Emerging markets during the crisis: why this time was different? Boris Vujčić

Emerging markets during the crisis: why this time was different? Boris Vujčić

Growth in emerging/developing economies resilient and catch-up untouched Real GDP growth, period averages GDP per capita growth rate, period averages 8 7 7 6 6 5 5 4 % 4 % 3 3 2 2 1 1 1993 22 23 27 28 212-1 1993 22 23 27 28 212 World Advanced Economies Advanced Economies Emerging and Developing Economies Emerging and Developing Economies Source: IMF WEO, September 211

...while Asia outperforms other regions, all expect solid growth, the most afffected being the CEE.. Real GDP growth, period averages 1 8 6 % 4 2-2 1993 22 23 27 28 212 211 212 Central and Eastern Europe Developing Asia Middle East and North Africa Source: IMF WEO, September 211 Commonwealth of Independent States Latin America and the Caribbean Sub-Saharan Africa

CA imbalances are reduced, but still there Current account balances by region, as % of GDP 4. 3.5 3. 2.5 2. 1.5 1..5. -.5-1. period averages 23 27 28 212 Advanced Economies Emerging and Developing Economies as % of GDP 14 12 1 8 6 4 2-2 -4-6 -8 23 27 28 212 Central and Eastern Europe Commonwealth of Independent States Developing Asia Latin America and the Caribbean Middle East and North Africa Sub-Saharan Africa Source: IMF WEO, September 211

Export growth affected most but terms of trade gains still there... Export Volumes of Goods and Services % change, period averages Terms of Trade of Goods and Services, % change, period averages 14 2.5 12 2. 1 1.5 % 8 6 % 1. 4.5 2. 1993 22 23 27 28 212 Advanced economies Emerging and Developing Economies -.5 1993 22 23 27 28 212 Advanced Economies Emerging and Developing Economies Source: IMF WEO, September 211

... largely related to commodity price increases 4 35 12 1 3 25 8 index, 2=1 2 15 1 6 4 5 2 2 21 22 23 24 25 26 27 28 29 21 211f 212f USD/barrel Nonfuel commodities Metals Petroleum price - right Agricultural raw materials Food Source: IMF GAS

Equity market has recovered rapidly, FED/bubble? But re-pricing of risk there to stay! Equity market and bond spread indices 15 5 12 4 basis points 9 6 3 2 basis points 3 1 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 EMBI Global - right MSCI Emerging Markets - lef t Source: Bloomberg

Capital flows much less affected by the crisis than was feared Net Private Financial Flows to Emerging and Developing Economies 8 7 6 USD billion 5 4 3 2 1 22 23 24 25 26 27 28 29 21 211f 212f April 21 WEO Forecast April 211 WEO Forecast October 21 WEO Forecast September 211 WEO Forecast Source: IMF WEO

1,4 1,2 1, 8 6 4 2-2 Capital flows over pre-crisis levels (27 outlier) Capital flows to emerging economies Composition of private capital flows, net 1, 8 6 4 2 2 21 22 23 24 25 26 27 28 29 21 211f 212f 2 21 22 23 24 25 26 27 28 29 21 Private flows, net Official flows, net Source: IIF USD billion 211f USD billion 212f Equity Debt

Net capital inflows much lower and more volatile in 8 s/9 s Regional breakdown of private capital flows (net) to emerging economies 198-2 21 18 15 12 USD billion 9 6 3-3 -6 198 1981 1982 1983 1984 1985 1986 1987 1988 1989 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 Central and Eastern Europe Developing Asia Middle East and North Africa Commonwealth of Independent States Latin America and the Caribbean Sub-Saharan Africa Note: Data on CIS available only since 1992 Source: IMF WEO, September 211

... than in the last 8 years, in spite of the recent crisis, CEE/CIS most affected.. Regional breakdown of private capital inflows (net) to emerging economies 2-212 8 7 6 5 USD billion 4 3 2 1-1 -2 2 21 22 23 24 25 26 27 28 29 21 211f 212f Central and Eastern Europe Commonwealth of Independent States Developing Asia Latin America and the Caribbean Middle East and North Africa Sub-Saharan Africa Source: IMF WEO, September 211

