global finance and growth case uk 2016

Global Finance and Growth

Joeri Schasfoort

University of Groningen

Dirk Bezemer

University of Groningen

and thanks to

Final assignment

and thanks to

Final assignment

Overview

1. The assignment

2. Example: United Kingdom 1. Finance in the domestic economy

2. International financial relations

3. Policy options and conclusions

3. Q&A

4. Break

5. Guest lecture Joram Kok (Pelargos capital)

6. Q&A

Chapter 1 –Finance in the Domestic Economy Chapter 2 – International Financial Relations Chapter 3 - Opportunities and Risks Chapter 4 – Summary and Policy Options

The Assignment An investment company has come to you to help them assess macro-financial risks and opportunities. You are going to write a country report for them. Report Structure:

Groups

Example: United Kingdom

What do you know about the British economy?

Biggest risks and opportunities.

• ?

• ?

• ?

• ?

Example: United Kingdom

Chapter 1 –Finance in the Domestic Economy

Ch1: Finance in the Domestic Economy

and thanks to

Disclaimer: not a full report

Composition of GDP

Source: UN


How is GDP growth financed?

Is it sustainable?


Population boom, inflation, unemployment, government finances.

Source: IMF


Credit to GDP

High

Source: BIS



Household credit expansion

Source: BoE

Housing market boom


Houses

are

expensive:

Source: BIS


Ch3: Risks

• Population growth might slow down (Brexit)

• House prices Can it go up much further?

• Consumer credit boom ….

• High credit to GDP, not much room?

Ch3: Opportunities

• Credit growth seems to have slowed down.

• Government budget can expand.

Ch2: International financial relations

and thanks to

Disclaimer: not a full report

International financial relations

Negative

Current account

Source: IMF


Capital &

Financial accounts

Source: IMF


Smaller gross flows

Source: IMF Source: BIS


Falling pound

Source: BoE

Ch3: Risks

• Persistent current account deficit

• Might worsen because of brexit? direct FX effect – service revenue

• Might improve because of brexit? indirect FX effect

competitiveness of manufacturing industry.

• Relatively modest gross flows


Negative international

investment position

Source: IMF


Foreign Assets & Liabilities

Source: BIS

Ch3: Opportunities & Risks

London is a global banking center:

• Banks have assets and liabilities in FX

• Large global exposure


High

short term

Debt

(Calvo)

Sudden-stop

Ch3: Risks

London is a global banking center:

• Lot of short-term debt


(Rey) Global financial cycle

Source: OECD


(Merhling) Hierarchy of money GBP 3rd used currency

Ch4 Policy options and conclusion

and thanks to

Policy options and conclusions

Biggest risks

• Household credit Consumption driven economy

• House prices

• Large current account deficit

• Large global banking sector global & sudden stop exposure


Biggest opportunities?

The Policy Trilemma

UK


Policy options

• Monetary policy (limited high credit)

• Capital controls (limited global banking system)

• Fiscal policy some headroom

• These were examples of graphs you can make … not a full-fledged assignment

• Also think about tables, correlations, international comparisons…

• Can you use or make the graphs and tables in the course literature for your country?

Thank you for listening… Questions?

Time for a break!

Applying Theory in Practice

January, 2017

Overview

Pelargos > Overview

Agenda

- U.K. case

- Financial markets perspective

- China case

- The impossible Trinity, a practical theory

Goals

Practical use of the course in general and assignment in particular;

Interrelatedness between financial asset prices and economic environment;

Complexity of the real world;

U.K. Case

Pelargos > U.K Case

U.K. Case

Pelargos > U.K Case

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1700 1750 1800 1850 1900 1950 2000

S. Ireland included in NGDP before 1920

per cent of nominal GDP

The Bank of England Balance sheet 1700-2014

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5%

9%

14%

18%

The bank of England Policy Rate

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UK GOVT. BOND 10 YEAR YIELD UK CORP BOND AAA 10Y YIELD

UK CORP BOND BBB 10Y YIELD

China Case: Overview

Pelargos > China Case

• The Three Angles

1. Independent Monetary Policy

2. Free movement of Capital

3. Fixed Exchange Rate

• Conclusion

1. Exchange Rate to be weakened

2. Execution: Currency Option to hedge Financial Market Instability

Three Angles : independent Mon Pol




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Q12016

CH CREDIT TO NONFINL CORPS % GDP CH CDT TO PRIV NONFINL SCT % GDP

CREDIT TO HSDS & NPISHS % GDP (RHS)

80

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1-1

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PPI CPI

Three Angles: independent Mon Pol


Three Angles : Free Movement of Cap.


Three Angles : Fixed Exchange Rate


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CHINESE YUAN TO US $ (WMR) - EXCHANGE RATE CHINESE YUAN TO EURO (WMR) - EXCHANGE RATE

CHINESE YUAN TO 100 JAPANESE YEN - EXCHANGE RATE

Three Angles : Fixed Exchange Rate


0,00%

5,00%

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20,00%

25,00%

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35,00%Q

1 1

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Foreign Exchange Reserves/M2

China IMF Lower Bound

China

Source: Thomson Reuters,

Conclusion


- China ‘needed’ looser monetary policy to deal with slowing growth, high private debt

levels, PPI deflation;

- China wanted more open capital account;

- China had a ‘managed’ exchange rate.

Hence, something had to give, we figured it would be the exchange rate:

- Would increase inflation;

- Would make exporters more competitive, easing pressure on corporate profitability,

improving debt service capabilities, lower non-performing assets of banking sector;

- Would allow China to continue financial market reform (needed for IMF SDR

inclusion);

- Enable Central Bank to keep foreign exchange reserves

Conclusion


Given these assumptions, how to execute?

- Time horizon

- When will China devalue the currency?

- How quick will China devalue? Credible one-off or managed devaluation?

- Scope

- What would be the size of the devaluation?

Thank you for listening… Questions (round 2)?

global finance and growth case uk 2016

Economy & Finance