No miracles. EM growth is back so are imbalances

Transcription

1 No miracles EM growth is back so are imbalances Sebastien Barbe Head of EM Research and Strategy research.ca-cib.com Crédit Agricole Corporate and Investment Bank is authorised by the Comité des Etablissements de Crédit et des Entreprises d Investissement (CECEI) and supervised by the Commission Bancaire in France and subject to limited regulation by the Financial Services Authority. Details about the extent of our regulation by the Financial Services Authority are available from us on request.

2 2 EM growth: outperforming again

3 Emerging markets: resilient 3 The deteriorated global outlook weighs on business confidence and EM Inc. prospects... As a matter of fact, a double-dip in G3 economies would put huge pressure on EMs However, consumer demand keeps on gradually gaining momentum, limiting the pace of the deceleration So far, the EM deceleration looks like a soft patch, not like a hard landing EM retail sales: recovering 14% 12% 10% 8% 6% 4% 2% 0% Retail sales in 16 large EM s (including Brazil, China and Russia) - YoY change in

4 Buffer #1: Fiscal leeway 4 Fiscal leeway is available in most EMs In Asia in particular EM: benefiting from fiscal leeway Asia: no debt problem USA Eurozone EM Mean (B1 to C) EM Mean (Ba1 to Ba3) EM Mean (Baa1 to Baa3) EM Mean (Aaa to A3) General government debt (% GDP) Source: M oody's G2 150% 130% 110% 90% 70% 50% JPY = 223% Government debt-to- GDP ratio (2010 est.) 40 30% EM 10% -10% JPY Gr It USD EUR GBP INR Ger Sp BRL PHP MYR TWD VND KRW IDR THB CNY RUB

5 Buffer #2: EM banks have cash too 5 Rather favourable liquidity situation in most EMs Eastern Europe: less so EM banks relatively comfortable liquidity means: Some leeway to support the recovery Less reliance on foreign money =>s risk of instability 150% 140% 130% 120% 110% 100% 90% 80% 70% 60% 50% Most EM banks display comfortable liquidity situation Bank loan-to-deposit ratio (regional: arithmetic averages) 100% M ost EM banking systems seat on excess deposits Russia EE MENA Asia China India Latam Brazil 140% 130% 120% 110% 100% 90% 80% 70% 60% 50% China: leeway remains large even after the stimulus Asia10 Korea China Bank credit-to-deposit ratio Asian bank s' liquidity benefiting from low loans-to-deposit ra tio

6 Buffer #3, 4 and 5: low household debt, job recovery and China 6 No major household debt problems in most EM => no major balance sheet adjustment required in most EMs Job markets have recovered over the past few months China would support its own growth, should it falter, with another round of stimulus Even exports should contribute positively to growth (provided No-US double dip) Unemployment rate: down Asian exports and the US ISM 8% 7% 6% 5% 4% Unemployment rate in Hong Kong, Korea, M exico, Poland, Russia, Singapore and Taiwan (GDP PPP-weighted average) 3% % 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% Exports YoY % change (Asia8) - LHS ISM manufacturing index, advanced 2 months - RHS