5 4 3 2 1-1 -2 and, as usual with the crisis - official money is back in the game... Official bilateral creditors, net International financial institutions, net 5 4 3 2 1-1 -2-3 -4 Source: IIF USD billion 212f 2 21 22 23 24 25 26 27 28 29 21 211f 212f 2 21 22 23 24 25 26 27 28 29 21 211f USD billion

But, this time around, most of the money goes to advanced countries Portugal in May 211 has received $11bn (78 bn euros), cca 45% of GDP two-thirds from other eurozone states and a fund backed by the EU budget (cca 3% of GDP) 26bn euros by the IMF (cca 15% of GDP) Greece alone has received cca 6% of GDP in support money in 21: cca $9bn from ECB s Securities Market Program (cca 38% of GDP) over $38bn from the IMF/EU (over 16% of GDP) EFSF 75 bn euros Greece + Ireland = 195bn euros Compared with: 1995: Mexico cca 8% of GDP 1998: Thailand (cca 12%) Indonesia (cca 8%), Korea (cca 3%) 1999: Brazil cca 2% of GDP 21: Argentina (cca 3%) and Turkey (cca 6%) of GDP

Remittances suprisingly resilient, decline in LatAm and ECA Remittances to Developing Countries 3 25 2 USD billion 15 1 5 2 21 22 23 24 25 26 27 28 29 21 Europe & Central Asia Latin America & Caribbean Sub-Saharan Africa East Asia & Pacific Middle East & North Africa Source: World Bank, Global Development Finance Databank

and ODA actually increased, again against the expectations Official Development Assistance to Developing Countries (all donors) 4 12 3 9 USD billion 2 1 6 3 USD billion 2 21 22 23 24 25 26 27 28 29 Europe America Oceania Total - right Africa Asia Developing Countries - unspecified Source: OECD, Development Database on Aid

What makes developing world so resilient to this crisis?

Less dependendent on foreign savings (except the CEE) Gross national saving, as % of GDP period averages 45 4 35 as % of GDP 3 25 2 15 1 5 199-1995 1996-23 24-212 Central and Eastern Europe Commonwealth of Independent States Developing Asia Latin America and the Caribbean Middle East and North Africa Sub-Saharan Africa Source: IMF WEO, September 211

Trade away from the advanced world (except for the CEE) Developing countries, trade by partner region share 1.9.8.7.6.5.4.3.2.1 1987 1988 1989 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 Advanced Economies Emerging and developing economies Total trade, annual growth rate - right 25 2 15 1 5-5 -1-15 -2-25 -3 % Source: IMF IFS

Good macroeconomic policies Consumer Price Inflation, annual % change period averages 24 2 16 % 12 8 4 1993-22 23-212 Central and Eastern Europe Developing Asia Middle East and North Africa Commonwealth of Independent States Latin America and the Caribbean Sub-Saharan Africa Source: IMF WEO, September 211

Large buffers of rapidly increasing fx reserves, not affected by the crisis - window effect International Reserves, gross USD billion 16 14 12 1 8 6 4 2 23 24 25 26 27 28 29 21 211f 212f 6 5 4 3 2 1 USD billion Central and Eastern Europe Latin America and the Caribbean Sub-Saharan Africa Commonwealth of Independent States Middle East and North Africa Developing Asia - right Source: IMF WEO, September 211

Developed and Emerging Market country ratings Number of upgrades and downgrades 6 5 4 3 46 28 43 39 51 31 32 32 2 1 7 9 1 1 14 27 28 29 21 211 17 18 12 Developed up Developed down Emerging up Emerging down Sources: Moody's, Standard&Poor's; J.P.Morgan

So, things look quite good... Things have never looked better for the EM Growth prospects are, still, at historicaly high levels, catch-up with the advanced economies as well, macroeconomic policies are better than ever, dependence on foreign savings significantly reduced (even in the poorest places like Sub-Saharan Africa), foreign exchange reserves high and growing, financial flows back to the precrisis levels, ODA even increased during the crisis, EM financial markets have deepened and, thus, became more robust most affected by the crisis was Central and East Europe because it is most integrated with the advanced economies of Europe, both tradewise and in terms of financial flows

