Policy Space in Emerging Market Economies

POLICY SPACE IN EMERGING MARKET ECONOMIES Pedro del Río Head International Economics Division

GLOBAL INTERDEPENDENCE CENTER: CENTRAL BANKING SERIES SESSION II: FROM THE EYES OF THE CENTRAL BANKS Fundación Rafael del Pino Madrid 3 October 2019

DG ECONOMÍA Y ESTADÍSTICA

GLOBAL ECONOMIC ACTIVITY General economic slowdown in the main advanced and emerging market economies GDP GROWTH. ADVANCED ECONOMIES 3.0

% year on year

GDP GROWTH. EMERGING MARKET ECONOMIES 5.5

% year on year

5.0 2.5

4.5 4.0

2.0

3.5 3.0

1.5

2.5 2.0

1.0

1.5 1.0

0.5

0.5 0.0

0.0

-0.5 OTHER ADV. ECON UNITED KINGDOM UNITED STATES

JAPAN EURO AREA ADV. GDP GROWTH

OTHER EM. ECON. LATINAMERICA CHINA

EMERGING EUROPE EMER. ASIA (EXCL. CHINA) EM. GDP GROWTH

Source: National Statistics.

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EVOLUTION OF GLOBAL TRADE Sharp deterioration in global trade as a consequence of the trade conflict PMI: NEW EXPORT ORDERS

EVOLUTION OF GLOBAL TRADE

3% quarter on quarter, 3 month moving

62

average

2.5

Index

60

2 58

1.5 1

56

0.5

54

0 -0.5

52

-1

50

-1.5

48

CHINA AFRICA EMERGING EUROPE JAPAN EMER ASIA (EXCL. CHINA)

OTHERS LATINAMERICA EURO AREA USA WORLD

46 44 Ja n1 Ap 6 r-1 Ju 6 lO 16 ct -1 Ja 6 n1 Ap 7 r-1 Ju 7 lO 17 ct -1 Ja 7 n1 Ap 8 r-1 Ju 8 lO 18 ct -1 Ja 8 n1 Ap 9 r-1 Ju 9 l-1 9

1/ 1 11 5/ /1 20 5 0 9/ /2 0 15 00 7/ /2 3 15 00 5/ /2 7 15 01 3/ /2 1 1 0 12 5/ 15 /3 20 12 0/ 19 /3 18 12 0/ 99 /3 18 12 0/ 99 /3 18 12 0/ 99 /3 18 12 0/ 99 /3 18 12 0/ 99 /3 18 12 0/ 99 /3 18 12 0/ 99 /3 18 12 0/ 99 /3 18 12 0/ 99 /3 18 0/ 99 18 99

-2

SPAIN WORLD

USA

EURO AREA

JAPAN

CHINA

Source: CPB, IHS Markit.

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IMPACT OF TRADE TENSIONS Impact of trade tensions: through direct (tariffs) and indirect (uncertainty) effects 5.00Index

TRADE UNCERTAINTY INDEX

4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50

TRADE CONFLICT ESCALATION: GDP IMPACT (4Q 2021) % of deviation relative to the baseline scenario

1/ 1/ 7/ 199 1/ 6 1/ 199 1/ 7 7/ 199 1/ 9 1/ 200 1/ 0 7/ 200 1/ 2 1/ 200 1/ 3 7/ 200 1/ 5 1/ 200 1/ 6 7/ 200 1/ 8 1/ 200 1/ 9 7/ 201 1/ 1 1/ 201 1/ 2 7/ 201 1/ 4 1/ 201 1/ 5 7/ 201 1/ 7 20 18

0.00

USA

CHINA

EURO AREA

REST OF THE WORLD

WORLD

IMPOSED/DECLARED TARIFFS UNTIL THE END OF 2019

CERO

Source: Ahir, Bloom y Furceri (2018), Banco de España.

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GDP FORECASTS Continued downward revisions of growth projections for 2019 in most economies ADVANCED ECONOMIES (GDP 2019) 3.0

% year on year

EMERGING MARKET ECONOMIES (GDP 2019) 7.0

% year on year

6.0

2.5

5.0

2.0

4.0 1.5 3.0 1.0

2.0

0.5

1.0

0.0

0.0 UNITED STATES JAPAN

EURO AREA

UNITED KINGDOM

CHINA EME. ASIA (EXCL. CHINA)

LATINAMERICA EASTERN EUROPE

Source: Consensus Economic Forecasts.

