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1、15 october 2012emerging marketscross-asset strategyabcglobal researchimf-wb meeting takeawaysnot much of a rising sun in tokyo no agreement to increase emerging market decision powerwithin imf emerging market policymakers complain about secondaryand unwanted effects of quantitative easing growth bia

2、s stays; “currency wars” are becoming structuralwe return from the imf meetings in tokyo with mixed feelings. on one hand, there isroom for hope; after all; the problems facing the global economy are well known and therecent policy actions have bought some time to agree on how to tackle them. on the

3、 otherhand, there are still too many disagreements on how to divide the adjustments needed ineurope (taxes versus benefits, debtors versus creditors, periphery versus core), and theextent of the global slowdown.whilst in a stronger macroeconomic position, emerging markets left tokyo as losers.first,

4、 the 2012 quota reforms that were supposed to give emerging market (em) nationsmore decision power at the imf failed to be ratified. second, policy makers in thedeveloped markets reaffirmed the need to keep ultra-loose monetary policies due to ailingdomestic economic growth, despite such policies pu

5、tting their em counterparts in adifficult bind.pablo goldbergglobal head of em researchhsbc securities (usa) inc.+1 212 525 dr. murat ulgenchief economist, central & easterneurope and sub-saharan africahsbc bank plc+44 20 7991 issuer of report: hsbc securities(usa) inc.disclaimer &disclosure

6、sthis report must be readwith the disclosures andthe analyst certifications inthe disclosure appendix,and with the disclaimer,which forms part of itat the hsbc emerging markets investors forum, investors had the opportunity tohear directly from the policymakers, where most of them complained about t

7、hedifficulties posed by subsequent rounds of quantitative easing (qe) and its derivatives bythe developed world, in particular about the pressures on exchange rates and the conductof their own domestic monetary policy. the extent of the “currency wars” was a recurrentquestion asked by the investors

8、that accompanied us in tokyo, and the answer was clear:we are just at the beginning stages of the battle.yet, investors remain optimistic on the asset class; most of them are wondering howexpensive some assets can get, rather than thinking about taking chips off the table.while qe is a source of con

9、cern for policymakers, it remains a strong force behind thereflation of assets in the em space.in the sections to follow, we share our observations from individual policymakers,academics, and financial institutions across em countries that were present at our forum.emerging marketscross-asset strate

10、gy15 october 2012what we learned at the imf-wb meetingstakeaways from policymakers andacademics presentationscolombiaready to step up the fight against currencyappreciationcolombia has now become the third largestlatin american economy by gdp size.sustained growth and a resilience to economiccycles

11、helped colombia surpass argentina,according to the data presented to investors bythe public credit director maria fernandasuarez. yet there is more work to do, asunemployment rates have not fallen sufficientlyyet and labor informality remains high. thesavings rate has increased to around 25% ofgdp,

12、of which 20ppt is private. on theinvestment side, new road concessions will belaunched between 2013 and 2014 andinfrastructure investment will be raised to 1.2%of gdp in 2014.fiscal consolidation continues on the back ofreforms. while the consolidated deficit wasaround 3.3% of gdp in 2010, it has be

13、en reducedto 1.2% now, and is planned to move toward asurplus by 2016. the government hasimplemented important reforms, including thefiscal rule that obliges the country to saverevenues that has come above expectations, andhas established a structural deficit target for thecentral government of 2.3%

14、 of gdp for 2014,trending towards 1% by 2022. also, oil royaltiesare now more fairly shared among states, and astabilization fund was established to prevent costoverruns at the state level, which is saved abroadand managed by the central bank. lastly, aconstitutional reform was passed to enforce int

15、er-temporal fiscal sustainability on theconstitutional courts ruling affecting spending.net debt of the non-financial public sector isexpected to drop from 25% in 2012 to below10% by 2020, and that of the centralgovernment from 34% to 27%, respectively.the debt composition is improving toward locald

16、ebt, and only 5% of the investor base is foreign.a significant drop in the local borrowing costwill provide important fiscal space in the future.the government also informed that the 2012financing plan is almost covered. a tax reform ison the making, which will reduce payroll taxesand replace them w

17、ith an increased income taxfor high net worth individuals.investors questioned whether thegovernment was concerned with theappreciation of the colombian peso (cop),and the response given shows this is clearlythe case. the government believes the centralbank has room to increase the level of reserves

18、,by an additional 2-4% of gdp. also, the fiscalreform might include means for the governmentto discourage investors from coming to the localmarkets by allowing for a capital gains tax onthe net debt proceeds received by investors,which can be changed between a 12.5 and 25%levels on discretion and de

19、pending on flows.special presentation by s&prating agencyrecent negative rating actions based on politicsand growththe s&p representatives discussed the recentrating actions and the outlook for furtherconvergence between emerging anddeveloped markets. the representatives firstindicated the c

20、riteria for ratings are independentof whether the countries are in one or anothergroup. s&p perceives the crisis in the eurozoneto be a typical balance of payment rather than afiscal crisis (although it acknowledges that oneled to the other). yet, the ability and willingnessabcto deal with probl