.. however, risks are still plentifull... they come from inside.. it is not difficult to envisage a (financial) crisis in the developing world, where markets are not properly regulated (Ireland, Iceland) where, along with the financial lliberalization, asset price bubbles are not contained where politics still play a large role in credit/assets distribution today the issue at hand is not the quantity, as was the case in the past, but quality of (intermediation) of finance for the EM the good thing being the fact that they have where to learn from

and that quality is about micro-management(1): providing access for people and companies to financing in a manner that is both conducive to growth but, at the same time, reduces inequalities, particularly in countries where they are still huge conclusion? how much, and in what ways, can a government intervention achieve in this area is still an open question (Gates project can help give some answers), microfinance... and, macro-management (2): intermediation of capital (in)flows in an efficient manner, which requires a good institutional set-up, with prudent (macro)economic policies in order to avoid crisis episodes/volatility which hampers long-run growth and, yes, don t forget politics play a large role

...and from the outside... as the crisis has nicely demonstrated, there is nothing like a perfect decoupling fiscal riks in both the US and Eurozone have increased during the crisis, which, if not managed very well, nad there are few good news there, can trigger another widespread financial crisis with dire consequences for growth prospects primarily in advanced economies, but also around the world

Fiscal developments in advanced economies Fiscal balance, General govt. gross debt, period averages period averages as % of GDP. -.5-1. -1.5-2. -2.5-3. -3.5-4. -4.5-5. 23 27 28 212 as % of GDP 12 1 8 6 4 2 23 27 28 212 Advanced Economies Emerging and Developing Economies Advanced Economies Emerging and Developing Economies Source: IMF WEO, September 211

...will deteriorate further in US/slightly improve in EMU (optimistic scenario)..lessons for the developing countries 12 2 11 18 16 1 14 as % of GDP 9 8 7 12 1 8 6 4 6 2 27 28 29 21 211 212 213 214 215 216 27 28 29 21 211 212 213 as % of GDP 214 215 216 United States Euro area Spain Greece Ireland Italy Portugal Source: IMF WEO, September 211

Europe has its own large imbalances.. 2 15 Net foreign assets (in percent of world GDP) 1 5-5 -1-15 -2-25 2 21 22 23 24 25 26 27 28 29 21 US JPN Eur surplus CHN EMA OIL ROW Eur deficit Discrepancy

..financed from within - share of outstanding debt securities held outside the euro area (28).. 4% 35% 3% 25% 2% 15% 1% 5% %

Another DM crisis? the way the things look like today there is an increasing probability of a large catastrophe if things, again, go wrong in the DM, spillovers will happen through different channnels through demand/trade channel through financial flows channel through exchange rate channel which affects both trade and value of assets, whereby today s strenghts of EM countries might show up as weaknesses or, there could be different other types of exogenous shocks, say in a commodity markets, where terms of trade gains for many countries might get wiped-out in the same way as they happened

Emerging markets EM Growth will be The biggest risk to EM growth comes from Relatively immune to a deep recession in the US and Euro area 2% Capital outflows due to riskreduction 37% Relatively immune to (i., modestly affected by) a mild recession in the US and Euro area 64% Deterioration of funding markets Export weakness due to weaker DM growth 12% 38% Materially affected by a mild recession in the US and Euro area 34% Too little policy support from both EM and DM policymakers 13% % 2% 4% 6% 8% % 1% 2% 3% 4% Source: Morgan Stanley

Equities By mid-212, EM equities will What is your most preferred equity region for next 12m? Outperform the S&P 5 by more than 2% 8% Europe 16% Outperform the S&P 5 by less than 2% 4% US 31% Be roughly on par with S&P 5 performance 25% EM 47% Underperform the S&P 5 by more than 1% 27% Japan 6% % 1% 2% 3% 4% 5% % 1% 2% 3% 4% 5% Source: Morgan Stanley

Emerging markets Is China a bubble economy? China s transition to consumer-led growth will occur in: 2-5 years 25% Yes 55% 5-1 years 46% No 45% More than 1 years 29% % 1% 2% 3% 4% 5% 6% % 1% 2% 3% 4% 5% Source: Morgan Stanley

Instead of conclusion So, although things loook very good at the moment, I m afraid we don t know much, i.e. over the last four years most of the economists were wrong on: sub-prime decoupling inflation commodity prices financial flows fiscal risks EMU need for the IMF Although crisis/post crisis performance of the EM/developing world points to a great deal of optimism, given many risks and uncertainties, I ll just conclude: let s see what will the world look like this time next year