emergers: exchange rate vs us$ source : oxford … · 2013-11-14 · source : oxford...

Emerging Markets

Weekly Economic

Briefing

India’s growth outlook at risk from capital outflows

Underlying weaknesses in many emerging markets were highlighted in May when the US

Federal Reserve hinted at scaling back its quantitative easing programme. The Indian and

Brazilian currencies depreciated particularly sharply, and foreign capital flowed out. While

most emerging economies were affected to some extent, India was hit hard and is still

vulnerable to external shocks. A simulation run on the Oxford Economics’ Global

Economic Model suggests that another, substantial, negative confidence shock in India

would have a significant adverse impact on the economy. Even though net trade would

benefit from the resulting currency depreciation, overall GDP growth would slow to just

3.2% in 2014, with the level of GDP remaining more than 1% below the baseline even in

2016.

Investors reassess emerging market potential as era of cheap money draws to an end

In common with many other emerging markets, India has enjoyed rapid economic expansion over

much of the last decade. Its GDP grew by 8.7% a year on average between 2005 and 2010,

supported partly by strong capital inflows. Foreign investment inflows more than trebled from

around US$20bn in 2005 to over US$60bn by 2010. This was accompanied by an increase in

share prices of almost 150%. Other emerging markets experienced similar surges. But these

strong trends masked a number of underlying economic weaknesses, not least the growing

current account deficits. This became apparent when the US Federal Reserve hinted at the

possibility of scaling back its quantitative easing (QE) programme in May this year. Investors

scrambled to switch out of risky emerging market assets (where this was possible) to safer US

ones. Most emerging markets were affected, some more noticeably than others. India and Brazil

saw their exchange rates depreciate by 20-25% against the US dollar between May and August,

and the Turkish lira fell 12%.

1 November 2013

65

70

75

80

85

90

95

100

105

110

Jan11 May11 Sep11 Jan12 May12 Sep12 Jan13 May13 Sep13

Emergers: Exchange rate vs US$Index (Jan 3, 2011 = 100)

Source : Oxford Economics/Haver Analytics

India

Brazil

Turkey

Fed

meeting

60

70

80

90

100

110

120

130

140

150


Emergers: Share pricesIndex (Jan 3, 2011 = 100)


India

Brazil

Turkey

Fed

meeting

1 November 2013

Emerging Markets Weekly Economic Briefing

The Indian currency fell to a historic low, and growing risk aversion was also reflected in a jump

in the three-month interbank rate of more than 300 basis points (bp) to nearly 11.6% in August.

India saw net capital outflows of US$10bn between June and August, versus net inflows of

US$15bn in the previous three months, representing a swing of US$25bn or 1.4% of GDP.

India is still vulnerable to external shocks…

While financial markets have stabilised somewhat over the past month or so, India is still not out

of the woods. It has a gaping current account deficit of around 5% of GDP, and annual GDP

growth has halved to around 4.5% compared with the period before the global financial crisis.

The economy remains vulnerable to capital outflows and therefore to events such as the start of

QE tapering or an increase in commodity prices. Even domestic factors such as weaker growth

than expected in Q3 could trigger another bout of capital outflows, which would have negative

knock-on effects for the rest of the economy.

We have used our Global Economic Model to quantify the effect of capital outflows on the Indian

economy resulting from a substantial negative confidence shock. To calibrate the scale of the

shock, we looked at previous episodes of capital outflows in various countries. We first

considered the impact of capital outflows in India, Brazil and Turkey after the Fed announced in

May that QE would be scaled back (without saying when the tapering would start). In all three

countries, there was an initial significant depreciation in the exchange rate and fall in share

prices. The Brazilian and Indian central banks both began to tighten monetary policy, despite

slowing growth, to contain inflationary pressures which were exacerbated by the currency

depreciation. We used this experience as a mild version of the scale of the shock that we wanted

to calibrate.