21、ems are constrained by the2emerging marketscross-asset strategy15 october 2012political arrangements ruling in the eurozone.this remains a driver of rating actions, e.g. ageneralized ratings downgrade occurs when theagency realizes that decision mechanisms ineurope where not up to the task.s&p t

22、hinks some good things have happenedin europe, including a resolution to break thelink between banks and sovereigns using theeuropean stability mechanism (esm), yetthe decision by germany, finland, and thenetherlands that such mechanism was notapplicable to legacy assets has seriouslyundermined its

23、effectiveness. also, europeancentral banks (ecb) launch of the outrightmonetary transactions (omt) has been animportant step, yet if, when and how it will befinally implemented remains a crucial and openquestion. when commenting on the recentdowngrade of spain, s&p said that is was ledby the pac

24、e of the ongoing recession plus theintention of some regions to get special deals.south africa was also a matter of discussion,following a recent downgrade just before ourforum. s&p believes the policy environment hasbecome more complicated, including unionslosing grip on the striking groups, wh

25、ich makesnegotiations more difficult. also, the rulingafrican national congress (anc) party has seenmore fragmentation, which could lead to morepublic spending. quite important is theannouncement of the medium term fiscalframework. still at negative outlook, a change tostable may require containment

26、 of spendingpressures, and would depend on the finaloutcome of the ancs elective conference indecember, including its presidential nomination.s&p was also asked about indias negativeoutlook. at bbb-, indias rating is unusual for acountry with such low level of gdp capita andwhich supports the su

27、stainability of the debtburden. given the recent deterioration in growthexpectations, s&p sees chances of a downgrade.should the pace of growth deteriorate, furthermajor fiscal adjustment would be needed. therecently announced reforms are good politicalsignals that the government wants to get a

28、grip onpublic finances, yet implementation risks remain.investors were also interested in s&ps opinionon the (potential) new comers to the asset class,like paraguay, zambia, and bolivia.mexicodownplaying the role of monetary policycentral bank governor agustin carstensbelieves that the aspects a

29、ffecting thedeveloped markets have not been affectingmexico as much as in some other places. forexample, the potential impact of europeanbanking weakness has been reduced byimposing limits to the ability of localsubsidiaries to finance or purchase assets fromtheir headquarters. these subsidiaries ha

30、ve astrong local capital and domestic funding base.carstens reckons mexicos gdp growthgoing forward will depend on the design andimplementation of structural reforms.investment and consumption have beensupported by a very active credit market,increasing around 20-30% y-o-y for households,and somewha

31、t slower for firms and small andmedium enterprises. still, the financial system isin a position to continue to support growth,which is so far well balanced between internaland external sources. a labor reform, that willprovide more flexibility to the labor market,particularly on hiring, has already

32、gone throughthe lower house, and is now at the senate, andit will provide more flexibility to the labormarket, particularly on hiring.abchigh debt-to-gdp ratio. however, the creditrating was backed by rapid economic growth,3emerging marketscross-asset strategy15 october 2012inflationary risks were o

33、n the upside, butpressures may have peaked. price pressures inmany goods are due to temporary factors, thusdo not require a change in the monetary policystance, as long as they do not affect inflationexpectations. nevertheless, bank of mexico(banxico) removed its easing bias in the lastmeeting. goin

34、g forward, carstens believes itshould start to see a deceleration in inflation,and highlighted the fact that core inflationremains well behaved and should converge to3.0% by the end of next year. carstens sees thecentral scenario is for the economy to movetowards higher rates of potential growth, wh

35、ichwould allowed for aggregate demand to expandfaster without putting pressure on inflation.he was comforted by the fact that thecurrency moves were very smooth during thepolitical transition and believes president-elect pena nieto will continue to support themacroeconomic institutions that have bee

36、nbuilt over the past years, including anindependent central bank. the mexican peso(mxn) continues to be an importanttransmission channel of events like the eurozonecrisis and qe3, so it is not surprising to haveseen an appreciation lately. yet, the incomeeffect is more important than that of the fx,

37、thus justifying little need to intervene againstmxn appreciation.carstens described himself as a believer inrules rather than discretion, and suggestedtoo much emphasis has been put around theworld to use monetary policy to beat thecycle. he believes the imf is falling into thattrap, and argues that

38、 structural factors likedeleveraging are more important, thus the a fullrecovery in europe and in the u.s. will take along time given that balance sheet repair isslow. he added that tinkering in the margins isnot a good idea, rather more effort should be puton structural reforms.4braziljustifying th

39、e recent cutscentral bank governor alexandre tombinihighlighted how the existing macroframework served the country very well,allowing brazil to grow for a decade and ahalf with a high degree of social inclusion.the size of the middle class has risen and hasled to an expansion of the domestic market.

