IMF World Economic Outlook with a focus on India and Emerging Market Comparators

Transcription

1 IMF World Economic Outlook with a focus on India and Emerging Market Comparators Thomas Richardson IMF Senior Resident Representative India/Nepal/Bhutan Meghnad Desai Academy of Economics October 9, 2015

2 Outline 1. World Economic Outlook 2. Uneven Recovery in Advanced Economies (AE s) 3. Emerging Market (EM) Volatility Brazil, China Financial market implications 4. What does this mean for India? 5. Conclusions 2

3 World Economic Outlook October 2015 WEO Real GDP Growth Projections (percent change from a year earlier) 2015 (Oct 2015) 2015 (Apr 2015) World U.S. Euro Area Japan Brazil Russia India* China (Oct 2015) 2016 (Apr 2015) *For India 2015 is FY2015/16, and 2016 is FY2016/17. Source: IMF, World Economic Outlook October 2015 (

4 Risks to global growth tilted to the downside 4

5 EM growth forecast revisions are mainly down 5

6 Asia continues to drive global growth Global: Real GDP Growth (Year-on-year; percent change) Asia Latin America and the Caribbean Emerging and Developing Europe Euro area United States United Kingdom Source: IMF, World Economic Outlook database. 6

7 but there are headwinds: consider volatility and correction in China Shanghai Composite Index and volume / volatility (percent) 7

8 Uneven Recovery in Advanced Economies Healthy recovery in the US Helped by lower oil prices Stronger housing and labor markets Should offset stronger dollar Fed lift off is likely Modest pick-up in the Euro area Again, lower oil prices help Sentiment improving, but potential growth is weak Bank lending slowly recovering Japan to see gradual rise in growth QQE combined with lower commodity prices to help Second quarter was disappointing Long term fiscal concerns remain 8

9 US: Ongoing recovery 9

10 US: expected Fed lift-off could imply tighter financial conditions outside the US as well United States: Interest Rates Fed Funds Rate Fed Funds Rate: September 2015 FOMC Median Fed Funds Rate: Market Expectation Term Premium (10Y-3M yield) Forecast horizon 0.0 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr Jul Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Source: Bloomberg LP. 10

11 Euro Area: Slow improvements and Greek decoupling 11

12 Euro Area: Improving credit but headwinds to QE 12

13 Japan: Disappointing 2015 Q2 13

14 Japan: persisting concerns about fiscal consolidation Japan: Public Finances (Percent of GDP) 300 Structural primary deficit (RHS) Projection 16 Japan: Labor Market 3 Projections Gross debt Nominal Wage Bill Real Wage Bill Job opening to application ratio (RHS) 2013Q1 2013Q4 2014Q3 2015Q2 2016Q1 2016Q4 0.8 Sources: CAO; IMF staff estimates Sources: Haver analytics and IMF staff estimates.

15 Emerging Market Volatility Global financial risks are rotating toward EMs and market liquidity

16 as seen in market turmoil of recent months 16

17 At the same time, many EMs are in the late stages of the credit cycle 17

18 while EM corporate fundamentals are deteriorating 18

19 even as EM corporate exposure to FX and commodities risk is high in some countries 19

20 Weak commodity prices: help some countries and hurt some countries 20

21 Forecasts are for commodity prices to stay low 21

22 due both to higher production and weaker demand from China 22

23 Commodity exporters are vulnerable to price shocks 23

24 Commodity price shifts have driven CAD movements 24

25 CAD improvement/deterioration is linked to net commodity export position 25

26 Related: a number of countries are exposed to China 26

27 China: rebalancing, but we shouldn t overstate the slowdown 27

28 China: stock market correction, but still up over 2014, while RMB depreciation was modest China: Stock Market Performance 6000 Shanghai Composite Index China: Exchange Rates 140 Real Effective Exchange Rate (2010=100) Bilateral Exchange Rates against U.S. Dollar (LHS) /1/2014 3/1/2014 5/1/2014 7/1/2014 9/1/ /1/2014 1/1/2015 3/1/2015 5/1/2015 7/1/2015 9/1/ M1 2006M1 2007M1 2008M1 2009M1 2010M1 2011M1 2012M1 2013M1 2014M1 2015M1 Source: Bloomberg L.P. Data as of Sep 21, Source: IMF staff calculations. Data as of August,

29 China: keep exchange rate and reserve movements in perspective 29

30 In China, corporate leverage remains high in the real estate sector, and among SOEs Share of Total Corporate Liabilities in Real Estate and Construction, by Leverage Ratios Group (In percent) Leverage <1 Between 1 and 2 Between % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Between 3-4 Bigger than 4 High leveraged firms (36 SOEs; 29 private firms) Sources: WIND database; and IMF staff estimates. 126 firms 30

