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Marcus Wright
RBS Economics
November 2015
Emerging Markets:
Gimme Shelter
What’s this about?
- Growth in emerging markets is slowing. This is
concerning. We consider two key questions:
1. What are the problems in emerging
market economies?
2. Why does that matter to us?
Emerging markets matter more than ever
0
10
20
30
40
50
60
70
1994 1996 1998 2000 2002 2004 2006 2008 2011 2013 2015
Share of the Global Economy (%)
Developed Economies
Emerging Economies
Emerging Asia
Source: IMF
0%
10%
20%
30%
40%
50%
60%
70%
80%
1994 1996 1998 2000 2002 2004 2006 2008 2011 2013 2015
Contributionto Global GDP Growth
Developed Economies
Emerging Economies
Emerging Asia
Source: IMF
• Emerging markets have
accounted for 50%-60%
of global output & 70% of
global economic growth
each year since the crisis.
• They are much more
important to the global
economy compared with
the late 1990s when the
last EM crisis struck.
• In other words, an EM
slowdown can do a lot of
damage to the outlook for
global growth.
Pass the credit parcel
• While credit growth
stagnated in developed
economies following the
crisis, it rebounded
quickly in emerging
markets.
• But now slower EM
credit growth and
Eurozone deleveraging
has left global credit
growth in the doldrums.
-5%
0%
5%
10%
15%
20%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Outstanding PrivateSectorCredittoDeveloped
andMajor Emerging Economies
(%Y/YChange)
Source: BIS
-10%
0%
10%
20%
30%
40%
2000 2002 2004 2006 2008 2010 2012 2014
Outstanding Private Sector Credit
(% Y/Y Change)
Developed Economies Emerging Economies
Source: BIS
Quelle surprise – China is the main culprit
0
5
10
15
20
25
China - Credit to Private
Non-Financial Sector
(Oustanding, $ Trillion)
Source: BIS
0%
20%
40%
60%
80%
100%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Outstanding Credit to
China'sprivate sector...
As% of the US
As% of global
Source: BIS
• Credit to China’s non-
financial private sector has
risen a staggering $15trn
since the crisis – close to
the size of the US economy.
• China’s credit pile has
risen from a mere 20% of the
level of the US to 80% in just
six years.
• When credit rises that
much so quickly, much of it
inevitably gets wasted.
A reckoning awaits China’s banking sector
-
5
10
15
20
25
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Liabilities of Chinese Corporates
(Trillions of RMB)
Transportation
Manufacturing
Mining, utilities
Nonfin services
Construction and real estate
Source: IMF
• It’s the corporate sector
that has driven China’s debt
increase.
• Hong Kong’s build-up has
been even greater, relative
to the size of its economy.
• China’s banking sector is
likely to be sitting on non-
performing loans in excess
of official figures.
• China can afford the clean-
up but the debt overhang
and banking sector repair
will drag on growth.
-40
-20
0
20
40
60
80
100
Corporate Sector Debt
(% of GDP Change since Crisis)
Source: BISNon-financial Corp Sector
That debt is becoming more of a burden
• Emerging economies have
gorged on debt.
Consequently, since the
crisis, they are devoting
more of their incomes to
repaying it.
• Developed countries by
contrast are devoting less.
0% 10% 20% 30% 40%
UK
Rest of World
US
Japan
France
Australia
Germany
Netherlands
Canada
Spain
Italy
Sweden
Banking Exposureto China
and HK by Country
(% of $1.5 trn global exposure)
Source: BIS
• Despite China’s relatively
closed financial system,
global banking exposure to
China is $1.5trn.
-10
-5
0
5
10
Den
Spa
UK
Hun
Por
SA
US
Aus
Fin
Jap
Ger
Ita
Kor
Cze
Pol
Mex
Swe
Bel
India
Fra
Indon
Bra
Neth
Thai
Mal
Tur
Rus
HKSAR
China
DebtService Ratios
- Change since 2008, Private Non-FinSector
Source: BIS
Mainly
Developed
Economies
Mainly
Emerging
Economies
A big score…off-shore
500
1,500
2,500
3,500
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Emerging and Developing Economies -
Debt Securities Outstanding
($ Bn)
AtHome
IncludingOffshore Borrowing
Source: BIS
China - Offshore Bonds by Industry
Real Estate
Finance
Oil and Gas
Utilityand Energy
Computersand
Electronics
Metal and Steel
Transportation
Source: IMF
• Offshore bond issuance
results in the classic
emerging market problem –
currency mismatch on the
balance sheet of EM firms.
