21 Emerging Markets Emerging Markets Weekly Economic Briefing Recession looms for some emerging economies Several major emerging economies struggling with domestically-induced problems are now in, or flirting with, recession. In Russia, Western sanctions and the government s retaliatory agricultural bans will contribute to higher inflation, tighter monetary policy and, it seems, a year of gradually contracting activity. A rise in the oil price would bring some support for Russian exports, but prices have been slipping since mid-june and we do not forecast much bounce-back. Brazil has also tumbled into recession after growth in Q2 contracted and a data revision pushed Q1 GDP negative. Tight monetary policy to contain inflation (mainly resulting from the government s economic policies) discourages investment and spending. We expect the economy to stagnate this year, but the possibility of a new political regime after next month s elections could improve the longer-term outlook. Turkey is flirting with recession after GDP contracted in Q2. Again, unorthodox economic policies are the root cause, resulting in the need for high interest rates to control inflation and attract foreign capital (to fund large government and external deficits). We expect the economy to grow less than 3% this year, well below its potential rate. The Indian economy has picked up speed since the elections, partly because of election-related spending. Industrial production has at last started to improve. We now forecast growth of.3% this year, up from.% last month, but are still sceptical about longer-term prospects. Premier Xi said this week that Chinese growth will meet its target (7.% this year) and expects strong growth to continue. Credit expansion is easing slightly (up 13.3% in the year to August) and imports are surprisingly weak, so the risks are to the downside. Election spending boosts Indian GDP The Indian economy grew faster than we expected in Q2, up.7% from a year earlier. Industrial production improved, with manufacturing output rising by 3.% on the year after falling for the previous two quarters. Trade contributed positively as exports rose while imports remained restricted. We raised our growth forecast for 21 to.3% from.%, and to.6% in 21, from.1%. But it is still too early to judge whether the longer-term outlook has also improved. Higher business confidence following the election may have boosted activity, and election expenditure is estimated to have added over 1% India: Manufacturing & electricity output (3 month average) 2 2 Manufacturing 1 1 Electricity - -1 26 27 2 29 21 211 2 213 21 Source: Oxford Economics 1
21 Emerging Markets to GDP, with government spending rising strongly in Q2. And CPI inflation was 7.% in August, so there is no room to cut interest rates this year. Tight monetary policy and budget constraints will continue to limit domestic demand. Chinese import weakness raises concerns China s continued import weakness raises questions about the strength of domestic demand, even though last month s GDP data put the economy on track to meet its 21 growth target. Imports fell 2.% on the year in August, while exports continued to rise up 9.%. The trade surplus is exaggerated by disguised capital inflows but in any case the currency has strengthened. If this continues, the trading band may be widened further (as in March) to stop the RMB being seen as a one-way bet. China: Merchandise trade (US$ terms) 3 month moving average 6 Imports economy. Food shortages will push up prices. We now expect inflation to average 7.3% in 21 and 7.2% in 21, significantly above our forecast last month. This will reduce consumer purchasing power and allows little scope for rate cuts. Furthermore, restrictions on access to western capital markets for some Russian entities, which now look set to include oil companies, will increase corporate borrowing costs. Indicators suggest that the economy shrank for a second quarter in Q2, and we expect it to continue contracting for the rest of this year. GDP is forecast to stagnate for the year as a whole and to grow just.2% in 21 (previously.7%). Russia: GDP and industrial production 3 2 1 Industrial production F'cast 2-2 Exports -1-2 GDP -3 199 1993 1996 1999 22 2 2 211 21 217 Source: Oxford Economics - 26 2 21 2 21 Source: Oxford Economics/Haver Analytics The poor import data may be partly explained by soft commodity prices, but this in itself indicates sluggish demand. It undoubtedly also reflects the effects of a weak property market the average price of new houses in the 1-City average has fallen for the past four months. Targeted action to support the property market may not be enough to prevent a more widespread asset price downturn, as property developers fail with knock-on implications for the banking and shadow-banking sectors. Russian economy will be hit by food ban Last week s ceasefire with Ukraine will make little difference to Russia s short-term outlook even if it holds, which we think unlikely. It will be some time before western sanctions are lifted; in the meantime the sanctions and Russia s retaliatory ban on agricultural imports from some countries will hit an already struggling Election hopes for Brazil s economy GDP contracted.6% in Q2, taking the year-on-year fall to.9%. Activity in Q1 was also revised down to a slight negative, pushing Brazil into recession. We now forecast zero growth for the year as a whole. This may mark a trough in activity, though, as the government stepped in last month to revive growth through policies to encourage bank lending. Still, any bounce in H2 will be limited given weakening confidence, tight monetary policy (rates are at 11%), high stock levels, and decelerating job creation and wage-growth trends. The rate of CPI inflation slowed slightly to 6.