Global Macro Outlook 2014-15
Subdued Growth, Tail Risks Diminishing
ALASTAIR WILSON, HEAD OF SOVEREIGN RATINGS
SEPTEMBER, 2014
Agenda
1. Economic Strength:
o Global Growth Lower, But EMs Approaching The Bottom?
o US : A Surprisingly Haltering Recovery
o China: Gradual And Protracted Rebalancing
2. Fiscal and Institutional Strength:
o Broad Stasis in LatAm Contrasts With European Recovery
3. Exposure to Event Risk:
o External Resilience Persists in LatAm
2
1
Global Growth Lower, But EMs
Approaching The Bottom?
3
Downward Revisions Dominate Global Outlook
Forecasts for GDP growth, %
» Downward revisions
dominate our recent
outlook, in both
developed and
emerging markets
» G20 growth 2014
forecast unchanged at
2.8%, similar to 2013.
» 2015 GDP growth will
still be below pre-crisis
averages
Argentina
Brazil
China
France
Germany
Italy
Mexico
Russia
South Africa
Turkey
UK
US
Euro Area
LatAm 8
G-20 All
G-20 Advanced
G-20 Emerging
2013
3.0
2.5
7.7
0.2
0.4
-1.9
1.3
3.8
1.9
4.0
1.7
1.9
-0.4
2.5
2.7
1.4
5.1
2014F
-2.5/-1.5
0.5/1.5
6.5/7.5
0.0/1.0
1.5/2.5
-0.5/0.5
1.5/2.5
-1.5/-0.5
1.0/2.0
2.5/3.5
2.5/3.5
1.5/2.5
0.5/1.5
1.0/2.0
2.5/3.5
1.5/2.5
4.0/5.0
2015F
-0.5/0.5
0.5/1.5
6.5/7.5
1.0/2.0
1.0/2.0
0.5/1.5
2.5/3.5
-0.5/0.5
2.5/3.5
2.5/3.5
2.0/3.0
2.5/3.5
1.0/2.0
1.5/2.5
3.0/4.0
2.0/3.0
4.5/5.5
Source: MIS. Orange (green) shading denotes recent negative (positive) revision
4
Low Yield Environment Expected to Continue
» Tapering likely to complete in Q4 this year. First rate rise expected mid-2015
» Rate increases relatively slow initially (200 basis points in 2 years)
Fed funds rates
%
Forecast
Federal Reserve funds rate
6
5
4
3
2
1
0
2005
2007
2009
2011
2013
2015
2017
Source: MIS Macroboard, August 2014
5
Emerging Markets’ Growth Outlook Revised Down
» Weak data on economic activity at the beginning of the year…
» …and no indication that the drivers of growth are improving…
» …led to further downward revisions in the growth outlook for EMs
GDP growth
EMs ex China, % year
Aug 13
May 14
Aug 14
2002-07 annual average growth
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2013
2014
2015
Source: MIS Macroboard, August 2014
6
As Have Been LatAm Forecasts
» While capital inflows have been unexpectedly robust, the focus of concern has
shifted towards domestic imbalances
» Exports and industrial production been weak, leading to downward revisions for a
number of countries
LATAM GDP growth revision for 2014
7.0
6.0
5.0
4.0
3.0
2.0
Original
1.0
Revision
0.0
-1.0
Source: CEPAL.
7
With Lower Growth Expected to Prevail Through 2015
» While growth is expected to pick up in 2015, it will rise only slowly towards
potential levels.
GDP Annual Growth (%)
Country
Argentina
Brazil
Chile
Colombia
Mexico
Panama
Peru
Venezuela
LATAM 8
2013
2014*
2015*
2.9
2.5
4.1
4.7
1.1
8.4
5.8
1.4
2.5
-2.0
0.7
3.0
4.7
2.2
5.5
4.1
-0.7
1.4
0.0
1.0
3.7
4.8
3.2
6.5
5.8
1.2
2.2
*Moody's Forecasts
Source: Moody’s Investors Service.
Difference
2014-15 vs 2013
-3.9
8.0
7.0
6.0
-1.6
5.0
-0.7
4.0
0.1
3.0
1.6
2.0
2014-15
-2.4
1.0
Potential
-0.9
-1.2
0.0
-1.0
-2.0
Source: Moody’s Investors Service.