• A move toward tighter US
monetary policy could
expose these vulnerabilities.
• Unsurprisingly, China is
again the major player with
real estate, finance and oil &
gas the main sectors.
The problems are more than debt alone
• Having previously grown
much faster than the pace of
global GDP growth, world
trade growth is now slower.
• Emerging markets hoped
for a strong rebound in
export growth following the
crisis but it never
materialised. It’s not just
due to the Eurozone.
• China’s slowdown is
transmitting across other
emerging markets as
reduced demand for their
exports.-20%
-10%
0%
10%
20%
30%
40%
2003 2005 2007 2009 2011 2013 2015
Export Volume (% Y/Y Change)
Emerging Economies
Emerging Asia
Source: CPB
Pre-crisis average: 10%
Post-crisis
average: 4%
-15%
-5%
5%
15%
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Global GDP Growth v
Global Trade Growth
(% Y/Y Change)
Global Trade Growth
Global GDP Growth
Here comes the deflationary wind
• Emerging markets pushed
investment in productive
capacity, housing &
infrastructure in response to
the global slowdown.
• The global economy
benefitted because developed
economies pulled back.
70
80
90
100
110
120
2007 2008 2009 2010 2011 2012 2013 2014 2015
Investment as Share of GDP
(2007 = 100)
Developed Economies Euro Area
Emerging Economies
Source: IMF
-4 6 16 26 36
China
S. Korea
Philippines
Taiwan
Singapore
Malaysia
Months in Producer Price Deflation
(Overpast 36 months)
Source: Macrobond
• Too much investment. Too
much capacity. Lots of price
deflation.
• That deflation gets exported
to the developed world.
Falling productivity, but room for reform
0.0
1.0
2.0
3.0
4.0
1970s 1980s 1990s Pre-Crisis 2011-2012 2013-2014
EM Labour Productivity per Person
Employed(% Y/Y Change)
Source: Conference Board
• Emerging market
productivity growth has
slowed substantially.
• It’s another sign that
investment in many emerging
markets, particularly China,
has been targeted at the
wrong areas. Capital has
been misallocated.
• And emerging markets,
generally speaking, are
relatively difficult places to
do business.
• They remain a long way
behind the great emerging
market success story –
S.Korea.
40
50
60
70
80
90
Ease of Doing Business
(Distance toFrontier of Best Practice, 100=best)
Source: World Bank
Less favourable demographics have arrived
30
40
50
60
70
80
90
1950 1960 1970 1980 1990 2000 2010 2020 2030
Population Dependency Ratio
China India
S.Korea
Source: UNRatio of population aged 0-14 and 65+ per 100 aged 15-64
Forecast
40
50
60
70
80
90
1950 1960 1970 1980 1990 2000 2010 2020 2030
Population Dependency
Ratio
SelectedEmerging
Economies
DevelopedEconomies
Ratio of population aged 0-14 and 65+ per 100 aged 15-64 Source: UN
Forecast
• China’s dependency ratio has
started to rise (more
dependents per working-age
person). The change to the
one-child policy may have
come too late in the day.
• South Korea’s is also
beginning to rise. But South
Korea is a much richer country.
• A falling dependency ratio
has thus far boosted growth.
Those days are over for many
emerging markets.
• India remains in the midst of
its ‘demographic dividend’.
Consequences…
• The issues facing emerging markets, are deep-rooted &
unlikely to disappear soon. Consequently their drag on
global growth, trade & inflation will likely persist.
• In response, the US Fed & the Bank of England may have to
keep interest rates lower for longer. The ECB and the Bank of
Japan will likely expand their Quantitative Easing (Buying for
longer).
…and yet more consequences
• All the while emerging markets will likely remain a source of
financial vulnerability. Periodic bouts of financial stress like
those seen in recent months should be considered the norm.
• China’s policy response to its debt problems will be a crucial
influence on the fortunes of the global economy in the
coming years. Either it cleans up its banks and rebalances
growth toward services and consumption (of which there is
so far little or no evidence) or it doesn’t & risks heading into
financial stress.