7 Our GDP growth forecasts: growth not too far from potential 7 Real GDP (YoY. %) CPI (YoY. %) Current Account (% GDP) Asia 6,1 8,8 7,8 0,6 4,3 3,8 4,5 3,4 3,1 China 8,7 10,0 9,0-0,7 3,1 3,1 5,8 4,7 3,8 Hong Kong -2,7 5,5 5,6 0,5 2,5 3,0 11,1 10,7 11,2 India 7,4 8,0 8,0 1,9 8,7 5,7-2,1-2,9-2,2 Indonesia 4,5 5,8 5,7 4,9 5,1 5,3 2,0 1,4 1,7 Korea 0,2 6,1 5,3 2,7 2,8 3,5 5,2 2,8 2,7 Malaysia -1,7 7,0 5,5 0,6 1,7 2,0 16,7 19,7 18,2 Philippines 1,1 7,5 5,0 3,3 4,1 4,4 5,3 5,6 4,2 Singapore -2,0 13,6 7,1 0,5 2,5 3,0 19,1 19,4 24,7 Taiwan -1,9 9,5 6,0-0,8 1,5 2,3 11,1 8,9 9,0 Thailand -2,3 7,0 4,3-0,8 3,5 3,8 7,7 2,6 3,1 Vietnam 5,3 6,1 5,8 7,0 8,5 8,1-7,7-8,5-7,0 Latin America -2,7 6,2 4,1 6,4 6,5 6,3-0,5-1,3-1,7 Argentina -3,0 6,0 4,0 14,8 17,0 17,0 3,5 2,5 2,5 Brazil 0,2 7,0 4,5 4,9 5,2 4,9-1,5-2,8-3,3 Mexico -6,6 5,3 3,5 5,3 4,2 4,0-0,6-0,6-1,2 Emerging Europe -5,4 4,2 3,3 8,0 6,6 7,0 0,9 0,8-1,8 Czech Republic -4,1 1,5 3,0 0,6 1,5 2,2-1,1-2,5-2,8 Hungary -6,3 0,0 2,4 4,6 4,7 3,2 0,3 0,0-1,6 Poland 1,8 3,1 3,4 3,5 2,8 2,8-1,7-2,5-3,0 Russia -7,9 5,0 3,0 11,7 8,0 9,5 3,9 5,6 1,0 Romania -7,1-2,0 1,7 5,6 6,2 5,2-4,4-5,8-6,9 Turkey -4,7 6,5 4,5 6,3 8,3 7,0-2,3-5,0-6,0 Africa & Middle East 1,5 4,3 4,5 5,7 5,4 5,3 1,6 3,9 4,2 Algeria 2,2 4,3 4,0 5,7 5,0 4,2-2,4 2,9 2,8 Egypt 4,7 5,0 5,5 11,8 12,1 10,0-1,7 0,2 1,0 Kuwait -2,7 3,2 3,5 4,0 3,4 3,4 25,8 32,1 29,1 Lebanon 7,0 6,0 5,5 3,4 3,0 3,0-6,0-9,0-7,0 Morocco 4,9 4,2 3,8 1,0 2,5 2,6-5,4-8,1-6,4 Qatar 9,7 14,8 11,4-4,7-2,3 2,3 16,4 21,8 26,5 Saudi Arabia 0,6 3,9 4,2 5,1 5,3 5,1 6,2 7,5 7,6 South Africa -1,8 2,5 3,5 7,1 4,5 5,0-4,0-3,5-4,0 United Arab Emirates -3,6 2,0 3,4 1,6 0,8 3,1-3,1 5,5 6,1 Tunisia 3,0 3,4 3,0 3,5 4,5 3,3-3,1-2,3-1,5 Emerging countries 2,7 7,3 6,3 3,0 5,1 4,8 3,0 2,4 1,8 What impact on EM currencies?

8 8 EM currencies: up gradually in

9 Higher rates to fuel EM FX s carry 9 Rate hikes : sooner in EMs than in DMs. The debt deflation risk is much lower in EM vs. DM Inflation is already back to normal, but nominal interest rates are still very low => very low real interest rates Resilient consumer demand should keep inflation pressure alive There could be some risk on the upside on commodity prices in case of no-double dip, and food and energy prices, in particular, would become volatile in case of weather disruption or other possible unexpected shocks. 10% 8% 6% 4% 2% 0% -2% EM real rates: very low EM average real policy interest rate EM average policy interest rate EM average inflation (CPI YoY) Inflation and rate indices include 21 large EMs % 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% Asia: sequential inflation is back to its pre-crisis level Sequential inflation in Asia ex-japan (QoQ SA AR - GDP PPP-w eighted index) Avera ge Inflation: not accelerating anymore, but back to "normal" levels