8
Continuing a Medium-Term Trend
» LATAM-8 GDP actual vs. potential growth
LATAM 8 Average GDP Growth
Potential Growth
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2005-2008
2010-2013
2014-15
Source: Moody’s Investors
Service.
9
In Brazil, Imbalances Persist, Growth below Potential
» Persistent below-potential GDP growth,
worsening debt metrics
» High government debt ratio (60%+ of
GDP), missed primary balance targets
» High gross financing needs (15% of
GDP) and interest burden,
» Large FX reserves (around $350 billion)
» Limited FC exposure (5%) and participation
by non-residents (18%)
» Large, diversified economy driven by
domestic demand (exports =12.5% of GDP)
» Low investment ratios (<20% of GDP),
weak growth (< 2%)
Real GDP (% c hange)
Gen. Gov. Financial Balance/GDP
Current Account Balance/GDP
Gen. Gov. Debt/GDP (RHS)
8
60
6
58
4
56
2
54
0
52
-2
50
-4
48
%
62
%
10
2008
2009
2010
2011
2012
2013
2014F
2015F
Sources: Haver Analytics, Official National Sources, Moody’s
10
Argentina’s prospects are worsening
» Default will exacerbate long downward trend in growth
» Inflation expected at or above 40%
» Significant deterioration in macroeconomic and credit conditions
GDP growth, % year
10.0
9.1
8.6
8.0
6.0
4.0
2.9
2.0
0.9
0.0
0.0
-2.0
2010
2011
2012
2013E
-2.0
2014
2015
Source: Moody’s Investors Service
11
Reforms Strengthen Mexico’s Outlook
» The approval of wide-ranging structural reforms reflects political will to address
longstanding structural issues.
» We expect that potential GDP growth will gradually shift to the 3%-4% range, from 2%3% prior to the reforms.
» We expect that after an increase to 3.5% of GDP in 2014, fiscal deficit will report a
declining trend supporting a sustained debt to GDP ratio.
4.0
GDP growth, % year
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2005-2008
Source: Moody’s Investors
Service.
2010-2013
2014
2015
12
2
US: A Surprisingly Haltering
Recovery
13
U.S. Rating Outlook Moved to ‘Stable’ in July 2013
» Budget deficits expected to continue to decline, Growth picking up and resilient to
reductions in growth of government spending.
» Debt-to-GDP ratio will decline by more than Moody's expected when we assigned the
negative outlook in August 2011
» Though without further fiscal consolidation, deficits will increase once again over the
longer term, which could put the rating again under pressure
US Deficits Under CBO Baseline Scenario and Administration Proposal
CBO
Administration
$1,200
US$ Billion
$1,000
$800
$600
$400
$200
$0
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Sources: US Congressional Budget Office, The Budget and Economic Outlook: 2014 to 2024 and Budget of the United States
Government, Fiscal Year 2015
14
Growth around 3% (‘old normal’) in H2 2014 and 2015
» Strong employment growth signals corporates’ confidence in the recovery
» Positive wealth effects to boost consumption
» Strong corporate balance sheets to foster investment
Non-farm payrolls, 3-month average
Household and corporate wealth, % of GDP
350
Non-financial businesses' net wealth, LHS
Households' net wealth, RHS
300
250
200
150
100
200
410
190
390
180
370
170
160
350
50
150
330
0
140
310
-50
130
-100
120
-150
110
270
100
250
290
1960 1967 1974 1981 1988 1995 2002 2009
Source: Haver Analytics
Source: Haver Analytics
15
But weak recovery could indicate lower potential growth
» This recovery phase is much weaker than average. Possible reasons:
– Underestimating the negative effects of demographic changes?
– Previous recoveries involved financial deepening/credit booms?
– Private sector still deleveraging?