% in August, with core inflation much improved. But inflation will remain near or above the upper bound of the target for some time, so we expect interest rates to stay on hold for the rest of this year. With just one month until the presidential vote, polls show that Marina Silva could force a second round run-off, but president Rousseff still has the lead. The race is likely to tighten as October approaches, and will ultimately decide whether Brazil will face more of the same policies, 2
21 Emerging Markets or a more orthodox approach to economic policy. Our analysis suggests that a Silva victory would bring more short-term pain but better long-term prospects. Brazil: Monthly economic activity indicator % 2 1 1 - -1-1 -2-2 -3 2 2 26 27 2 29 21 211 2 213 21 3 month annualised growth Year- on- year growth Turkey hindered by monetary policy The economy contracted in Q2, shrinking.% (s.a.) over the quarter. Both private and government spending were held back by tight monetary policy. Although rates have been steadily lowered for the past four months, monetary policy remains too tight for domestic comfort but too loose to control inflation (which reached 9.% in August). We forecast that growth will slow to 2.9% this year, as higher inflation and slower credit expansion weigh on domestic demand. A more competitive lira should underpin exports, gradually narrowing the current account deficit, but as Turkey s twin deficits require external funding the economy is vulnerable to any deterioration in investor sentiment, especially if monetary policy becomes completely divorced from reality. Turkey: Interest rates % 13 11 1 9 7 6 3- month interbank rate 1- year bond yield 3
21 Emerging Markets Latest data Recent Data Releases Previous month Latest Comment China Consumer Prices Consumer Prices ex Food Producer Prices (Aug) Loans (Aug) Exports(Aug) Imports (Aug) Trade balance (m total) 2.3% y/y (Jul) 1.6% y/y (Jul) -1.2% y/y 13.% y/y 1.% y/y -1.6% y/y $23.bn (Jul) 2.% y/y (Aug) 1.% (Aug) -1.% y/y 13.3% y/y 9.% y/y -2.% y/y $3.bn (Aug) Exports grew steadily in August, continuing the improvement seen in Q2. But imports fell for a second consecutive month, suggesting that domestic activity data may be weaker than indicated by the authorities bank lending continued to moderate, too. If imports remain weak, not only would regional trade suffer, but the widening current account surplus would put further upward pressure on the exchange rate. Brazil Retail sales vol. (s. adj.) (Jul) -.7% m/m 2.% y/y -1.% m/m -1.% y/y After falling by.9% q/q in Q2, retail sales fell again in July, indicating continued weak GDP. India Consumer Prices Industrial Output (Jul).% y/y (Jul) 3.9% y/y 7.% y/y (Aug).% y/y CPI remains uncomfortably high and industrial output eased notably in July, raising concerns that some of the improved growth may be election-related and therefore short-lived. Russia Exports (Jul) - Imports (Jul) - Trade balance (m total) -2.6% y/y -.2% y/y $193.3bn (Jun).% y/y -.2% y/y $197.bn (Jul) Export values have trended upwards in recent months but low confidence levels have weighed on domestic activity, reducing imports. As a result the trade surplus has risen in 21. Taiwan Exports (Aug) - Imports (Aug) - Trade balance (m total).% y/y 9.% y/y $36.bn (Jul) 9.6% y/y 1.1% y/y $3.9bn (Aug) Export growth rose to a 19-month high in August as electronic exports picked up. Forward indicators are positive and if new iphone sales grow as strongly as some suggest, export growth could accelerate by more than we currently forecast. Korea Unemployment (Aug) Employment (Aug) 3.% (seas. adj.) 1.9% y/y 3.% 2.3% y/y Employment is picking up but unemployment remains higher than in 2 and 213. Mexico Ind. Output (Jul, s. adj.) Consumer Prices (Aug, s. adj.) -.2% m/m 1.% y/y.1% y/y.3% m/m 2.% y/y.1% y/y The manufacturing sector has steadily strengthened this year and construction activity has stabilised. We expect these trends to gain further momentum in the coming months. Turkey GDP (Q2, s. adj.) Consumer spending (Q2) Fixed Investment (Q2) Export Volumes (Q2) Current account (m total) Industrial Output (Jul, s.adj) 1.% q/q.7% y/y 2.% y/y -.3% y/y 1.% y/y -$2.1bn (Jun).% m/m 2.% y/y -.% q/q 2.% y/y.3% y/y -3.6% y/y.1% y/y -$.bn (Jul) 1.% m/m 3.9% y/y The economy contracted in Q2. Sharply tighter monetary policy meant that both private and government spending fell over the quarter, and fixed investment was also lower. The government is targeting % growth this year, but we think the economy will struggle to achieve anything more than 2.9% given the policy constraints. The current account deficit has narrowed this year but much more is still needed.
