Istanbul September Testing Times. Sonja Gibbs Senior Director Global Capital Markets Institute of International Finance

Transcription

1 Istanbul September 218 Testing Times Sonja Gibbs Senior Director Global Capital Markets Institute of International Finance

2 Waning global liquidity G4 official policy rates Central bank balance sheets % of GDP Fed ECB BoJ Other MM Total EM Source: national sources September 218 2

3 Strongest U.S. growth in the rear-view mirror? Purchasing managers indices some signs of slower U.S. activity %3m/3m, saar, 2-month moving average U.S. -5 EA -1 Japan -15 China -2 EM -25 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18 Source: IIF, Bloomberg Slowdown seen through Source: BEA, WSJ September 218 3

4 Question marks over pace of policy tightening, implications of yield curve flattening Correction after September payrolls, but markets and Fed still far apart Very divided opinions on yield curve flattening bps (shadowed areas=recessions) percent 3 1 yr-2yr yields Recessions 25 Fed funds '85 '88 '91 '94 '97 ' '3 '6 '9 '12 '15 ' Source: IIF, Bloomberg Source: IIF, Bloomberg September 218 4

5 Markets vs. the Fed March 22, 217 5

6 Hedging bets Futures market positioning favors USD, U.S. equities but net positions in U.S. Treasuries are at record shorts diffusion index, 5=no crowded trade, latest data Crude oil USD S&P 5 Russell 2 Nasdaq EUR MXN Copper Gold RUB Nikkei CAD JPY VIX BRL GBP CHF AUD NZD US Treasuries Source: IIF, Bloomberg cr owded sh orts crowded longs U.S. Treasuries and Equities: Futures Market Net Positions contracts, 4wk mav, net non-commercial combined Treasuries Source: IIF, Bloomberg Equities September 218 6

7 Dollar path makes all the difference How far can renewed USD strength go? What will be the Chinese reaction function? Substantial correction across EM currency markets index, rebased1/1/214 = 1 RMB USD (DXY) EUR GBP JPY index, real effective exchange rate 25-present September 218 CHF USD SAR CNY EUR GBP PLN JPY INR MXN IDR BRL NGN ZAR RUB TRY Source: IIF, Bloomberg Source: IIF, Bloomberg September 218 7

8 How bad is EM contagion risk? EM FX correlations rising but not to extremes Inflation risk varies significantly across EMs avg 9day rolling correlation between percentage change in MSCI EM FX index & USD/local exchange rate.7 EM a v g correlation Post-28 Crisis Average.6 Pr e-28 Crisis Average percentage points Inflation above target Ytd higher policy rate Ytd lower policy rate No change in policy rate In flation below target AR TR LB UA PH NG MX HU CZ IN CO EG ZA PL CL KR ID TH BR RS CN MY Source: IIF, Bloomberg Source: IIF, Bloomberg March 22, 217 8

9 EM fundamentals vary significantly Rising external financing needs for many emerging markets Emerging Markets: Reserve Adequacy avg. of 218/19 external financing needs as % of GDP NI higher external financing needs CN PH RU EG BR CO IN KR ID ZA MX AR CL TH TR PO MY HU a v g. of 212/1 3 external financing Reserve Adequacy Ratio, %risk weighted metric W ithout capital controls With capital controls 1-15% of the Reserve Adequacy metric is typically considered adequate for precautionary purposes UA TR CL HU ZA AR PL MY ID CN MX CO EG CZ KR BR RU PH IN TH Source: IIF, World Bank. *external financing needs= current account deficit + amortization on medium to long-term external debt + short-term external debt Source: IIF EM Scorecard March 22, 217 9

10 Vulnerabilities in EM bond markets Risk aversion rising, but still a lot of differentiation among EMs EMs with more non-resident bond ownership may be more vulnerable to a selloff Global risk aversion, EMBIG spread, bps 8 September September AR EC LB UA TR NG EG ZA BR MX RU ID CN CO MA IN PE CL MY HU PH BU PL TH Source: Haver, National Sources, IIF Source: IIF, Bloomberg March 22, 217 1

11 How cheap are EM equities? Equity valuations have come down but few markets look cheap Higher corporate leverage, and higher debt service costs, are an issue for many SMEs forwardprice/earnings ratio bars= average blue= G4 markets January218 September 218 IN PH US MY MX CL TH ZA ID EA UK JP PL CN BR HU TR RU percent of firms with ICR less than 1 (% of assets) 217 (or latest) 21 Brazil India Turkey China Canada Indone U.S. Germany France Mexico Italy UK Russia Japan Source: IIF, Bloomberg Source: IIF, Bloomberg March 22,

12 How long will the skew towards U.S. persist? Remarkable shift in fund allocations towards U.S. stocks and bonds Near-record fund underweights in EM equities, but EM bond positioning not far from neutral 59 % of g lobal bond/equity allocations Equ ity Bon d (rhs) % of global bond/equity allocation Equity 2 19 Bond (rhs) Source: IIF, EPFR Source: IIF, EPFR March 22,