We also drew on the experience of the Thai economy following capital outflows during the Asian

currency crisis in 1997-98. Foreign investment in Thailand fell by around 70% between1997 and

2000, accompanied by a fall of around 45% in share prices. The exchange rate, which had

previously been pegged to the US$, depreciated by around 70%, and the central bank increased

the policy interest rate from 8% to 17%. Given that India has a floating exchange rate and has

7

8

9

10

11

12


India: 3-month interbank rate%


Fed

meeting

-8

-6

-4

-2

0

2

4

2000 2002 2004 2006 2008 2010 2012

India: Current account balance % of GDP


1 November 2013


built up some foreign reserves, we concluded that the scale of the shock in India would be less

severe.

Taking the middle ground between these two episodes, we simulated a confidence shock in India

at the beginning of 2014. Given the country’s underlying economic weaknesses, we assumed

that confidence would not return to pre-shock levels until mid-2017. The effects would be most

negative in the first quarter, reflecting the tendency of financial markets to react particularly

strongly at first, before gradually becoming less negative over subsequent quarters.

The fall in confidence causes investors to withdraw assets from India. Our scenario suggests that

foreign investment falls by 20%, accompanied by a similar decline in share prices. A sell-off in

financial markets causes the currency to depreciate by 15% against the US$. This raises the

price of imported goods such as oil and other commodities, pushing CPI inflation above 11%

(compared to 7-8% in our baseline forecast). To curb inflation, the central bank raises the policy

rate by up to 300bp above the baseline. The combination of higher interest rates, high inflation

and a fall in confidence causes both households and businesses to scale back spending.

40

45

50

55

60

65

70

75

80

2010 2011 2012 2013 2014 2015 2016

India: Exchange rateINR/US$


Baseline

Scenario

0

2

4

6

8

10

12

14

16

18

2010 2011 2012 2013 2014 2015 2016

India: Consumer price index

% year


Baseline

Scenario

60

80

100

120

140

160

180

200

2010 2011 2012 2013 2014 2015 2016

India: Share prices

2010=100


Scenario

Baseline

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

2010 2011 2012 2013 2014 2015 2016

India: 10-year government bond yield

%


Baseline

Scenario

1 November 2013


Consumer spending falls by 3% relative to the baseline, while investment falls by more than 6%.

Although the weaker currency leads to a decline in imports and increase in exports, this is not

enough to prevent a fall in overall GDP relative to the baseline. Growth slows to 3.2% in 2014

(from our baseline forecast of 4.5%) and GDP remains around 1% below the baseline even by

the end of 2016.

…highlighting the urgent need for timely reform

This scenario highlights India’s vulnerability to a high inflation/low growth spiral and the need for

effective policy action to avoid it. We do not think that short-term reforms will be enough to secure

completely India’s economic environment, but there is scope to minimise the negative impact of a

confidence shock in the near future.

The new central bank governor has already taken some encouraging steps in this regard. He has

introduced measures to encourage the repatriation of funds by non-resident Indians. He also

raised the repo rate by 50bp over the past two months while lowering the Marginal Standing

Facility (MSF) rate by 150bp, with the aim of curbing inflation as well as bringing the monetary

policy stance back to “normal”, after the extraordinary measures taken in July.

While these measures are a step in the right direction, they need to be supplemented by

government action to reduce food and fuel subsidies, to develop infrastructure, improve the

business environment and make India more attractive for foreign investors. We do not expect any

significant progress in this direction in the coming months, especially in light of the upcoming

general elections in May 2014, ahead of which the government is eager to steer clear of

unpalatable economic reforms.

3

4

5

6

7

8

9

10

11

2010 2011 2012 2013 2014 2015 2016

India: Central bank policy rate

%


Baseline

Scenario

0

2

4

6

8

10

12

2010 2011 2012 2013 2014 2015 2016

India: GDP

% year


Baseline

Scenario

1 November 2013


Latest data

Recent Data Releases

Previous month

Latest Comment

China – Official Manufacturing PMI (Oct)

– HSBC Manufacturing PMI (Oct)

51.1

50.2

51.4

50.9

The official PMI rose to its highest level since March 2012. New export orders have now risen for three successive months, prompting manufacturers to increase output.

Brazil – Manufacturing PMI (Oct)

49.9

50.2

The PMI expanded for the first time in four months but export orders are still down, falling at the fastest pace since July.

