Seminar Series on Regional Economic Integration IMF Outreach Presentation on the IMF 214 Spillover Report Sweta Saxena Senior Economist IMF Research Department 26 September 214 9: 11: Manila time ADB Headquarters, Manila
International Monetary Fund 214 IMF Spillover Report
Main Messages 1. Changing Growth Patterns are Leading Source of Spillovers at this Point. 2. Recovery and Normalization in Key AEs will Have Global Spillovers. Nature of spillovers depends on underlying drivers of higher interest rates at source. For recipients, spillover effects differentiate depending on their fundamentals. 3. EM Slowdown has Global Spillovers, Substantial Local Spillovers. 4. Spillover Risks Remain Relevant Going Forward and Can Interact. Stronger Action at National Level Aligns with Better Global Outcomes. 2
Changing Tides and Global Spillovers AE Yield Projections 1/ (1-year; percent) EM Growth (percent change year-over-year; period averages) 6 Forecast Range April 214 WEO 8 23-8 21-13 214-18 5 7 Pre-Crisis 4 Post-Crisis 6 3 Medium-term 5 2 1 4 1 11 12 13 14 15 16 17 18 Sources: IMF, World Economic Outlook; and Consensus Economics. 1/ Rates for United States and United Kingdom. Range based on WEO forecasts from October 29 used to measure +/-1 standard deviation. 3 3
Are Market Risks Rebuilding? 13 12 11 1 Implied Volatility (percent) EM foreign exchange volatility U.S. interest rate volatility, Move index (basis points; RHS) 12 1 12 115 11 15 Emerging Market Assets (index; January 1, 213=1) Equities - MSCI EMBI (RHS) Taper talk Non-Taper Taper Taper talk Non-Taper Taper 15 14 13 9 8 1 12 8 95 11 7 6 9 6 85 1 5 7/1/214 Jan-13 May-13 Sep-13 Jan-14 May-14 4 8 7/1/214 Jan-13 May-13 Sep-13 Jan-14 May-14 9 Sources: Bloomberg, L.P.; and IMF staff calculations. 4
International Monetary Fund Spillovers from Monetary Normalization
Taper Shock Generated Large EM Spillovers EM Response in Purchasing Episode 1/ (percent change) EM Response in Taper Episode 1/ (percent change) 3 UMP Purchase UMP QE1 3 UMP Taper UMP Taper Talk 2 2 1 1-1 -1-2 Equity Bond yield Exchange rate -2 Equity Bond yield Exchange rate Source: IMF staff calculations. 1/ Average responses during 2-day window around U.S. monetary events. Increase in exchange rate denotes EM currency appreciation. 6
Drivers of U.S. Yields Evolved during Taper Episode 1.2 1.1 1..9.8.7.6.5.4.3.2.1 Real versus Money Shocks 1/ (percentage points; change in 1-year Treasury bond yield since May 21, 213) June 19 FOMC Statement Sept. 18 FOMC Statement no taper surprise Money Dec. 18 FOMC Statement taper announcement. 5/22/13 6/21/13 7/21/13 8/2/13 9/19/13 1/19/13 11/18/13 12/18/13 1/17/14 2/16/14 3/18/14 4/17/14 5/17/14 Real Jan. 22, 214 FOMC Statement Sources: Haver Analytics; and IMF staff calculations. 1/ Historical shock decomposition since May 21, 213 based on a two-variable VAR estimated on daily data (23-13). The variables are (log) S&P 5 and the 1-year Treasury bond yield. The VAR is identified with sign restrictions. 7
Different Drivers of Yields Have Different Spillovers 6 5 4 3 2 1 6 4 2-2 Bond Yield (basis points) Money Industrial Production (percent change) EM Response to G-4 Shocks 1/ (Average response in the first 12 months to initial 1bps in U.S. 1 year yield) Real 2. 1.5 1..5. -.5-1. -1.5.2.1. -.1 NEER (percent change; + = appreciation) Money Capital Flows (percent) Real -4 Money Real Source: IMF staff calculations. 1/ G-4 comprises of United States, United Kingdom, Euro area and Japan. -.2 Money Real 8
