Global Outlook and Risks

Transcription

1 Global Outlook and Risks Andrew Burns World Bank October 21,

2 Global Outlook and Risks Andrew Burns World Bank October 21,

3 Main messages High income countries are beginning to revive Despite recent weakness in some major middle income countries, activity in developing countries is also strengthening and expanding in line with potential Risks remain: Financial pressure from a renewed taper Credit bubbles in East Asia Uncertainty due to US debt ceiling brinksmanship Longer term growth in developing countries will come under pressure from higher borrowing costs, doing better will depend on structural reform 3

4 Growth in high income countries is strengthening Quarterly GDP growth, annualized United States Japan Euro Area Other high income Jan '11 Apr '11 Jul '11 Oct '11 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 Source: World Bank, Datastream. 4

5 60 Business confidence in high income countries is improving Purchasing Managers, indexes (50 or more indicates expansion) 55 Other high income 50 Euro Area 45 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Jul '13 Source: World Bank, Markit, Haver Analytics. 5

6 High spread borrowing costs have stayed down Yields on 10 year sovereign debt, percent 18 United States Germany 16 Ireland Italy 14 Spain Portugal /1/2009 6/1/2010 6/1/2011 6/1/2012 6/1/2013 Source: World Bank, DataStream. 6

7 But GDP in most European countries remains well below its pre crisis level Level of GDP in 2013, as a percent of 2008Q Developing Euro area High Income Non-EU United States Germany France United Kingdom Italy Portugal Ireland Greece Source: World Bank, Datastream. 7

8 Developing countries Short term cycle is strengthening Output gaps in most countries are closed Financing costs remain modest Forecast is for modest pickup in growth Longer term focus needs to be on structural policies 8

9 Growth firming or solid in most developing countries Industrial production growth, 3m/3m saar Other developing 10 China India Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Jul '13 Source: World Bank, Datastream. 9

10 Developing country business sentiment is pointing up Balance of respondents (>50 implies expansion) Manufacturing Purchasing Managers Indices ( +50: expansion) Mexico South Africa China Brazil India Turkey 45 Jan '12 Apr '12 Jul '12 Oct '12 Jan '13 Apr '13 Jul '13 Source: World Bank, Markit Economics 10

11 Pressure on developing country CDS rates Credit default swap rates, basis points has eased Europe & Central Asia Middle East & N. Africa Latin America & Caribbean East Asia & Pacific 0 Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Jul '13 Source: World Bank, DataStream. 11

12 USD price, 2005= Commodity prices have eased or are stabilizing Metals and Minerals Food Energy Source: World Bank, Datastream, Bloomberg. 12

13 Grain prices have eased on improved crops USD price, index Jan = Maize Rice 130 Wheat 80 Jan '10 Jul '10 Jan '11 Jul '11 Jan '12 Jul '12 Jan '13 Jul '13 Source: World Bank, Datastream, Bloomberg. 13

14 Energy prices show signs of equalizing USD Price per British Thermal Unit West Texas Crude Brent Crude LNG Japan Natural Gas Europe Natural Gas USA 0 Dec '99 Dec '01 Dec '03 Dec '05 Dec '07 Dec '09 Dec '11 Source: World Bank, Datastream. 14

15 Financial conditions will tighten over the medium term Recent episode of weakness in developing countries due to fears of an end to quantitative easing is a wake up call Pressure is off but will return as long term interest rates inevitably rise Countries with vulnerabilities have been granted a reprieve need to act now Other countries need to rebuild buffers depleted during crisis 15

16 Talk of tapering off undid between 25 and 35% of the long term interest rate effect of QE Percent of Global GDP Bank of England - Total Assets ECb - Total Assets Total Sources: ECB, FED, BoE, BoJ and BIS / Turner Yield on 10 year US T bills, percentage points Bank of Japan - Total Assets Federal Reserve - Total Assets Yield 10 year US T-bills

17 Most countries did not come under excessive currency pressure # of countries India 17% Only 34% of developing countries depreciated between April 1 and August 28 Turkey, Brazil 12% 62% have appreciated (4% unchanged) Size of nominal effective appreciation/ depreciation since April Source: World Bank, Datastream. 17

18 Capital inflows fell as investors shifted into developed markets, but seem to have Gross capital flows, billions, USD, Equity Issuance Bond Issuance Syndicated Bank loans recovered 0 Jan '12 Mar '12 May '12 Jul '12 Sep '12 Nov '12 Jan '13 Mar '13 May '13 Jul '13 Sep '13 Source: World Bank, JP Morgan, DataStream. 18