31 Large spillovers from China are due to its increased trade linkages in Asia Domestic Value-added Embedded in Exports to China (In percent of total exports of each economy) 16 Latest Taiwan POC Hong Kong SAR Malaysia Korea Sources: OECD, and IMF staff calculations. Singapore Thailand Vietnam Philippines Australia Indonesia Japan New Zealand India 31

32 Propagation to Asia from growth shocks in China has therefore strengthened Estimated Impact of a 1 percent Growth Shock from China on Partner Country s Growth (Percentage points) Asia ASEAN5 Korea Vietnam India Source: IMF staff calculations. Note: ASEAN5 includes Indonesia, Malaysia, the Philippines, Singapore and Thailand. 32

33 Partly due to China s slowdown, global trade growth has weakened 33

34 But Brazil faces a very difficult outlook too 34

35 For Asia, external vulnerabilities are mitigated by strong CADs and healthy reserves Current Account Balance (In percent of GDP) Japan Australia New Zealand Hong Kong SAR Korea Singapore Taiwan POC Indonesia Malaysia Philippines Thailand Vietnam China India Source: IMF, World Economic Outlook (WEO) database. EMs Latin America EMs Europe other EMs Total Reserves (In percent of GDP; excluding gold) Latest End of 2014 Japan Australia New Zealand Hong Kong SAR Korea Singapore Taiwan POC Indonesia Malaysia Philippines Thailand Vietnam China India EMs Latin America EMs Europe other EMs Sources: IMF, World Economic Outlook (WEO) database; IMF, IFS database; and IMF staff calculations. 35

36 Yet even in Asia, corporate vulnerability to potential shocks adds to liquidity and solvency risks Debt at Risk: Share of Debt Held by Firms with Interest Coverage Ratio<1.5 (in percent of GDP) Scenario 1: 30 percent depreciation Scenario 2: 30 percent increse in borrowing cost Scenario 3: 20 percent decline in earnings China India Indonesia Malaysia Philippines Thailand Shares were calculated by applying the firm level debt-at-risk ratios from the Orbis database to the country-level corporate debt as share of GDP.

37 Indeed, portfolio equity outflows from Asian EMs surged over the summer Asia excl. Japan and China: Cumulative Equity and Bond Flows 1 (In billions of U.S. dollars; positive=inflow) Summer 2015 Equity Taper Tantrum Bond t t+2 t+4 t+6 t+8 t+10 t+12 t+14 t+16 t+18 t+20 t+22 t+24 t t+2 t+4 t+6 t+8 t+10 t+12 t+14 t+16 t+18 t+20 t+22 t+24 Sources: EPFR Global; Haver Analytics; and IMF staff calculations. 1 Includes exchange traded fund flows and mutual fund flows. Note: t is mid-may 2013 for the Taper Tantrum episode, and July 1, 2015 for the Summer 2015 episode; weekly data; data as of September 11,

38 EMs: transmission channels of shocks 38

39 What does all this mean for India? Investor appetite for Indian risk remains healthy So far, spillovers have been limited for India though equity outflows picked up over the summer Many planned reforms will be growth- and sentiment-positive GST, Aadhaar, labor market, move to inflation targeting, PSU bank corporate governance, etc. But there are a couple of challenges

40 India: three problems made it one of the fragile 5 in 2013 Current Account; Fiscal Balance; and Inflation (In percent of GDP) General gov. balance Current account balance Inflation (RHS) 2012/ / / /16 Sources: Haver Analytics; Reserve Bank of India; and India Ministry of Finance

41 The fiscal sector remains a risk for India: GoI spends about as much as the rest of EM Asia

42 Yet India has much higher general government deficits

43 Implication: India s government sector is under-resourced

44 While corporate vulnerabilities remain elevated in India Nonperforming Loans and Loan Loss Provisions (In percent of total gross loans) 12 Nonperforming loans Restructured loans Provisions Brazil China India Indonesia South Africa Source: IMF, Financial Soundness Indicators 44

45 Conclusions Risks to global outlook tilted to the downside Global economy is recovering but it s slow and uneven Impact on EM s is differentiated Financial conditions are tightening exacerbating impact of weaker commodity prices for exporters India is the world s fastest growing large economy Inflation and CAD are down but fiscal space is lacking (need revenue reforms) Corporate balance sheets are a worry 45

46 Thank you Want to know more? 46 on global outlook on our work in Asia what we do in India Follow on

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