13 Backdrop: U.S.-China trade tension U.S.-China Trade Dispute Timeline: U.S. Actions U.S.-China Trade Dispute Timeline: China Actions USD billion 217 value of USimports fr om China covered by tariffs Share of total imports from China covered by tariffs, rhs Sec. 21 tariffs on solar panels/ w ashing machines (Feb. 7) Sec. 232 tariffs on steel/aluminum (March 23) Share of goods imports (%) $2 bn tranche Sec. 31 tariffs (TBD) $34 bn tranche Sec. 31 tariffs (July 6) $16 bn tranche Sec. 31 tariffs (Aug. 23) Feb 18 Apr 18 Jun 18 Aug USD billion Share of goods exports (%) 217 value of USexports to China covered by retaliatory tariffs Sh are of total exports to China covered by retaliatory tariffs, rhs $6 bn retaliation on US $34 bn tranche $2 bn tranche (TBD) retaliation (July 6) $16 bn tranche retaliation Sec. 21 retaliation (Aug. 23) on sorghum (Apr. 18-May 18) Sec. 232 retaliation (Apr. 2) Feb 18 Apr 18 Jun 18 Aug Note: Only includes actions implemented or officially announced. Source: USITC, USTR, MOFCOM, IIF Note: Only includes actions implemented or officially announced. Source: USITC, USTR, MOFCOM, IIF September

14 U.S. vs. China who has more at stake? U.S. Exports to China (217 values) and China's Retaliatory Tariffs U.S. Imports from China (217 values) and U.S. Tariffs on China U.S. Exports to China Not Yet Targeted (approx. $2 bn) -mostly commercial aircraft/parts $3 bn Sec. 232 r etaliation, effective April 2nd $34 bn Sec. 31 retaliation, effective July 6th U.S. Im ports from Ch ina Not Yet Targeted (approx. $267 bn) - mainly major consumer items such as cell phones, laptops, apparel $3 bn Sec. 232 tariffs, effective March 23rd $34 bn Sec. 31 tariffs, effective July 6th $16 bn Sec. 31 t ariffs, effective Aug. 23rd $6 bn Sec. 31 retaliation announced Aug. 3rd, effective TBD $16 bn Sec. 31 retaliation, effective Aug. 23rd $2 bn Sec. 31 t ariffs announced Ju ly 1th, effective TBD Source: MOFCOM, USITC, IIF Source: MOFCOM, USITC, IIF September

15 Unfinished business: NAFTA and Brexit September

16 Warning signals for EM bond markets Appetite for EM carry trades are at 5-year low index, end-212=1, MM/EM rate diff. over EM FX volatility ratio, trading volume/bonds outstanding Local currency turnover ratio Hard currency turnover ratio Source: IIF, Bloomberg Source: IIF, Bloomberg September

17 A closer look at EM portfolio flows China an asset class of its own? Total Net Portfolio Flows USD billion, cumulative non-res portfolio flows 9 Total ex- China, Total ex- China, 216 China, 218 China, Total ex- China, China, 218 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: National sources, Bloomberg, IIF Flows Alert Report; *IN, ID, TH, ZA, HU, MX, BR, PH, VN, TW, TR. Partial data through September 7, 218. USD billion; monthly flows through August China Equity 7 EM ex -China Equity 6 Debt Total Flows, 3-month 5 moving average Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18 Source: National sources, Bloomberg, IIF. September

18 Total Non-Resident Capital Flows to EMs Non-Resident Capital Flows to EMs and EM-DM Growth Differential $ billion % 16 EM-DM Growth Differential,rhs 7 14 EM (ex-china) IIF Forecast China

19 Massive increase in global debt Rising global debt stock Higher corporate leverage not only in EMs $trillion 2 3 Q1 2 8 Q Q Q Households Non-fin. corporates Government 3 Financial corporates %of GDP, Q1 avg. Higher nonfinancial corporate NO CN FR debt SE CA CH EA CL KR ES IT U.S. UK JP TR RU PO DE MX ZA TH BRIN AR %of GDP, 26-7 avg Source: IIF Global Debt Monitor. Source: IIF Global Debt Monitor. September

20 Higher debt levels across emerging markets China deleveraging? percent of GDP, sectoral debt for China Non-financial corporates Government Households 2 Financial corporates Distribution of EM debt by sector percent of GDP Korea China Malaysia Chile Brazil Hungary Thailand Israel UAE Czech Rep. Poland S. Africa Households Egypt Turkey Non-fin. corproates India Philippines Colombia Government Ukraine Ghana Fin. corproates Mexico Kenya Russia Argentina Pakistan Source: IIF Global Debt Monitor. Source: IIF Global Debt Monitor. September 218 2