US GDP
Trough=100
From 2009
Average of recoveries since 1950s
Average of recoveries since 1980s
125
120
115
110
105
100
95
Source: Haver Analytics, Moody’s Investors Service
16
3
China: Gradual And Protracted
Rebalancing
17
China: Credit Strengths Offset by Latent Risks
» World’s second largest economy, high domestic savings, rising GDP per capita
» Net International Investment Position at about 21% of GDP at the end of 2013,
including considerable official FX reserves ($3.95 trillion)
» Very strong government finances, high capacity to absorb shocks even once offbalance sheet activities are taken into account
» But upward rating pressure eased because less progress than expected in:
– Containing local government contingent liabilities
– Containing rapid credit growth to the private sector and SOEs intermediated by the
shadow banking system
» Credit-positive structural reforms announced by the 18th Central Committee’s
Third Plenum in October 2013. But success will take time to assess.
18
Economy Largely /Credit Debt Driven Since 2008
» Corporations slow to adjust to the new domestic and external economic realities
» Though households remain lightly leveraged, with ample financial buffers
Debt-to-GDP Ratio, %
Household
Private credit vs. Income levels, % of GDP
and US$ per person
Corporate
Government
250
200
200 China
% of GDP
150
100
50
Source: Moody’s Investors Service, Bank for International
Settlements, International Monetary Fund, Haver Analytics
2013e
2012
2011
2010
2009
2008
2007
2006
0
Private credit to GDP, %
250
150
S. Korea
UK
Canada
Hungary
100
50
GDP per capita
0
0
20000
40000
60000
80000
Source: BIS, Moody’s Investors Service
19
Growth is stabilising
» Targeted stimulus measures seem to have had a positive impact already
» Although investment has slowed markedly
» And property slowdown shows no sign of abating
China: Manufacturing PMI, Index, average of HSBC
and CFLP PMIs
60.0
China: Fixed assets investment, % year
40
35
30
55.0
25
50.0
20
15
45.0
10
40.0
5
0
Source: Haver Analytics, Moody’s Investors Service
May-14
Sep-13
Jan-13
May-12
Sep-11
Jan-11
May-10
Sep-09
Jan-09
May-08
Sep-07
Jan-07
May-06
Sep-05
Jan-05
35.0
Source: Haver Analytics
20
Marked Slowdown in Property Sector Underway
» GDP stabilised in Q2 but property slowdown shows no signs of abating. Building
activity not reduced in line. Inventories building to high levels.
» Deep property downturn could shave between 1.5ppt and 2.25ppt from growth,
mainly through supply chain linkages. Though policy space exists to mute the impact.
Property Transactions, % year
Value of total buildings sold
Price (RMB/sq m)
100
80
60
40
20
0
-20
-40
Source: Haver Analytics
21
Rebalancing Will Be Gradual and Protracted
» 2014 growth close to 7.5% target, 6.5%-7.5% in 2015. Deep property downturn could shave 1%-2% off
growth, mainly through supply chain linkages. Even then, policy space exists to mute the impact.
» Strong fiscal and external position. Government has demonstrated willingness to exercise control over
key policy levers – interest rate, exchange rate, credit.
» But deleveraging and rebalancing will be gradual and protracted. Leading to more volatile growth than
in the recent past
China: GDP growth, % year
16
14
12
10
8
6
4
2
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014 (F)
2015 (F)
2016 (F)
2017 (F)
2018 (F)
0
Source: Moody’s Investors Service
22
4
Fiscal and Institutional Strength:
Broad Stasis in LatAm Contrasts with
European Recovery
23
EMs Carrying Lower Debt Loads Post-Crisis
» Euro Area sovereigns carry higher debt loads, particularly in the periphery.
EMs (including LatAm) face pressures but are in a stronger fiscal position.
» Reversals of previous downgrades in Euro Area partly reflects forward view on
reversal of debt trajectory. View carries risks given low growth and inflation.
Mean Debt:GDP Ratios, 2013, %
Euro Periphery
120
100
80
60
40
20
0
Euro Area
(Aaa-Baa3)
Advanced Industrial
Countries
(Aaa-Baa3)
Emerging Markets
(Aaa-Baa3)
Latam-8
Source: World Bank, Moody’s
24
And Euro Area Countries Have a Hard Road Ahead
» 15 years of surpluses needed to return to debt level of 60% of GDP.
» In the meantime, debt trends vulnerable to demographics and shocks in a low
growth environment.