10 Interest rates forecasts 10 Asia 07-oct déc-10 mars-11 juin-11 sept-11 déc-11 China 1Y lending rate 5,31 5,31 5,31 5,58 5,85 6,12 Hong Kong Base rate 0,50 0,50 0,50 0,50 0,50 0,50 India Repo rate 6,00 6,25 6,50 6,50 6,50 6,75 Indonesia BI rate 6,50 6,75 7,00 7,00 7,00 7,25 Korea Call rate 2,25 2,50 3,00 3,25 3,25 3,25 Malaysia OPR 2,75 2,75 2,75 2,75 2,75 3,00 Philippines Repo rate 4,00 4,00 4,00 4,25 4,50 4,50 Singapore 6M SOR 0,46 0,67 0,64 0,71 0,86 1,01 Taiwan Redisc 1,50 1,75 2,00 2,25 2,50 2,50 Thailand Repo 1,75 2,25 2,50 2,75 3,00 3,00 Vietnam Base rate 8,00 8,00 8,00 8,00 8,50 9,00 Latin America Argentina 3M deposit 10,69 10,00 10,00 10,50 11,00 11,00 Brazil Overnight/Selic 10,75 10,75 11,25 11,50 11,50 11,50 Mexico Overnight rate 4,50 4,50 4,75 5,25 5,75 6,00 Emerging Europe Czech Rep. 14D repo 0,75 0,75 0,75 1,00 1,25 1,50 Hungary 2W repo 5,25 5,25 5,25 5,25 5,25 5,25 Poland 7D repo 3,50 3,75 4,00 4,50 4,50 4,50 Romania 2W repo 6,25 6,25 6,25 6,50 6,75 6,75 Russia Deposit rate 2,50 2,50 3,00 3,50 4,00 4,50 Turkey 1W repo rate 7,00 7,00 7,50 8,00 8,50 9,00 Africa & Middle East South Africa Repo 6,00 6,00 6,00 6,50 7,00 7,50 UAE Repo 1,00 1,00 1,00 1,00 1,00 1,00 Saudi Arabia Repo 2,00 2,00 2,00 2,00 2,00 2,00

11 Capital flows to chase EM growth 11 Capital flows also likely to come back to EMs to benefit from strong growth potential. Capital flows to EMs USD Bn Private capital flow s to EMs (total) FDI Commercial bank lending IIF forecasts

12 But mind the headwinds 12 3 main headwinds Current account. EM s aggregate trade balance still posts a surplus but sub-par growth in DMs combined with relatively strong domestic demand in EMs will cap the overall surplus, and suggest deficits could come back/widen in some EMs (for instance: South Africa, Turkey, India, Brazil, some Eastern European and North African markets). Central bank intervention to cap FX appreciation. Some Central banks being behind the curve. The market may get worried about too accommodative monetary policies, should inflation pressure pick up. EM trade balance: still supportive, but EM 16: trade surplus (12M rolling sum - USD Bn)

13 Our forecasts: a slow rebalancing EM FX up gradually vs. DM FX 13 Credit Agricole-CIB EM FX index Our EM 21 Fx index vs. a USD-EUR-JPY-GBP basket EUR USD Frcsts

14 EM FX forecasts USD Exchange rate 07-oct déc-10 mars-11 juin-11 sept-11 déc Asia China USD/CNY 6,68 6,63 6,56 6,50 6,47 6,45 Hong Kong USD/HKD 7,75 7,77 7,77 7,77 7,77 7,77 India USD/INR 44,2 44,7 44,5 44,3 44,1 43,8 Indonesia USD/IDR Malaysia USD/MYR 3,09 3,03 3,01 3,00 2,98 2,96 Philippines USD/PHP 43,4 43,0 42,6 42,3 41,9 41,5 Singapore USD/SGD 1,31 1,29 1,29 1,26 1,26 1,26 South Korea USD/KRW Taiwan USD/TWD 30,7 31,1 31,0 30,8 30,7 30,5 Thailand USD/THB 29,9 30,3 30,2 30,0 29,9 29,7 Vietnam USD/VND Latin America Argentina USD/ARS 3,96 4,00 4,05 4,10 4,15 4,20 Brazil USD/BRL 1,67 1,67 1,67 1,70 1,75 1,80 Mexico USD/MXN 12,46 12,15 12,00 12,00 11,90 11,90 Africa & Middle East South Africa USD/ZAR 6,87 6,95 6,95 7,10 7,20 7,30 TRY/ZAR 4,85 4,83 4,86 5,07 4,93 4,97 Emerging Europe Poland USD/PLN 2,83 2,76 2,71 2,68 2,70 2,69 Russia USD/RUB 29,74 28,85 28,17 29,07 30,50 31,10 Basket/RUB 35,09 34,30 33,50 34,30 35,30 35,30 Turkey USD/TRY 1,42 1,44 1,43 1,40 1,46 1,47 Central Europe Czech Rep. EUR/CZK 24,5 24,6 24,5 24,3 24,2 24,1 Hungary EUR/HUF Poland EUR/PLN 3,96 3,92 3,85 3,75 3,65 3,50 Romania EUR/RON 4,27 4,35 4,32 4,30 4,30 4,20