21 Emerging Markets Events Monetary policy meetings in past week Key rate (now) Outcome Comment Sep th Mexico 3.% (Target rate) Unchanged As expected, Banxico kept its benchmark policy rate unchanged at 3%. The bank appeared less dovish than in previous months, noting that current growth trends are improving and becoming betterbalanced. We expect the bank to start raising rates towards the end of 21. Sep 11 th Chile 3.2% (Policy rate) Down 2bp Banco Central de Chile cut its main interest rate for the seventh time in the past year, as had been widely anticipated. With growth nowhere near as dynamic as expected and inflation forecast to ease, this was the third consecutive month of rate cuts. We think they may leave rates on hold now although a further reduction is possible if activity disappoints in coming months. Sep 11 th Philippines.% (Overnight reverse repo rate) Up 2bp The central bank increased its key policy rate by another 2bp after raising rates for the first time this cycle in July. Higher CPI inflation, a lower inflation target range next year, negative real interest rates and the expected shift in US monetary policy next year will have influenced the decision. We expect another 2bp rate hike this year possibly as soon as next month with further tightening throughout 21. Sep 11 th Indonesia 7.% (Policy rate) Unchanged Bank Indonesia held the interest rate unchanged for a tenth month, as expected. Inflation fell to % in August, well within the bank s target range of 3.-.% for this year. But as the impact of the good harvest on food prices wears thin, and the new government tackles energy subsidies, there is likely to be some upward price pressure in the short term. We expect one more rate hike in this cycle, towards the end of Q1 21. Sep th Korea 2.2% (Base rate) Unchanged The interest rate was left on hold as expected following last month s 2bp cut. Provided economic activity picks up momentum through the rest of the year, the BOK is expected to start raising rates in H2 21. If the recovery falters though, there is a chance the bank may cut rates again. For further information contact Sarah Fowler (sfowler@oxfordeconomics.com)
21 Emerging Markets Asia China: Trade US$bn (seasonally adjusted, 3 month averages) 2 1 16 1 Exports 1 6 Imports 2 21 23 2 27 29 211 213 Taiwan: Exports and imports 6 Imports Exports 2-2 - 3 month moving average (US$) -6 199 1997 1999 21 23 2 27 29 211 213 Emerging East Asia: Trade balance US$ bn 3 month moving average 3 China 2 2 Taiwan: Exports by destination US$bn (seasonally adjusted) 1 China & HK 1 1 "Rest of East Asia" 6 2 US Rest of emerging Asia Europe - 1997 1999 21 23 2 27 29 211 213 2 22 2 26 2 21 2 21 Source: Taiwan Ministry of Finance / Oxford Economics China: Inflation 2 2 16 - Consumer prices Manufacturing Producer prices - 2 22 2 26 2 21 2 21 Source: China Bureau of Statistics. Food prices India: Merchandise exports and imports 7 6 Imports (US$) 3 2 1-1 -2 Exports (US$) -3 3 month moving average - 199 1997 1999 21 23 2 27 29 211 213 Source: India Ministry of Commerce & Industry 6