Spillover Effects Differentiate Depending on Fundamentals 1 EM Bond Yields and Fundamentals 1/ (2-day change; percentage points) -1-2 -3 Reserves/GDP Inflation Current account/gdp Credit/GDP Market capitalization/gdp GDP growth 1-year ahead consensus Macroprudential Sources: IMF staff calculations; and Mishra et al (forthcoming). 1/ Change in yields shown as differences from the mean for one standard deviation change in fundamentals from cross-section averages. 9
International Monetary Fund Reversal of Fortunes: Spillovers from Emerging Market
Gradual and Synchronized Slowdown in EM Growth Emerging Markets: Evolution of Growth (percent change year-over-year) Synchronized EM Slowdown (percent of EM countries with growth slowdowns) 2/ 9 8 7 6 5 4 3 2 1 23-8 21-13 214-18 1993-213 1 9 8 7 6 5 4 3 2 1 All Asia Latin America CEE 1/ 9 92 94 96 98 2 4 6 8 1 12 14 Sources: April 214 World Economic Outlook; Consensus Economics; and staff calculations. 1/ Central and Eastern Europe; consisting of Czech Republic, Hungary, Poland, Russia, and Turkey. 2/ Red bars denote more than 7 percent of sample countries. For years 199-22, below the average of 1994-1996 real GDP growth, thereafter below the 23-27 average. 11
Weaker Medium-Term Growth for EMs WEO Growth Forecasts in Emerging Markets (percent change in GDP growth relative to 21) Oct-1 Oct-11 Oct-12 Oct-13 Apr-14 3 2 1-1 -2-3 -4-5 All EMs 1 11 12 13 14 15 16 17 18 19 3 2 1-1 -2-3 -4-5 Asia 1 11 12 13 14 15 16 17 18 19 3 2 1-1 -2-3 -4-5 Latin America 1 11 12 13 14 15 16 17 18 19 3 2 1-1 -2-3 -4-5 CEE 1 11 12 13 14 15 16 17 18 19 Source: IMF, World Economic Outlook. 12
Significant Spillovers Through Trade. Cumulative Effect of a One-Percentage-Point Decline in EM Growth (percentage points). Cumulative Effect of a One-Percentage-Point Decline in China Growth (percentage points) -.1 -.1 -.2 -.2 -.3 -.3 -.4 AE United States Euro Area Japan United Kingdom Source: IMF staff estimates. Note: Results are significant at 1 percent. The method of estimation is Global VAR using exports plus import value added weights. Generalized Impulse response are used for structural decomposition. -.4 AE United States Euro Area Japan United Kingdom Other EM 13
Commodity Prices are Heavily Influenced by EM Growth Cumulative Effect of a One-Percentage-Point GDP Growth Decline on Commodity Prices (percentage points) -1-2 -3-4 -5-6 -7 AE EM Sources: IMF, Primary Commodity Price System; and IMF staff estimates. Note: Results are significant at 1 percent. The method of estimation is VAR using Cholesky with AE entering first in the ordering. The IMF commodity price index includes energy, metal and food price inflation deflated by US CPI and weighted by their respective shares in global trade. 14
Risk of Bank Losses through EM Exposures 1.5 Total AE Bank Capital Losses (percent of GDP) AE Losses 1..5 EM Losses. Structural EM slowdown Cyclical EM slowdown Funding stress Sources: IMF staff calculations based on BIS; Central Banks; Bankscope; and IMF, International Financial Statistics. 15
ECU VEN COL PER CHL URY ARG BOL PRY GTM HND LCA SUR ECU BRB CRI PAN ARG URY BOL PRY SLV VCT DMA DOM KNA ATG JAM BLZ HTI GRD GUY NIC 1/ By source Tajikistan Kyrgyz Republic Armenia Ukraine Azerbaijan Local EM Spillovers Can Be Large Exposure to Brazil, 21 212 (exports to Brazil) percent of total exports External Financing Provided by Venezuela (percent of recipient GDP; 212) CEE + CIS: Regional Remittances (percent of total remittances to the region; 212) 4 35 3 25 percent of GDP (RHS) 14 12 1 8 7 6 5 4 45 4 35 3 25 Other CEE+CIS Russia s largest remittance recipients (percent of country s GDP) 2 15 6 3 2 15 Russia 1 4 2 Country Average = 1.6 1 5 2 1 5 Sources: Country authorities; IMF, Direction of Trade Statistics; PDVSA; World Bank, Migration and Remittances database; and IMF staff calculations. 1/ Includes 1.5 percent of GDP foreign direct investment. 16
