emerging economies for the second quarter in a row. Amidst the retrenchment in capital flows, banks in all regions witnessed a significant deterioration in funding conditions and tightened credit standards further.
Peru: Moving to Sustain Growth
Peru has weathered well the increased global financial volatility over the last few months. However, growth has softened below-trend under the weight of lower commodity prices and a decline in business confidence. A string of protests exposing widespread frustration with Peru’s political establishment has put further pressure on policymaking. Sustaining high and inclusive growth requires overcoming lingering structural weaknesses and increasing social spending to improve the distribution of benefits.
Egypt: An Easy Road Map, A Difficult Road Ahead
In the three months since the ouster of President Morsi, the military has clamped down hard on the Muslim Brotherhood, alienated the movement from the political transition process, and strengthened its grip on internal security. Faced with dire economic conditions, the interim government has taken some measures to spur demand but skirted fundamental reforms. The immediate outlook is for the authorities to muddle through while the transition proceeds. Over the longer term, the outlook remains cloudy with major risks to the downside.
The Euro Area Debt Crisis: What’s Next?
Progress has been made at the national level reducing fiscal and external deficits, improving competitiveness and stabilizing activity. Progress has also been made at the EU level strengthening fiscal rules, advancing banking union and expanding the volume and flexibility of financial support from the ECB and the ESM. Much remains to be done to strengthen growth, which will not be sufficient, when it returns, to lower unemployment from very high levels. Vulnerabilities will persist to renewed financial tensions until banking union is completed and as long as debt mutualization remains limited.
October 2013 Global Economic Chartbook Update
The October edition of the Global Economic Chartbook updates our global forecasts, providing charts on the global business cycle, global inflation, capital flows to emerging economies, economic policy, and financial conditions. Special features include the future of the Euro Area, U.S. policy changes ahead, Japanese monetary policy, and challenges for emerging economies. This Chartbook is also available in PowerPoint format—to access the underlying spreadsheets please double-click on each chart. You are encouraged to use the charts and data in your own work.
Restoring Financing and Growth to Europe's SMEs
SMEs in Europe have been hard hit by Europe’s economic difficulties and have seen major declines in financing since 2008. To promote better understanding of the factors behind reduced financing, the IIF and Bain & Company held more than 140 interviews with a broad range of stakeholders in six Euro Area countries and with officials in key European institutions. The interviews made clear that progress is needed both to improve the availability of information and the financial health of SMEs and to broaden the base of financial institutions able to identify and fund promising SME activities. The report recommends the establishment of a coordinated European process focused on national task forces to develop tailored, technical, nonpolitical action plans to address each of these impediments in each national market.
Emerging Europe: Rising Challenges to Growth
Regional growth has slowed sharply, with growing divergence among countries. Growth has lagged in the EU5, but resilience to shocks has improved thanks to diminished external imbalances. Turkey has grown much faster, but at the expense of widening external imbalances, while the commodity-based growth models of Russia and Ukraine have reached their limits. The outlook looks most favorable for the EU5, but more challenging for Turkey, where the authorities face difficult policy choices. Growth will remain subdued in Russia because of structural rigidities. A major adjustment looks unavoidable in Ukraine.
Structural Challenges to Emerging Market Growth
Emerging markets are experiencing a broad-based slowing of growth which contrasts with the gradual pick-up of advanced economy growth momentum. This weakening in EM growth is not just cyclical, but also reflects underlying structural factors, including a lack of reform during years of impressive performance and a gradual exhaustion of the drivers of rapid growth. Revitalizing emerging market growth prospects will depend on advancing a broad range of interlocking reforms aimed at achieving better balanced and higher quality growth, based on refreshed growth models. The required mix of reforms and the new vision for growth will vary across countries, as discussed in detail for ten large emerging market countries in this report, but in all cases will depend on being able to overcome internal political challenges.
2013 October Capital Flows to Emerging Market Economies
Capital flows to emerging economies have seen a sharp retrenchment since mid-May 2013, prompted in part by a shift in market expectations towards an earlier normalization of U.S. monetary policy. In the immediate future, EM capital inflows look set for a rebound, in part because the Fed has delayed its tapering of asset purchases. We project that this recovery will be sustained through 2014, barring any major shift in market views about the course of Fed monetary tightening. Capital inflows are likely to be less buoyant than in recent years, however, as the fundamental underpinnings of EM growth have deteriorated.