India – HSBC Manufacturing PMI

(Oct)

49.6 49.6 The manufacturing sector remains very weak, with no immediate prospect of relief in sight.

Korea – Exports (Oct)

– Imports (Oct)

– Trade balance (12m total)

– Industrial Output (Sep)

– Wholesale & Retail Trade (Sep)


-1.5% y/y

-3.6% y/y

$41.0bn (Sep)

1.6% m/m

3.6% y/y

0.5% y/y

49.7

7.3% y/y

5.1% y/y

$42.2bn (Oct)

-2.1% m/m

0.2% y/y

-1.9% y/y

50.2

The export recovery in Korea remains patchy, but imports rose again in October (they had declined for six consecutive quarters until Q3). This suggests that domestic demand may be starting to build momentum. Wholesale and retail trade volumes fell by 0.7% y/y in Q3 though, so the recovery is still fragile. The manufacturing PMI expanded for the first month in five on stronger export orders.

Mexico – Exports (Sep)

– Imports (Sep)


5.9% y/y

4.0% y/y

-$5.4bn (Aug)

4.3% y/y

2.7% y/y

-$4.9bn (Sep)

Export growth accelerated from 1.8% y/y in Q2 to 4.5% y/y in Q3 on stronger demand from the US, particularly for cars.

Russia – Manufacturing PMI (Oct) 49.4 51.8 New orders rose at the fastest pace for eight months, but export orders continued to fall.

Turkey – Exports (Sep) (s.adj)


- Business Confidence (Oct)

- Capacity Utilisation (Oct)

0.2% m/m

-8.6% y/y

-$95.3bn

108.6

75.0

2.7% m/m

1.3% y/y

-$95.1bn

111.9

75.8

The central bank business confidence measure and the HSBC PMI continued to improve. Exports picked up in Q3 but imports fell by 7.4% q/q, the biggest drop since Q1 2009. A continuation of this trend would help rein in the trade deficit.

South Africa - Exports (Sep)

- Trade balance (12m total, Sep)

-5.5% y/y

-$17.0bn

-2.7% y/y

-$17.2bn

Exports remain very weak but higher commodity prices boosted mineral exports.

Taiwan – GDP (Q3) (s.adj)


0.6% q/q

2.4% y/y

52.0

0.1% q/q

1.8% y/y

53.0

Investment fell sharply in Q3 and export volumes remained modest, cancelling out the improvement in private spending. The PMI rose at the fastest pace since March 2012.

Thailand – Industrial Output (Sep)

(s.adj)

Private Spending (Sep, s.adj)

Private Investment (Sep, s.adj)

1.3% m/m

-1.9% y/y

0.7% y/y

-3.4% y/y

-2.6% m/m

-3.4% y/y

-6.1% y/y

-3.3% y/y

Industrial output fell for a fifth successive quarter in Q3, reflecting subdued export demand and the temporary impact of flooding. Private spending and investment remain weak.

Singapore – Industrial Output ex

biomed (Sep, s.adj)

-0.9% m/m

5.3% y/y

5.7% m/m

12.0% y/y

Electronics output grew by 9.7% y/y in Q3, the fastest pace since Q1 2011.

1 November 2013


Events

Monetary policy meetings in past week

Key rate (now) Outcome Comment

Oct 25th – Mexico 3.5% (Target rate) Down 25bp The central bank cut the interest rate unexpectedly

for the third time this year to boost economic activity. But the bank acknowledged that there were signs that growth was beginning to improve, adding that ‘additional cuts to the reference interest rate target would not be advisable in the foreseeable future’.

Oct 29th – India 7.75% (Repo rate) Up 25bp As expected, the Reserve bank increased the repo

rate for a second successive month. The increase will be partly offset by a 150bp decline in the MSF rate over the last two months and a fall in the interbank rate since early September. Nevertheless the structure of interest rates is now significantly higher than in early July. The policy dilemma between tackling inflation and currency volatility on the one hand, and stimulating growth on the other, is difficult to balance.