40、this framework has been tested over the lastfive years by the financial crisis, and brazil hasshown a quick recovery post crisis. yet hebelieves it has taken the authorities a little bittoo long to remove the stimulus put forward asa response.following the election of the president dilmarousseff and

41、 with economic activity running at a7.5% pace, the central bank identified areas of thedomestic market where excessive risks were takene.g. housing, car financing, and thus started toimplement macroprudential policies to cool downthe economy.a renewed monetary tightening cycle startedin january 2011

42、 but it overlapped with thedeterioration of the global economy. thisrequired the central bank to change its stance andcut rates by 525bp since the summer of last year.still, the recovery has been slower than expected,in particular due to the deterioration of theconfidence channel. growth is now gain

43、ingmomentum, and brazil could grow at a 4.0% rategoing into 2013, governor tombini believes.the total wage bill has grown 6.0% in last 12months, and industrial production is finallyshowing some signs of growth. the agriculturalsector has hurt headline gdp growth following amajor drought in the south

44、 of brazil, e.g. insoybeans production. the service sector hasgrown faster then the rest of the economy, now itis a little slower but still outperforming.abcemerging marketscross-asset strategy15 october 2012on inflation, tombini indicated that the path ofconvergence towards the target had to beadju

45、sted forward, and that the pass-throughfrom the currency has decreased over time.importantly, wage adjustments next year shoulddrop to around 8.0% from 14.0% this year. hebelieves more supply side measures to reduceproduction costs are necessary.when asked about the effectiveness of themeasures put

46、forward by the central bank tofight inflation, he said that those affecting thecredit channel have been increasingly moreimportant. he highlighted how the elasticity ofthe term structure of interest rates to changes in thepolicy rate selic has been improving.hungarynbh emphasizes the painful externa

47、l re-balancingnational bank of hungary (nbh) governorandras simor spoke about the build up of debtin hungary and optimistic expectations aboutthe economic outlook before the global crisis.however, since the crisis, hungary has been goingthrough a severe adjustment on the external front.both the hous

48、ehold and the corporate sectors havebecome net savers, while the current accountposition has swung from a very large deficit ofabove 7.0% of gdp to a respectable 3.0%-4.0% ofgdp surplus position since the crisis, therebysignificantly reducing the countrys next externaldebt from c40.0% of gdp from ar

49、ound 55.0%.this adjustment process has a huge costattached to it. retail sales have practically notgrown in hungary since late 2006, in real annualterms. private sector confidence also remainsweak. the only driver of meagre economicactivity has been net exports. there, hungary hasbeen doing relative

50、ly well according to thegovernor and the country has managed to gainnot broad-based but rather confined in a fewsectors, notably in the automotive industry.one interesting area was poor domestic creditoutlook contraction- in hungary. hungarianbanks argue lack of demand and businessprojects, while nb

51、hs loan officer survey arguesthat banks themselves are tightening the lendingstandards. this is not because lack of forint(huf) liquidity but rather fx funding (asforeign shareholders tend to cut back oninternational funding, read: deleveraging) aswell as risk aversion by the banks.on the fiscal pol

52、icy, nbh reckons a budgetdeficit below 3.0% is attainable, however thereal question is whether the fiscal adjustment issupporting or choking growth. with regards tothe recently announced fiscal measures, nbh issceptical and sees the governments forecastsrather on the optimistic side. it expects the

53、highervat collection in 2013 to be around half of theoriginal plan, at around 0.3%-0.5% of gdp. themain reason is the difficulty and time needed toconnect all the tills in hungarian shops to therevenue agency. even though the idea by itself iscommendable, the proceeds expected from thisstep in 2013

54、could prove lower. similarly, the neteffect on savings from teachers pay could also behalf of what is expected in the plan.on monetary policy nbh sees significantchallenges. on the one hand, the negativecyclical position and improving (global) riskappetite argue for lower interest rates, whileabove-

55、target inflation necessitates the opposite.governor simor says inflation constantly overthe target becomes sticky as residents get used toit and demand also above-target wage increases.governor simor also stressed the divide withinthe monetary council on the assessment ofhungarys output gap.abcsome

56、market share, although this improvement in51emerging marketscross-asset strategy15 october 2012finally, as per the much-awaited imf agreement,the biggest challenge is to resume growth and anagreement with the imf would clearly help. thestructural problems in the budget are where animf program should

57、 matter, not the individualfiscal numbers. for instance, “tax stability” isrequired, especially for banks, which are still riskaverse. although, the differences relating to imfnegotiations could not be easy to iron out.polandslower but still soundthe deputy director of the public debtdepartment from

58、 the ministry of finance, ms.anna suszynska stressed polandsoutperformance in growth during and sincethe global crisis among the oecd countries.indeed poland was the only country in theeuropean union to avoid outright contraction in2009 (1.6% growth). accordingly, polisheconomic growth, whilst slowi

59、ng sharply from4.3% in 2011, still remains one of the fastest inthe eu with 2.4% in 2q12. the main pillarsbehind continued growth are a “large andincreasingly productive domestic economy,competitive exports supported by the flexibleexchange rate regime and the robust bankingsystem”, according to the

60、 ministry of finance.also, ratio of public investments to gdp hasrisen in poland from 4.2% in 2007 to 5.8% in2011, in a stark contrast with many eu countries.on the employment side, deputy directorsuszynska says the rise since 2009 is largely aresult of higher participation rate, amongstthe older population, reflecting the restrictionsto