21 Emerging Markets Asia Philippines: Policy rates and money growth % 7 6 Reverse Repo Rate SDA Rate M2 (RHS) 3 2 1 2 26 2 21 2 21 Source : Oxford Economics/Haver Analytics 3 3 2 2 1 1 Indonesia: Interest rates & CPI inflation % 2 1 Policy interest rate 16 1 1 6 CPI inflation 2 21 23 2 27 29 211 213 Source: Bank Indonesia Thailand: Equity market MSCI Index, US$ (3 Dec 21 = 1) 1 1 Thailand 13 11 1 9 Emerging Markets 7 Jan 211 Jan 2 Jan 213 Jan 21 Emergers: Exchange rates v US$ Index (Dec 3, 21 = 1) 11 11 China 1 1 Korea 9 9 Indonesia appreciation India 7 7 6 Emergers: Exchange rates v US$ Index (Dec 3, 21 = 1) 11 1 appreciation Malaysia 16 Singapore Philippines 1 1 9 96 9 Thailand 92 9 Emergers: Equity markets Index (May 1, 213 = 1) 13 11 11 1 1 9 9 US S&P MayJun Jul AugSep Oct NovDec Jan FebMar AprMayJun Jul Aug MSCI Emerging Markets Index, US$) 7
21 Emerging Markets Latin America Brazil: Retail sales volumes 27=1 (seasonally adjusted) 17 16 1 1 13 11 1 9 7 2 22 2 26 2 21 2 21 Source: IBGE Mexico: Industrial production 1 3 month moving average 1 - -1-1 199 1997 1999 21 23 2 27 29 211 213 Brazil: Exports and imports 7 6 3 month moving average (US$) 3 Exports 2 1-1 -2-3 Imports - 1996 199 2 22 2 26 2 21 2 21 Mexico: CPI inflation and monetary policy 9 Target rate 7 6 Headline CPI 3 Banxico tolerance range Core CPI 2 2 29 21 211 2 213 21 Latin America: Equity markets Index (Dec 3, 21 = 1) 13 Emergers: Exchange rates v US$ Index (Dec 3,21 = 1) 11 11 Mexico 1 1 9 Mexico 1 9 9 7 Brazil 7 7 appreciation Brazil 6 6
21 Emerging Markets Emerging Europe CEE: Investment 2 Central & East. Europe: Retail sales volumes 2=1 (seasonally adjusted) 19 1 1 Czech Poland 17 1 13 Russia Poland 11 Czech - Hungary 9 Hungary -1 7-1 2 22 2 26 2 21 2 21 2 22 2 26 2 21 2 21 / Oxford Economics Brazil, Russia & China: Retail sales volumes 2 16 - - Russia China Brazil 3 month moving average - 21 23 2 27 29 211 213 Russia & Ukraine: Exchange rate v US$ Index (Dec 3, 21 = 1) 11 1 9 Ruble per US$ 7 6 Hryvnia per US$ depreciation Emergers: Exchange rates v Euro Index (Dec 3, 21 = 1) 19 Hungary 16 Czech 13 1 97 Poland 9 91 depreciation World: US yields and emerging currencies % 3. 2. 1. US 1- year bond-yield (LHS) Emerging market currency index (RHS) Index (Dec 3, 21 = 1. Jan 11 Jul 11 Jan Jul Dec Jul 13 Dec 13 Jun 1 1 9 9 9