Oct 29th – Hungary 3.4% (Base rate) Down 20bp The National Bank of Hungary cut the interest rate

for the 14th time since August 2012, bringing it down from 7% to a record low of 3.4%. We expect interest rates to be cut to 3.25% this year with risks skewed to further easing, provided investor sentiment remains favourable.

For more information contact Clare Howarth ([email protected]) or Sarah Fowler ([email protected])

mailto:[email protected]

mailto:[email protected]

1 November 2013


Asia

10

15

20

25

30

35

40

45

50

55

2000 2002 2004 2006 2008 2010 2012

US$bn (seasonally adjusted)

Source: Korea Customs Service / Oxford Economics

Korea: Exports

-20

-15

-10

-5

0

5

10

15

20

1997 1999 2001 2003 2005 2007 2009 2011 2013

% year

Korea

(Wholesale/Retail)

Source: Haver Analytics

Emerging Asia: Retail sales & consumption

Volumes (3 month

moving average)

China

Thailand

35

40

45

50

55

60

2005 2006 2007 2008 2009 2010 2011 2012 2013

50 = expansion / contraction line

Source: China Federation of Logistics and Purchasing / Markit

China: Manufacturing PMI

Official PMI

HSBC PMI

60

70

80

90

100

110

120

130

140

150

160

2000 2002 2004 2006 2008 2010 2012

2005=100 (seasonally adjusted)

Taiwan

Source: Haver Analytics / Oxford Economics

Korea, Taiwan & Thailand: Industrial output

Thailand

Korea

-30

-20

-10

0

10

20

30

40

2001 2003 2005 2007 2009 2011 2013

% year (3 month average)

Thailand


Emerging Asia: Monthly investment indicators

Korea

0

3

6

9

12

15

18

21

24

27

30

2000 2002 2004 2006 2008 2010 2012



Emerging Asia: Exports by destination

China & HK

US

Leading EU

Japan

Exports of Korea, Thailand

and Taiwan

1 November 2013


Asia

65

70

75

80

85

90

95

100

105

110

Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13

Index (Dec 30, 2010 = 100)

China


Emergers: Exchange rates v US$

India

Indonesia

Korea

appreciation

-45

-30

-15

0

15

30

45

60

75

1996 1998 2000 2002 2004 2006 2008 2010 2012


Source: Biro Pusat Statistik

Indonesia: Exports & imports (US$)

Imports

Exports

0

2

4

6

8

10

12

14

16

18

20

2001 2003 2005 2007 2009 2011 2013

%

Policy interest rate

Source: Bank Indonesia

Indonesia: Interest rates & CPI inflation

CPI inflation

-2

0

2

4

6

8

10

12

14

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

% year

Repo rate

Source: Oxford Economics

India: Interest rates and wholesale prices

Mumbai 3-month

offered rate

Wholesale prices

(WPI) inflation

40

45

50

55

60

65

2005 2006 2007 2008 2009 2010 2011 2012 2013

50 = expansion/contraction breakeven point

Source: Markit

India: HSBC Manufacturing PMI

-10

-5

0

5

10

15

20

25

2006 2007 2008 2009 2010 2011 2012 2013


Source: Oxford Economics

India: Manufacturing & electricity output

Manufacturing

Electricity

1 November 2013


Latin America

-20

-10

0

10

20

30

40

50

60

70

80

90

2001 2003 2005 2007 2009 2011 2013

US$ bn


Brazil: Investment inflows & current account

12 month total

FDI inflows

Portfolio inflowsCurrent account

deficit

-40

-30

-20

-10

0

10

20

30

40

50

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

% year

Exports

Imports


Mexico: Exports & imports

3 month moving average (US$)

-20

-15

-10

-5

0

5

10

15

20

1997 1999 2001 2003 2005 2007 2009 2011 2013

% year (3 month moving average)


Argentina: GDP proxy & industrial output

GDP proxy

Industrial output

-10

-5

0

5

10

15

20

25

30

35

40

2000 2002 2004 2006 2008 2010 2012

% year


Brazil: Bank lending

Industry & commerce sectors

Total private

sector

0

4

8

12

16

20

24

28

2000 2002 2004 2006 2008 2010 2012

%

Chile


Latin America: Short-term interest rates

Mexico

Brazil

Colombia

65

70

75

80

85

90

95

100

105

110


Index (Dec 30,2010 = 100)