15 15 China: Controlled deceleration but growing challenges

16 (Gradual) deceleration ahead 16 GDP growth will likely decelerate as the stimulus measures are gradually withdrawn 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% GDP growth will likely range between 7.5% and 9.5% GDP YoY growth 4-quarter moving average Our foreca sts Source: Bloomberg, CEIC, Credit Agricole CIB

17 Rebalancing: only the beginning 17 China has plenty of scope to increase the role of private consumption Possible measures include: strengthening the social safety net, increasing wages, reforming land rights The share of private consumption in GDP remains low 80% World Private consumption (% GDP) 70% 60% 50% 40% 30% Some scope to rebalance China 20% 10% 0% Ba sed on a sample of the world's 62 largest economies Source: Bloomberg, CEIC, Credit Agricole CIB

18 Fast rising property prices: a source of concern 18 House price increases have been strong since the beginning of the stimulus in particular But some are more equal than others 200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% 37% 150% Housing prices: bubbling? A pril 2010/A pril 2009 (LHS) A pril 2010/January 2007 (LHS) House price ('000 RMB/sqm in April RHS) 50% 120% 26% 3% 8% 12% 65% Beijing Shanghai Wuhan Nanjing Chongqing Source: Bloomberg, CEIC, Credit Agricole CIB

19 Buffer #1: Urbanisation still has a long way to go 19 Urbanisation will likely bring million more people to cities in the next decade supporting housing demand 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Rural population vs. GDP per capita: cross-country comparison (38 large emerging and developed markets) % rura l population China 2009 China 2020 GDP per ca p (current USD 0 10,000 20,000 30,000 40,000 50,000 Source: Bloomberg, CEIC, Credit Agricole CIB

20 Buffer #2: Deposits supporting asset prices 20 Excess deposits exceed USD3trn A large part of that money cannot/does not want to leave the country This would help domestic asset prices to find a floor after a correction Excess deposits and the Chinese banking system Excess deposits in the banking system (equiv. USD TR)* FX reserves (USD TR) * Deposits - credits in the banking system Source: Bloomberg, CEIC, Credit Agricole CIB

21 21 China: The G word

22 Tightening: more to come 22 The reserve ratio has been raised Looking forward, rates will likely be raised to cap prices, but also to satisfy depositors Rates: looking up 20% 15% Bank required reserve ratio PBOC 1Y lending rate PBOC 1Y deposit rate CPI YoY 10% 5% 0% -5% real deposit rates: negative Source: Bloomberg, CEIC, Credit Agricole CIB

23 The trade surplus has not disappeared 23 Lower global demand combined with domestic stimulus has induced a sharp contraction of the trade surplus Looking forward, the trade surplus will be much narrower than in , but it will likely remain in place (at a level close to the 2005 level) Trade surplus: challenged? Trade balance (USD 12mma) Trade balance (USD Bn) Trade balance normalising Source: Bloomberg, CEIC, Credit Agricole CIB

24 A strict CNY basket?... far from being obvious 24 Still high volatility of CNY NEER suggests PBOC does not stick to a strict FX basket CNY NEER s volatility: still high 2,0% 1,8% 1,6% 1,4% 1,2% 1,0% 0,8% 0,6% 0,4% 0,2% 0,0% Fixed peg 1 Volatility of CNY NEER July 2005 Crawling peg July 2008 Fixed peg NOW June 2010 Source: Bloomberg, CEIC, Credit Agricole CIB

25 EUR/USD swings suggest CNY appreciation should be gradual 25 Possible EUR weakness could potentially accelerate the appreciation of the CNY NEER CNY appreciation vs. USD to be gradual CNY NEER: swinging 125 CNY's nominal effective exchange rate July 2005: Oneoff CNY revaluation The European crisis has moved the CNY NEER Our forecasts 24-sept déc-10 mars-11 juin-11 sept-11 déc-11 USD/CNY 6,69 6,63 6,60 6,50 6,47 6,45 Source: Bloomberg, CEIC, Credit Agricole CIB

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