Fiscal Adjustment Needs Are Significant
Change in cyclically-adjusted primary balance needed to reduce public debt
to 60% of GDP by 2030 versus current position
Current position, 2014
CAPB in 2020-30
8
7
6
5
4
3
2
1
0
-1
-2
France
Germany
Italy
Spain
Portugal
Ireland
CAPB: Cyclically Adjusted Primary Balance, % of GDP, Sources: IMF, Moody‘s
25
But Institutional Strength Is Also Lower in EMs
» Advanced Economy (incl. EA) institutions are much stronger, supporting higher
ratings per unit of debt.
» Though the crisis exposed institutional weaknesses in the euro area overall.
Ratings will not return to pre-crisis levels in the foreseeable future
» And positive institutional developments in train in Lat Am, eg Mexican
structural reforms which will enhance
both economic and institutional strength
Political Stability
75
Median Latam8
50
Government
Effectiveness
Regulatory Quality
25
Mean - Europe
0
Voice & Accountability
Mean - AsiaPacific
Rule of Law
Control of Corruption
Source: World Bank, Moody’s
26
5
Event Risk: External Resilience
Persists in LatAm
27
‘Taper Tantrum’ – Overblown, Blown Over?
» Volatility and currency pressures in early 2014 showed the vulnerability of some
EM sovereigns to an extended period of uncertainty/volatility
Equity Markets
MSCI EM Index
Nominal Exchange Rate to US$ (1 Jan
2013=100) Russia
Brazil
S&P 500 Index (RHS)
1100
2000
1050
1800
India
Mexico
Turkey
South Africa
110
105
1000
1600
100
95
950
1400
90
85
900
1200
80
75
Sources: Bloomberg, Moody’s
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
70
Jan-13
May-14
Apr-14
Feb-14
Mar-14
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Feb-13
Mar-13
1000
Jan-13
850
Sources: Haver Analytics, Moody’s
28
But Capital Flows Have Held Up
Fixed-Income and Equity Flows LATAM 4*, $ US Billions
Debt
120
100
80
Capital flows in largest emerging markets, $ billion
Equity
50
Fixed Income Flows
Equity Flows
40
30
60
20
40
10
20
0
0
-10
-20
-20
-40
2005 2006 2007 2008 2009 2010 2011 2012 2013
* Net flows for Mexico, Brazil,
Chile, Colombia
Source: Institute of International Finance, Moody’s Investors
Service
29
External Vulnerability? Mixed, but No Alarm Bells
Basic Balance (Current Account Net of FDI, % of GDP)
1.2
2010-12 avg.
0.2
0.2
-0.1
-0.5
-0.6
-0.9
Chile (Aa3)
Mexico (A3)
-1.0
Colombia (Baa2)
Brazil (Baa2)
FX Reserves / (Maturing Long-Term External Debt + Short-Term External Debt)
2012
1.4x
0.9x
2013
4.3x
3.9x
1.6x
2.1x
1.8x
0.9x
Chile (Aa3)
Mexico (A3)
Colombia (Baa2)
Brazil (Baa2)
30
Though Argentina is One Pressure Point
» Reserves have diminished rapidly, though stabilised recently with decision to
allow depreciation
» But negative market reaction to the recent default could trigger a balance of
payments crisis
Official Foreign Exchange Reserves (US$ Bil.)
55
50
45
40
35
30
25
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
20
Source: Moody’s Investors Service
31
Overall, Risks Remain. But Not a Broad ‘EM’ problem.
» Vulnerability specific and dispersed. High external imbalances, reliance on external
funding, weak policy frameworks are most vulnerable to monetary normalisation.
Vulnerability Indicators
Issuer
Chile
China
Poland
Malaysia
Mexico
Russia
Thailand
South Africa
Peru
Brazil
Colombia
Philippines
India
Indonesia
Turkey
Hungary
Argentina
Venezuela
Ukraine
Policy Space
Current Account External
Gross Borrowing Govt. FC
Balance, % of GDP Vulnerability
Requirement, % of Debt/Total Govt. CPI Inflation, %
(2014F)
Indicator* (2014F) GDP (2014F)
Debt, % (2014F) (2014F)
General Govt.
Debt, % of GDP
(2014F)
Sources: Haver Analytics, Moody’s
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