21 Shift away from EM FX debt Growth in the EM debt universe Big drop in FX issuance in recent months $ tr illion, outstanding as of Q Local currency sov ereign Hard currency sovereign Local currency corporate Hard currency corporate Source: IIF Global Debt Monitor USD billion, EM25 corp and sov. bond issuance in foreign currency, 12mms EM A sia EM Eu r ope Latin America MENA Source: IIF Global Debt Monitor. March 22,

22 Debt-related vulnerabilities Reliance on variable rate corporate bonds FX-Denominated EM Debt, by sector % of ou tstanding international bonds, shaded bars represent mature markets Financial corporates Non-financial corporates ZA IT US IS EG JP DE FR SG CA TH SA HU KR MY AR CZ CN UA HK IN PL MX TR NG RU PE BR PH CL ID UA Turkey Hungary Argentina Poland Chile Korea Israel Malaysia Czech Rep. Colombia South Africa Mexico Brazil Russia Indonesia Saudi Arabia Thailand India China %of GDP Households Non-fin corp. Government Financial sector Source: IIF Global Debt Monitor. Source: IIF Global Debt Monitor March 22,

23 Turkey Near-term outlook September 218 Ugras Ulku, Deputy Head of EM Europe

24 The TRY is Undervalued. The TRY is now significantly undervalued. 24

25 Undervalued TRY will fuel external imbalance adjustment. Huge real devaluation since

26 Large Devaluations Median GDP falls 7-1 percent, the current account swing into surplus. 26

27 High frequency growth indicators Credit impulse has turned negative, weighing on growth in 218H Turkey: high frequency indicators, YoY, 3mma Consumer confidence (lhs) Motor vehicle sales 15 Retail sales volume House sales 2 Imports volume Exports volume 25 Industrial production 1/15 7/15 1/16 7/16 1/17 7/17 1/18 7/

28 External imbalance adjustment has started. Preliminary high frequency data suggests that the current account deficit turned to surplus in August while net capital inflows shifted to outflows USD billion Net capital flows Current account balance 15 1 USD billion Net capital flows (USD billion) TRY per currency basket FX reserves (- = increase) Q1 Q2 Q3 Q4 218Q1 Q2 Q3* Source: Haver, IIF. * July-August -1 TRY per.5usd+.5eur, rhs -15 Jan 17 Jul 17 Jan 18 Jul 18 Source: Haver, IIF

29 The adjustment will come mostly from imports. With the weaker TRY shifting demand away from imports while boosting exports, the current account deficit should narrow sharply in % Domestic demand (volume, % change) 2 % Export market volume (% change) Current account balance (% GDP) -1-3 Imports of goods and services (volume, % change) Exports of goods and services (volume, % change) Source: Haver, IIF. Source: Haver, IIF. 29

30 Capital outflows weigh on growth. Abrupt TRY depreciation is contractionary through deteriorated confidence, reduced profits, and weaker corporate balance sheets. 9 8 USD billion % change Bond and loan issuances (USD billion) 6 Nonresident debt Nonresident equity 8 6 Banks Government Other Q1 Q2 Q3 Q4 218Q1 Q2 Q3* Source: Haver, IIF. * July-August -2 Real GDP (% change), rhs Resident capital + net errors/omissions Source: Haver, IIF

31 negative output gap should help inflation to ease in 219. If sustained, the TRY s 2% depreciation since July will likely push the 12-month headline inflation to 22% in early % 7 14 % 2 12-month headline inflation TRY per USD, rhs Real GDP (y/y % change) Real GDP SA (q/q % change) Jan 17 Jul 17 Jan 18 Jul 18 Jan 19 Jul Source: Haver, IIF. Source: Haver, IIF. 31

32 Challenging inflation outlook led to a tighter monetary stance. Tighter monetary stance has helped attract portfolio capital inflows, lowering long-term interest rates. 3 % 35 One-week repo rate Bond yields (%) 25 Overnight lending rate Late liquidity lending rate 3 Aug 16, Sep 13, July 24, Apr 25, Source: Haver. 5 1Y 2Y 3Y 5Y 1Y Source: Haver. 32

33 tighter fiscal stance seems needed to further improve investor confidence. The widening in the fiscal deficit during January-July was mainly driven by a pre-election surge in capital spending from a year earlier. 2 1 Central government balance, cumulative (TRY billion) External financing needs (USD billion) Medium-long-term debt repayments Current account deficit Short-term external debt Jan Feb Mar Apr May Jun Source: Haver. Jul Aug Sep Oct Nov Dec Source: Haver, IIF. 33

34 NEAR-TERM OUTLOOK External balance If sustained, undervalued TRY should lead to a sharp adjustment in the current account deficit in 219. Growth Capital outflows will likely lead to a decline in output during 218H2-219Q1 before the recovery starts in 219Q2. Inflation With overheating no longer the concern, large negative output gap should help inflation to ease in 219. Policies With economy slowing and unemployment rising, maintaining a tight policy stance might be challenging ahead of the local government elections in March