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INFLATION RATES Absence of inflationary pressures both in advanced and emerging market economies ADVANCED ECONOMIES: INFLATION 3.5

% year on year

EMERGING ECONOMIES: INFLATION 8.0

3.0

% year on year

7.0 6.0

2.5

5.0 2.0

4.0

1.5

3.0 2.0

1.0

1.0 0.5

1/ 1 11 5/2 /1 00 5 9/ /20 7 15 0 7/ /20 7 15 0 5/ /20 8 15 0 3/ /20 9 15 1 1/ /20 0 1 11 5/2 11 /1 01 5 9/ /20 2 15 1 7/ /20 2 15 1 5/ /20 3 15 1 3/ /20 4 15 1 1/ /20 5 1 11 5/2 16 /1 01 5 9/ /20 7 15 1 7/ /20 7 15 1 /2 8 01 9

0.0 EURO AREA

UNITED STATES

JAPAN

UNITED KINGDOM

1/ 15 1/ /20 15 0 1/ /2 7 15 00 1/ /20 8 15 0 1/ /2 9 15 01 1/ /20 0 15 1 1/ /20 1 15 1 1/ /20 2 15 1 1/ /20 3 15 1 1/ /2 4 15 01 1/ /20 5 15 1 1/ /20 6 15 1 1/ /20 7 15 1 /2 8 01 9

0.0 CHINA

TOTAL (EXCL. CHINA)

LATINAMERICA

EMERGING ASIA(EXCL.CHINA)

EASTERN EUROPE

Source: National statistics and IMF.

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MONETARY POLICIES Central banks all over the world have eased the stance of monetary policies EMERGING MARKETS: INTEREST RATES

ADVANCED ECONOMIES: INTEREST RATES 3

%

18

%

%

30

2.5

16

27

2

14

24

1.5

12

21 18

10

1

15 8

0.5

12

6

0 -0.5

9

4

6

2

3

0

0

-1 USA EURO FUTURO EEUU FUTURO EURO

UNITED KINGDOM JAPAN FUTURO REINO UNIDO FUTURES:24 SEPTEMBER

Fuente: Datastream.

MEXICO TURKEY (RH SCALE)

INDIA

BRAZIL

RUSSIA

Source: Thomson Reuters, Bloomberg.

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FINANCIAL CONDITIONS Loosening of financial conditions except in some specific countries under financial stress

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CAPITAL FLOWS TO EMERGING MARKETS Sensibility of capital flows to exchange rate movements in emerging market economies

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VULNERABILITY TO FX MISMATCHES Exposure to exchange rate depreciation through foreign currency debt or foreign ownership of EME local currency sovereign bonds (“original sin” redux)

Source: BIS 2019 Annual Economic Report, chapter II.

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FISCAL SPACE IN EMERGING MARKETS Worsening public finances limit fiscal space in most emerging market economies

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POLICY SPACE IN CHINA Constraints: Weaker public finances and the need to advance on the deleveraging process CHINA: FISCAL DEFICIT AND PUBLIC % DEBT GDP % GDP

CHINA: TOTAL DEBT BY SECTORS

120

12

100

8

80

4

% of GDP

300

250

200 0

40

-4

20

-8

0

-12

BUDGET BALANCE (OFFICIAL) (RH SCALE) BUDGET BALANCE (IMF) (RH SCALE) PUBLIC DEBT (OFICIAL) PUBLIC DEBT (IMF)

150

100

50

0 31 .0 3 31 .2 .0 00 3 6 31 .2 .0 00 3 7 31 .2 .0 00 3 8 31 .2 .0 00 3 9 31 .2 .0 01 3 0 31 .2 .0 01 3 1 31 .2 .0 01 3 2 31 .2 .0 01 3 3 31 .2 .0 01 3 4 31 .2 .0 01 3 5 31 .2 .0 01 3 6 31 .2 .0 01 3 7 31 .2 .0 01 3. 8 20 19

60

PUBLIC SECTOR

HOUSEHOLDS

FIRMS

TOTAL

Source: IMF, CEIC. DG ECONOMÍA Y ESTADÍSTICA

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EXTERNAL IMBALANCES IN EMERGING MARKETS Large external imbalances limit policy space in emerging market economies

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NEED TO BUILD UP BUFFERS Accumulation of foreign reserves and proliferation of macroprudential policies

Source: BIS 2019 Annual Economic Report, chapter II. Cumulative sum of the average number of measures per country (right).

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THANK YOU FOR YOUR ATTENTION

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