Chile


Emergers: Exchange rates v US$

Brazil

depreciation

ArgentinaMexico

1 November 2013


Emerging Europe

-40

-30

-20

-10

0

10

20

30

1998 2000 2002 2004 2006 2008 2010 2012

% balance


Central & East. Europe: Industrial confidence

Poland

Czech

Hungary

-20

-10

0

10

20

30

40

50

60

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

% year

Russia


Central & Eastern Europe: Bank lending

Poland

Czech

Hungary

40

50

60

70

80

90

100

110

120

130

140

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

2010=100 (seasonally adjusted)

Slovak


Central Europe: Merchandise exports in EUR

Czech

Hungary

-70

-60

-50

-40

-30

-20

-10

0

10

1998 2000 2002 2004 2006 2008 2010 2012

% balance


Central & East. Europe: Consumer confidence

Poland

Czech

Hungary

0

4

8

12

16

20

2000 2002 2004 2006 2008 2010 2012

%

Czech


Central & Eastern Europe: Interest rates

Poland

Hungary

Romania

-2

0

2

4

6

8

10

12

14

16

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

% year

Poland


Central & Eastern Europe: Consumer prices

Czech

Russia

Hungary

1 November 2013


Rest of the world & financial developments

4

6

8

10

12

14

16

18

20

22

24

2005 2006 2007 2008 2009 2010 2011 2012 2013


Exports


Turkey: Merchandise trade

Imports

30

35

40

45

50

55

60

65

2000 2002 2004 2006 2008 2010 2012

50 = expansion / contraction line


South Africa: PMI

60

63

66

69

72

75

78

81

84

2007 2008 2009 2010 2011 2012 2013

% (seasonally adjusted)


Turkey: Manufacturing capacity utilisation

60

65

70

75

80

85

90

95

100

105


Index (Dec 30, 2010 = 100)


Emergers: Exchange rates

Turkey (v Euro)

depreciation

S. Africa (v US$)

3

4

5

6

7

8

9

10

11

12

13


%

Poland


Emergers: 10 year government bond yields

Brazil

South Africa

Turkey

20

40

60

80

100

120

140

160

180

200

2000 2002 2004 2006 2008 2010 2012

2007=100 (rebased)


