EPSTEIN
page 4 / 469 . OCR, unverified
term risk of deflation, debt, and trade dependency, and the medium-term
risk of aging and lower potential growth. Aggressive demand generating
policy in the immediate future and well thought-out structural policies to
address aging and competitiveness are needed. The previously successful
model of growing fast as a global beta is unlikely to be replicable for most
Asian economies. The key is to recognize the challenges mentioned here
and strive for a more domestically (and perhaps regionally) sustainable
growth model
Taimur Baig
Deutsche Bank AG/London
Page 39
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December 2015
World Outlook 2016: Managing with less liquidity
Countries' recent investment performances also allow us to identify the most
challenging macroeconomic outlooks in the region, led again by Brazil and
Argentina, but including also the special case of Chile. In the latter, the
combination of worsening external backdrop and controversial reforms has
badly affected confidence and investment, but this effect should be partly
temporary in nature, as policy uncertainties are expected to fade, and macro
policy is actively helping the recovery in confidence and growth.
The suboptimal investment performance is also a good indicator of the need
for a second round of reforms in the region. Unfortunately Mexico has been
the only country to show a clear determination to push for reforms in a couple
of specific areas, particularly in the energy sector. By contrast, in Argentina,
Brazil, and in particular in Venezuela, there has been an increasing intervention
of some form of state capitalism, with expending governments, increasing
trade protectionism, and economic controls. This appears to explain the
observed characteristics of the recent slowdown in the region, particularly
visible in the industrial sector, and in countries reporting significant increases
in unit labor costs, typical of a middle income malaise.
In this regard, recent presidential elections in Argentina provide room for hope.
The new administration is expected to introduce corrective policies for existing
macro-imbalances, while bringing Argentina back to international markets
after a likely resolution of the pending holdouts case. Similarly, a mid-term
election in Venezuela could bring a more balanced policy making, although the
risk of a power vacuum should not be disregarded. By contrast, ongoing
political instability in Brazil is likely to remain a big burden for fiscal adjustment
and economic performance at least in 2016. A warranted fiscal adjustment has
been announced, and steps are being taken to reestablish much needed policy
credibility, but President Rousseff's conviction and power to support these
policies remain major question marks.
Low external debt is a plus but fiscal dynamics could worsen fast
The last several years of ultra-low global interest rates have been a bonus for
emerging countries and a likely rise in US rates has the potential to create
further turbulence in capital flows. Similarly, the recent decline in commodity
prices might prove too strong a test to external balances in producer countries.
However, low levels of hard currency debt, with Brazil, Chile, Peru, and Mexico
being actually creditors of the world economy, provide an exceptional buffer
this time around. Expectations for slow-motion rate normalization in the US are
another blessing for emerging economies in this cycle.
This notwithstanding, public debt dynamics show that countries like Brazil,
Venezuela, and Colombia might face significant increases in their debt levels if
they fail to reduce their large primary deficits. Furthermore, at current oil prices,
external conditions in Venezuela remain unsustainable, as a low level of
reserves barely covers the projected balance of payment deficit of a single year
under the status quo. Besides, a public debt restructuring appears difficult to
avoid, with the government being harshly constrained politically by a
protracted recession with inflation.
Gustavo Cationero, (1)
Figure 3: Public debt dynamics
turning fragile for some countries
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iFiguie 4: Deutsche Bank forecasts:
yO;,. ufle'; 4'4:5!
z E4 2or.if 2C.I 1 6F Mr;
Argentina GDP
1.0
-0 1
3.9
CPI
386
279
373
23.6
CA bal.. %GDP
-17
-24
-2 3
&fal
GDP
-3.7
-24
CPI
SO
6.2
CA bal.. %GDP
.43
-15
-18
Chile
GOP
2.1
2.2
2.7
CPI
4.4
CA bal., %GOP
-1.2
-0.7
-1.3
.09
Colernb. GDP
3.2
CPI
4.9
6.0
3.5
CA bat, %GDP
-5 2
-6.2
-53
1
Mexico
GOP
2.3
2.3
2.7
3.2
CPI
2.5
3.4
CA bal.. %GOP
-23
-2.5
-27
Peru
GOP
2.8
CPI
3.5
3.8
3.3
CA bal.. %GOP