21 Emerging Markets Rest of World Turkey: Real GDP 3 2 Consumer spending Investment Exports Turkey: Interest rates and inflation % 27 2 21 1 Average bank lending rate on consumer loans 1 1 1-week interbank rate -1-2 GDP -3-21 23 2 27 29 211 213 9 6 3 "Core" inflation 26 27 2 29 21 211 2 213 21 / Oxford Economics South Africa: Manufacturing output 2=1 (seasonally adjusted) 11 11 1 1 9 9 2 26 27 2 29 21 211 2 213 21 South Africa: Exchange rate Index v US$ (Dec 3, 21 = 1) 1 1 9 9 7 7 6 6 depreciation Jan-11 Jul-11 Jan- Jul- Jan-13 Jul-13 Jan-1 Jul-1 Turkey: Exchange rates Index (Dec 3, 21 = 1) 1 1 Turkey (v US$) 9 Turkey (v Euro) 9 7 7 6 depreciation 6 Emergers: Equity markets Index (Dec 3, 21 = 1) 17 16 S. Africa 1 1 13 11 1 9 Turkey 7 Jan-11 Jul-11 Jan- Jul- Jan-13 Jul-13 Jan-1 Jul-1 1
21 Emerging Markets Industrial Production Percentage changes on a year earlier unless otherwise stated China Brazil Korea India Mexico Russia Turkey Taiwan Poland 213 Jul 9.7 1.2 -.2 2.6 -.9..3. 3. Aug 1.. 3.3. -.2 -.2 1.6 -.1.3 Sep 1.2 2. -.2 2.7-1. 1.3 6.3 -. 3.9 Oct 1.3. 1.2-1.2.3 1. 2.1.. Nov 1. 1.9 -.6-1.3-1. 2..7. 7. Dec 9.7-2. 1.1.1 -.3. 6...7 21 Jan.6-1. 1.1 1.1.9 -.2 6.3 1.2 6.3 Feb.6 1.1 -.1-2.. 2.1...6 Mar. -1.1 2. -..1 1. 3.7 3.. Apr.7-2. 2. 3.7 2.1 2....1 May. -3. -.7. 2.3 2. 3.9 6.1 2.6 Jun 9.2-7.6 1. 3.9 1.. 2. 7. 2.3 Jul 9. -3. 3.. 2. 1. 3.9 6.1 2.2 Consumer prices Percentage changes on a year earlier unless otherwise stated China Brazil Korea India Mexico Russia Turkey Taiwan Poland 213 Aug 2.6 6.1 1. 9. 3. 6..2 -. 1.1 Sep 3.1.9 1. 9. 3. 6.1 7.9. 1. Oct 3.2..9 1.2 3. 6.3 7.7.6. Nov 3.. 1.2 11.2 3.6 6. 7.3.7.6 Dec 2..9 1.1 9.9. 6. 7..3.7 21 Jan 2..6 1.1.. 6.1 7... Feb 2..7 1...2 6.2 7.9..7 Mar 2. 6.2 1.3.3 3. 6.9. 1.6.7 Apr 1. 6.3 1..6 3. 7.3 9. 1.7.3 May 2. 6. 1.7.3 3. 7.6 9.7 1.6.2 Jun 2.3 6. 1.7 7. 3. 7. 9.2 1.6.3 Jul 2.3 6. 1.6..1 7. 9.3 1. -.2 Aug 2. 6. 1. 7..1 7.6 9. 2.1-11
21 Emerging Markets Exports (US dollars) Percentage changes on a year earlier unless otherwise stated China Brazil Korea India Mexico Russia Turkey Taiwan Poland 213 Aug 7.2 -.3 7.6 13.9.6 3. -9.1 3.6 1. Sep -.3.3-1.7.9...9-7. 13.2 Oct.6.9 7.2 1.3. -6.6 -.3.7 9.2 Nov.7 1.9.2 3.6 2. 3. 2.1 3. 7. Dec.1.6 6.9 3.7 1.2 2.7. 1.2 1.1 21 Jan 1.6. -.2. 2. 2.1 7.7 -. 13. Feb -1.1 2. 1. -.1. -.9.3 7.9. Mar -6.6 -. 3.7 -. 1.6..7 1.9 1.2 Apr.9 -..9.3.9 6.7 7. 6.2 13.2 May 7. -.9-1. 11.2 7.. 2. 1. 17.9 Jun 7.2-3.2 2. 9.6.2-2.6.6 1.2 1.7 Jul 1. 1.7.7 7.3.9. 11.9. - Aug 9. -. -.1 - - - - 9.6 - Imports (US dollars) Percentage changes on a year earlier unless otherwise stated China Brazil Korea India Mexico Russia Turkey Taiwan Poland 213 Aug 7.3. 1.2 -. 3. -.3 1. -1.3 7.2 Sep 7..1-3. -17.9 2..9 -.6 -.7.2 Oct 7.6 1.6.1-13. -.2 -.6.7-2.9 1.1 Nov.3-7. -.6-16. -2. -2.6 6.3 -..9 Dec. 3.9 3. -1. -1. 2.. 1.. 21 Jan 1.. -1.2-1.9 3.2-3. 2. -1.2 9. Feb 1. 7.3. -17.9 1.6-9.3 -.7.9 9. Mar -11. -.6 3.6-3. 1.7-3.3-3.2 7. 9. Apr. -11.1. -13. 3.2-7. -9.2..7 May -1.6 -..3-1..3-1. -2. -2.3 1.1 Jun. -3..1 7. 6. -.2 -.3 7. 13.1 Jul -1.6 -...3.3 -.2-2.6 9. - Aug -2. -. 3.1 - - - - 1.1 -