World: Commodity prices

Oil

CRB

foodstuffs

CRB raw

industrial

materials

Copper

1 November 2013


China Brazil Korea India Mexico Russia Turkey Taiwan Poland

2012

Sep 9.2 -0.6 -1.8 -0.7 2.9 2.0 3.6 5.2 -1.6

Oct 9.6 1.2 -0.7 8.4 1.0 1.8 1.0 2.4 0.7

Nov 10.1 -0.9 2.2 -1.0 2.5 1.9 3.9 5.8 -1.7

Dec 10.3 -1.6 4.1 -0.6 0.2 1.4 -1.2 4.3 -4.5

2013

Jan 9.9 3.3 0.6 2.5 -0.4 -0.8 2.1 1.4 -2.3

Feb 9.9 -0.6 -1.6 0.6 0.3 -2.1 3.9 5.3 -2.3

Mar 8.9 1.4 -1.4 3.5 0.3 2.6 1.2 -1.7 0.8

Apr 9.3 3.7 -1.4 1.5 -1.6 2.3 3.1 -1.8 -0.4

May 9.2 2.0 -2.8 -2.5 -1.3 -1.4 0.5 -1.0 -0.9

Jun 8.9 4.2 -1.0 -1.8 -1.6 0.1 4.0 1.5 4.6

Jul 9.7 0.7 -0.5 2.8 -1.3 -0.7 4.4 0.6 2.7

Aug 10.4 -0.7 3.6 0.6 -0.4 0.1 0.5 0.3 2.7

Sep 10.2 - 0.2 - - 0.3 - 0.1 5.0

Industrial Production

Percentage changes on a year earlier unless otherwise stated


2012

Oct 1.7 5.4 2.1 9.8 4.6 6.5 7.8 2.3 3.4

Nov 2.0 5.5 1.6 9.9 4.2 6.5 6.4 1.6 2.8

Dec 2.5 5.8 1.4 10.6 3.6 6.6 6.2 1.6 2.4

2013

Jan 2.0 6.2 1.5 10.8 3.3 7.1 7.3 1.1 1.7

Feb 3.2 6.3 1.4 10.9 3.6 7.3 7.0 3.0 1.3

Mar 2.1 6.6 1.3 10.4 4.3 7.0 7.3 1.4 1.0

Apr 2.4 6.5 1.2 9.4 4.6 7.2 6.1 1.0 0.8

May 2.1 6.5 1.0 9.3 4.6 7.4 6.5 0.7 0.5

Jun 2.7 6.7 1.0 9.9 4.1 6.9 8.3 0.6 0.2

Jul 2.7 6.3 1.4 9.6 3.5 6.5 8.9 0.0 1.1

Aug 2.6 6.1 1.3 9.5 3.5 6.5 8.2 -0.8 1.1

Sep 3.1 5.9 0.8 9.8 3.4 6.1 7.9 0.8 1.0

Oct - - 0.7 - - - - - -

Consumer prices


1 November 2013



2012

Oct 11.6 -1.7 1.0 1.7 5.2 2.9 19.8 -1.9 12.7

Nov 2.9 -6.0 3.9 -0.1 5.3 -2.5 13.2 0.8 5.2

Dec 14.0 -10.8 -6.0 0.6 4.2 -4.0 4.9 8.9 -1.7

2013

Jan 25.0 -1.1 10.9 1.2 -0.7 -1.6 7.4 21.6 9.4

Feb 21.7 -13.8 -8.6 2.3 -0.9 -6.9 7.8 -15.8 5.4

Mar 10.0 -7.6 0.0 5.9 1.7 -4.8 2.3 3.2 -2.9

Apr 14.7 5.4 0.2 1.9 -0.7 -1.0 -3.5 -1.9 9.9

May 1.0 -6.0 3.1 -0.7 1.7 -9.8 0.7 0.7 1.8

Jun -3.1 9.2 -1.0 -4.9 4.4 2.6 -3.4 8.7 10.7

Jul 5.1 -0.9 2.6 10.4 3.4 5.5 -1.5 1.6 12.3

Aug 7.2 -4.3 7.7 13.2 5.9 2.3 -8.6 3.6 9.7

Sep -0.3 5.0 -1.5 11.2 4.3 - 1.3 -7.0 -

Oct - - 7.3 - - - - - -

Exports (US dollars)



2012

Oct 2.3 1.7 1.6 8.5 6.5 12.0 -2.1 -1.8 4.0

Nov 0.0 -2.5 0.9 5.7 8.7 2.8 1.0 0.1 0.8

Dec 6.1 -4.5 -5.3 8.3 2.3 6.3 0.4 1.5 -1.4

2013

Jan 29.0 14.7 4.0 6.3 6.6 13.2 8.4 22.2 4.0

Feb -15.2 3.1 -10.4 2.8 2.7 7.5 14.5 -8.5 -5.2

Mar 14.0 1.4 -2.3 -3.4 4.8 1.2 3.2 0.2 -3.1

Apr 16.8 15.7 -0.5 10.2 0.3 12.9 15.3 -8.2 0.6

May -0.3 4.0 -4.6 6.0 4.2 -6.2 7.3 -8.0 -4.7

Jun -0.7 1.5 -3.0 -0.8 5.3 5.0 5.9 6.8 3.0

Jul 10.9 25.2 3.2 -6.4 5.8 1.5 7.1 -7.7 7.5

Aug 7.1 5.4 1.0 -1.6 4.0 -5.3 0.7 -1.2 6.7

Sep 7.4 8.0 -3.6 -18.1 2.7 - -0.2 -0.7 -

Oct - - 5.1 - - - - - -

Imports (US dollars)


emergers: exchange rate vs us$ source : oxford … · 2013-11-14 · source : oxford...

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