International Monetary Fund Spillover Risks and Global Policies
Elements of Global Downside Scenario 1. Sharper tightening in global financial conditions Sooner-than-expected tightening in key advanced economies (money shock) Long-term interests rates rise by 1 basis points in first year before easing gradually, short-term interest rates rise briefly then ease within the year (up 25 bps) 2. Further slowdown in emerging economies Unanticipated slowdown that is perceived to be cyclical, eventually seen as structural (Autonomous) slowdown of ½ percentage point for growth per annum for 3 years 3. Additional financial market stress Higher risk premia in vulnerable emerging markets (5 basis points) G2MOD Calibrated asset price declines and exchange rate movements based on event studies of past EM-led sell-offs G4 Model 18
Global Downside Scenario (percent; deviation from baseline). -.2 -.4 -.6 -.8-1. -1.2-1 -2-3 Money Shock in U.S. and U.K EM structural slowdown Additional tightening in EM Source of AEs: U.S. and U.K. Recipient AEs: Euro Area and Japan. -.2 -.4 -.6 -.8-1. -1.2 213 214 215 216 217 218 219 213 214 215 216 217 218 219 Vulnerable EMs Other EMs -1-2 -3-4 213 214 215 216 217 218 219-4 213 214 215 216 217 218 219 Sources: IMF staff estimates; and G2MOD. 19
Global Downside Scenario Asynchronous Normalization Simulated Output Effect in 215 (percent deviation from baseline) Losses greater than 3.75 Between 3.75 and 2.5 Between 2.5 and 1.5 Between 1.5 and.75 Between.75 and.25 Losses less than.25 Sources: IMF staff calculations; and G4 model. 2
Global Downside Scenario Asynchronous Normalization + EM Slowdown Simulated Output Effect in 215 (percent deviation from baseline) Losses greater than 3.75 Between 3.75 and 2.5 Between 2.5 and 1.5 Between 1.5 and.75 Between.75 and.25 Losses less than.25 Sources: IMF staff calculations; and G4 model. 21
Global Downside Scenario Asynchronous Normalization + EM Slowdown + Financial Turmoil Simulated Output Effect in 215 (percent deviation from baseline) Losses greater than 3.75 Between 3.75 and 2.5 Between 2.5 and 1.5 Between 1.5 and.75 Between.75 and.25 Losses less than.25 Sources: IMF staff calculations; and G4 model. 22
Different Spillover Effects Across Countries Spillover Effects on Output (cumulative contribution to real GDP by 216; percent deviation from baseline) Own Impact EM Spillovers ADV Spillovers -1-2 -3-4 -5-6 -7-8 -9 Source Advanced (US, UK) Recipient Advanced (EA, JP) Recipient Advanced Other Vulnerable Emerging Markets Remaining Emerging Markets Source: IMF staff estimates. 23
Policy Implications 1. Central banks need well-calibrated communications and policy actions. 2. Advanced economies vulnerable to adverse spillovers may need further monetary accommodation. 3. In EMs, priorities depend on country circumstances and vulnerabilities. Strengthening fundamentals and policy frameworks where needed to reduce vulnerabilities; Certain responses can help weather turbulence. Renewed attention on structural reform priorities for medium-term growth. 4. Scope for cooperation reflects tradeoffs and possibly modest spillbacks. 24