19 Most recently developing country stock markets have rebounded substantially MSCI Equity Index, Jan 2013= High income markets Developing country markets Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Source: Bloomberg. 19

20 Downward pressure on developingcountry currencies has eased even before tapering postponement Nominal effective exchange rate, April 1, 2013= Brazil Malaysia South Africa India Russian Federation Turkey 80 Jan '13 Feb '13 Mar '13 Apr '13 May '13 Jun '13 Jul '13 Aug '13 Sep '13 Oct '13 Source: World Bank, JP Morgan, DataStream. 20

21 Developing stock markets have rebounded, but countries with poor fundamentals remain down Stock market indexes, April 1, 2013= Developing Turkey Indonesia South Africa India Brazil 60 4/1/2013 5/1/2013 6/1/2013 7/1/2013 8/1/2013 9/1/2013 Source: World Bank, Datastream. 21

22 Postponement of tapering offers developing countries a reprieve Countries hit hardest were hurt because of: Relatively deep capital markets implying financial investors feel they can get in and out easily therefore more volatile than less deep markets. Commodity exporters, whose prospects have been weakened by lower commodity prices (Brazil, South Africa, Indonesia, Malaysia). Domestic imbalances: Countries experiencing a combination of some (or all) of the following, namely slower growth, high or accelerating inflation and large current account deficits that are not expected to be financed fully by net FDI inflows (Turkey, India, Brazil, Indonesia). Adequate but declining FX reserves (India, Indonesia). 22

23 Outlook Projected pick up in growth to be led by highincome countries Developing country growth in line with underlying potential Regional growth shows strengthening or stability going forward Slower growth in middle income countries may reflect weaker than thought potential 23

24 A gradual pick up in growth, led by high income countries Percent annual GDP growth 10 Middle Income 8 Low Income 6 4 World 2 High Income Source: World Bank.

25 Regional growth strengthening or stable almost everywhere Percent annual GDP growth East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle-East & North Africa South Asia Sub-Saharan Africa Source: World Bank. 25

26 Most developing countries have recovered from the crisis and are growing at close to potential Output gap, % of potential output Large negative output gap in India East Asia & Pacific (ex China) Europe & Central Asia Latin America & Caribbean Middle-East & North Africa South Asia Sub-Saharan Africa Source: World Bank. 26

27 Longer term developing countries need to GDP and potential GDP, annual growth rate focus on structural policy Developing Developing potential DEV (ex China) DEV (ex China) potenital Period of gradual acceleration in potential Boom Period Trend growth post crisis is lower than at the peak, but much higher than in pre boom period Growth slower only relative to boom Source: World Bank. 27

28 Short term risks Tapering related risks have eased, but uncertainty will remain and future communication will be crucial East Asian banking sector crises Excessive leveraging in Indonesia, Malaysia, Thailand could generate domestic banking crises, possible provoked by rising interest rates due to tapering of quantitative easing Disorderly unwinding of investment / lending bubble in China Potential impact of 3% of CHN GDP, c. 3% of regional GDP US default Fiscal brinksmanship is back Uncertainty likely to cut into Q3 growth (shut down could cut 0.3 to 0.5% from quarterly growth) Debt ceiling is riskier: technical default could have very serious consequences Possibility of bank crisis due to impact on risk weighted financial sector balance sheets Real side impact of higher interest rates Confidence effects An up to the edge scenario without default would have similar but more muted effects 28

29 A rapid increase in credit provision is associated with increased risk of bankingsector crisis Change in bank credits, (% of GDP) Level of banking sector credits in 2012, % of GDP Change in Credit level Credit levels in Thailand Bhutan Botswana Armenia Serbia China St. Lucia Vanuatu Vietnam Malaysia Morocco Gambia Turkey Venezuela Lesotho Cambodia Paraguay Lao PDR Malawi Romania Kosovo Brazil Source: World Bank, IMF. 29

30 Excessive Chinese investment poses risks to activity and banking sector Chinese Investment as a share of GDP, % 50 Average ,45% Average , 40% 45 Average , 35% Average , 28% Source: World Bank. 30

31 High external debt increases vulnerability to Macedonia, FYR Bosnia and Herzegovina Armenia Jordan Jamaica Georgia Lao PDR Serbia Lithuania Kyrgyz Republic Nicaragua Romania Moldova Kazakhstan Bulgaria Papua New Guinea Latvia Seychelles changes in sentiment Private sector external debt, % of GDP Source: World Bank, International Debt Statistics. 31

