Kicking off the briefing, Fitch’s chief operating officer, Tony Stringer, described 2015 is a year of divergence. While the overall forecast for global gross domestic product (GDP) is improving, there a divergence between regions, and between developed and emerging markets.
Moreover, although the trend for world gross domestic product (GDP) growth appears to be improving, it could be moving sideways. A key reason, he said, is that although the US and the UK are trending in the right direction, employment presents a different story. The improvement in UK employment levels reflects part-time positons rather than full-time, while unemployment in the US would be closer to 11% if the jobless rate was based on a broader definition that included factors such as part-time jobs.
A much more positive development is lower oil prices, which act like a tax cut by putting money in peoples’ pockets. “It’s typically good for growth,” noted Stringer and a number of countries across Asia are cutting fuel price subsidies, which is positive for the fiscal outlook.
Having noted these trends he turned the central theme of his presentation, which was monetary policy. “You have two polar opposite camps. The Bank of England (BoE) and the US are imminently about to embark on a tightening phase, while on the other side the Bank of Japan (BoJ) and the European Central Bank (ECB) are into aggressive monetary easing.”
One especially interesting trend noted by Stringer is towards convergence, with developed markets going down and emerging markets on the rise over the past 10 years. That trend has come to a hiatus, however, and there is a slight negative bias overall. While developed markets now have a modestly positive bias, only four of the top emerging markets are on positive outlook and 11 are negative.
In China the story is one of gradual adjustment and “the lower GDP target of around 7% will be challenging,” said Stringer. A slowing construction and property sector, a monetary position that is relatively tight and slower growth in credit all play a part. Real estate and fixed asset investment in property have also slowed dramatically, which reflects a property overhang. “We do think that despite this slowing economy, they have the capacity to manage the slowdown,” he added.
By contrast, Stringer said India is a standout and he anticipates growth of 8% this year and in 2016 – albeit after revisions to GDP numbers – due to the structural reforms that prime minister Modi has enacted so far and expectation that they will continue.
Delving deeper into the India growth story, Asia-Pacific sovereign ratings director Thomas Rookmaaker said that the country’s new monetary policy framework, with agreements between the government and central bank, should lead to structurally lower inflation.
One uncertainty is the new GDP data, as the difference between previous numbers and the new numbers is substantial. While “not everyone understands where it comes from,” he said “we have to deal with this data, as the old series will be discontinued. What’s important is to get a better feeling once we have more data.”
Rookmaaker described this year’s budget as “a mixed bag,” with some reforms that the government started last year continuing while at the same time fiscal targets are being kicked back another year.
Implementation is still a key risk, he said, citing the planned acquisition of land bill that passed in the lower house as an example. “It still as to go to the Senate. That will be difficult. And you have the states with a large role. It won’t be easy to implement reforms.”
Indonesia also has a new government, which similarly brings new potential for growth, Rookmaaker said. The economic situation now looks better as the government allowed the exchange rate to fluctuate. When Indonesia tried to defend the rate of 10,000 rupiah (IDR) to one US dollar (USD) in May 2013, reserves fell quite substantially. Once the country let the rate go, they started to build up again.
He noted that reforms to the fuel subsidy were a bold move, and although Indonesia still has a subsidy for fuel it is now no more than about 2% of GDP. While the move was not politically easy, “it had an impact on investor confidence.”
“We forecast GDP growth to pick up as a result of the reforms and the investment climate should improve,” Rookmaaker said.
Nonetheless, Indonesia’s exports are dependent on commodities and FDI is rather low compared with peers, which makes the country vulnerable. Indonesia could become less vulnerable if exports become less commodity-dependent or if manufacturing becomes more important, Rookmaaker said, though the question is whether there is enough demand in the rest of the world to have a China success story.
There has been increasing interest in Malaysia, reported Fitch’s senior director and head of Asia-Pacific sovereign ratings, Andrew Colquhoun. The ringgit [MYR] has continued to weaken, even as oil prices have stabilised, so “there’s more to the story than oil prices.”
One important factor is government debt ratios, which have increased above those for its peers. The composition of the budget has become weaker from a credit standpoint and since 2009 there has been convergence in the share of the budget going to development spending versus subsidies.
Furthermore, government-guaranteed debt that is outside the government’s budget has risen from 10% to 15% of GDP, and “we think there has been a rise in implicit sovereign liability.” The debt load of Malaysia’s 1MDB state fund, for example, rose from zero in 2009 to 4% of GDP by March 2014.
Where there has also been slippage, said Colquhoun, is in the external creditor position. Although the country remains in a current account surplus, short-term debt has doubled from about US$50bn to US$100 billion, although reserves have also risen to around US$110bn.
Governance indicators are also “something we factor into sovereign ratings,” he added, noting that the uncertainty created by the developments in 1MDB “can be viewed as a demonstration of what we mean by governance.” All this “underscores the story we’ve been telling” and the negative outlook.
Summing up, Colquhoun noted that Malaysia has weaknesses in public finances and structural issues, and its indebtedness erodes its resilience. “The key reason why we haven’t taken the rating down is that we don’t see Malaysia as likely to suffer a financial crisis,” he said, and it was prudent to allow more time to assess the government’s policy response.
The Road Ahead
Summarising the broader global outlook, Stringer said global growth is picking up, oil prices are net positive and widespread disinflation is here to stay – yet at the same time monetary policy divergence is leading to different growth paths and there is a negative bias to sovereign ratings.
China and Malaysia faces challenges in the year ahead, but India and Indonesia are bright spots that have good potential under their new leaders.
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