32 But domestic debt can be problematic when Colombia Macedonia, FYR Russian Federation Samoa Costa Rica Serbia Bangladesh Honduras India Turkey Bhutan Mongolia St. Vincent and the Grenadines Nepal Lithuania Maldives Bosnia and Herzegovina Montenegro Ukraine Dominica Belize Brazil Cape Verde Vanuatu Chile Morocco Bulgaria Jordan Fiji Tunisia Grenada Latvia Lebanon Mauritius Thailand Panama St. Lucia Vietnam Malaysia South Africa China interest rates rise Private Domestic banking claims (% GDP) Middle income countries Low income countries Source: World Bank, International Debt Statistics. 32

33 Developing countries have much less fiscal space than in 2007 General government deficit, % if GDP East Asia & Pacific Europe & Central Asia Latin AmericaMiddle-East & & Caribbean North Africa South Asia Sub-Saharan Africa Source: World Bank.

34 High deficits makes several countries very vulnerable General government deficit in 2013, % if GDP South Africa Tanzania Kirgz Republic KHM Senegal Jordan Iran Tunisia Marocco Benezuela Yemen Sri Lanka Haiti Mongolia Madagascar Azernaijan Mozambique India Pakistan Syria Eritrea Jamaica St. Lucia Lebanon Egypt Cape Verde Lesotho South Sudan Source: World Bank

35 Debt to GDP ratios have been rising as General government debt, % if GDP 140 well 0 East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & N. Africa South Asia Sub-Saharan Africa Source: World Bank. 35

36 Many countries have government debt levels in excess of 60% of GDP General government deficit, % if GDP Guinea Bissau Marocco Guyama Albania Venezuela Pakistan India Brazil Gambia VCT DMA Seychelles Mauritania Hungary Belize Jordan Egypt St. Lucia Sudan Cape Verde Eritrea Lebanon Jamaica Source: World Bank

37 Concluding remarks Strengthening recovery in high income world will support developing country growth going forward But global financial conditions will tighten and commodity prices ease, acting as sustained headwinds for developing countries The turmoil associated with the phasing out of quantitative easing is a warning 37

38 Policy recommendations Global environment remains fragile and the risk of further external shocks is real Countries with vulnerabilities (high current account deficits, large increases in credit, large government and private deficits and debt) need to move quickly to reduce these Other countries need to work to rebuild the buffers that helped them do so well in the 2008 crisis, but are now significantly drained 38

39 Global Outlook and Risks Andrew Burns World Bank October 21,

40 US fiscal crisis could have important implications for developing countries Distinguish between 3 scenarios Government shutdown: (living it) small impact for US, negligible for developing economies Near miss: (getting uncomfortably close)debt ceiling deadline approaches without movement, markets become volatile; default is avoided Default: A technical default occurs, market uncertainty spikes, firms and households stop spending, US currency potentially downgraded with implications for CDS contracts and bank s risk weighting of capital 40

41 Even a near miss on the debt ceiling has major implications Developing country bond spreads and USD stock market prices, indexed June 1, 2011= August Dev. bond spreads increase by 75bp Dev. stock markets drop by 15% Mar '11 Jun '11 Sep '11 Dec '11 Source: World Bank, Datastream. 41

42 Spreads rose by as much as US yields fell, so borrowing costs were broadly constant Developing country bond yields and US 10 year treasury yield, indexed June 1, 2011= August Dev. bond yields broadly stable US 10Y treasury yields drop 60bp Mar '11 Apr '11 Jun '11 Aug '11 Oct '11 Dec '11 Source: World Bank, Datastream. 42

43 Even the close call event hit capital flows hard 120 Gross bond and equity flows to developing countries, index March 2011=100 Aug Dev. bond & equity issuance drops 50% Source: World Bank. 43

44 A major invent, like the 2008 crisis has similar but much larger impacts Developing country bond spreads and USD stock market prices, indexed October 1, 2011= Sept Developing bond spreads increase by 500bp 90 Developing stock markets drop 50% 40 Source: World Bank, Datastream. 44

45 In 2008, developing country borrowing costs rose 500 bps Developing country bond and US 10 year T bill yields, indexed October 1, 2011=100 Sept Dev. bond yields increase 500bp US 10Y treasury yields unchanged Apr '08 Jul '08 Oct '08 Jan '09 Source: World Bank, Datastream. 45

46 Slowdown post event was much steeper in 2008 Industrial production growth, % 3m/3m annualized Developing 2011 Developing 2008 High income 2011 High income Deceleration in: Developing High income pp 25pp pp 2.4pp Source: World Bank. # of quarters since debt ceiling deadline, Lehman s failure 46

47 Impact was close to 100 percent during financial crisis Gross bond and equity flows to developing countries, index March 2011=100 Sept Dev. bond & equity issuance drop close to 0 Source: World Bank. 47