Follow us on Twitter
15
@RBS_Economics
https://twitter.com/rbs_economics
16
Disclaimer
This material is published by The Royal Bank of Scotland plc (“RBS”), for information purposes only and
should not be regarded as providing any specific advice. Recipients should make their own independent
evaluation of this information and no action should be taken, solely relying on it. This material should not be
reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this
would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by
RBS and RBS makes no representation or warranty (express or implied) of any kind, as regards the accuracy
or completeness of this information, nor does it accept any responsibility or liability for any loss or damage
arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any
views, forecasts, or estimates are solely those of RBS’s RBS Economics Department, as of this date and are
subject to change without notice. The classification of this document is PUBLIC. The Royal Bank of Scotland
plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. The
Royal Bank of Scotland plc is authorised by the Prudential Regulation Authority and regulated by the Financial
Conduct Authority and the Prudential Regulation Authority. © Copyright 2015 The Royal Bank of Scotland
Group plc. All rights reserved

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Emerging Markets - Gimme Shelter

  • 1. Marcus Wright RBS Economics November 2015 Emerging Markets: Gimme Shelter
  • 2. What’s this about? - Growth in emerging markets is slowing. This is concerning. We consider two key questions: 1. What are the problems in emerging market economies? 2. Why does that matter to us?
  • 3. Emerging markets matter more than ever 0 10 20 30 40 50 60 70 1994 1996 1998 2000 2002 2004 2006 2008 2011 2013 2015 Share of the Global Economy (%) Developed Economies Emerging Economies Emerging Asia Source: IMF 0% 10% 20% 30% 40% 50% 60% 70% 80% 1994 1996 1998 2000 2002 2004 2006 2008 2011 2013 2015 Contributionto Global GDP Growth Developed Economies Emerging Economies Emerging Asia Source: IMF • Emerging markets have accounted for 50%-60% of global output & 70% of global economic growth each year since the crisis. • They are much more important to the global economy compared with the late 1990s when the last EM crisis struck. • In other words, an EM slowdown can do a lot of damage to the outlook for global growth.
  • 4. Pass the credit parcel • While credit growth stagnated in developed economies following the crisis, it rebounded quickly in emerging markets. • But now slower EM credit growth and Eurozone deleveraging has left global credit growth in the doldrums. -5% 0% 5% 10% 15% 20% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Outstanding PrivateSectorCredittoDeveloped andMajor Emerging Economies (%Y/YChange) Source: BIS -10% 0% 10% 20% 30% 40% 2000 2002 2004 2006 2008 2010 2012 2014 Outstanding Private Sector Credit (% Y/Y Change) Developed Economies Emerging Economies Source: BIS
  • 5. Quelle surprise – China is the main culprit 0 5 10 15 20 25 China - Credit to Private Non-Financial Sector (Oustanding, $ Trillion) Source: BIS 0% 20% 40% 60% 80% 100% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Outstanding Credit to China'sprivate sector... As% of the US As% of global Source: BIS • Credit to China’s non- financial private sector has risen a staggering $15trn since the crisis – close to the size of the US economy. • China’s credit pile has risen from a mere 20% of the level of the US to 80% in just six years. • When credit rises that much so quickly, much of it inevitably gets wasted.
  • 6. A reckoning awaits China’s banking sector - 5 10 15 20 25 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Liabilities of Chinese Corporates (Trillions of RMB) Transportation Manufacturing Mining, utilities Nonfin services Construction and real estate Source: IMF • It’s the corporate sector that has driven China’s debt increase. • Hong Kong’s build-up has been even greater, relative to the size of its economy. • China’s banking sector is likely to be sitting on non- performing loans in excess of official figures. • China can afford the clean- up but the debt overhang and banking sector repair will drag on growth. -40 -20 0 20 40 60 80 100 Corporate Sector Debt (% of GDP Change since Crisis) Source: BISNon-financial Corp Sector
  • 7. That debt is becoming more of a burden • Emerging economies have gorged on debt. Consequently, since the crisis, they are devoting more of their incomes to repaying it. • Developed countries by contrast are devoting less. 0% 10% 20% 30% 40% UK Rest of World US Japan France Australia Germany Netherlands Canada Spain Italy Sweden Banking Exposureto China and HK by Country (% of $1.5 trn global exposure) Source: BIS • Despite China’s relatively closed financial system, global banking exposure to China is $1.5trn. -10 -5 0 5 10 Den Spa UK Hun Por SA US Aus Fin Jap Ger Ita Kor Cze Pol Mex Swe Bel India Fra Indon Bra Neth Thai Mal Tur Rus HKSAR China DebtService Ratios - Change since 2008, Private Non-FinSector Source: BIS Mainly Developed Economies Mainly Emerging Economies
  • 8. A big score…off-shore 500 1,500 2,500 3,500 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Emerging and Developing Economies - Debt Securities Outstanding ($ Bn) AtHome IncludingOffshore Borrowing Source: BIS China - Offshore Bonds by Industry Real Estate Finance Oil and Gas Utilityand Energy Computersand Electronics Metal and Steel Transportation Source: IMF • Offshore bond issuance results in the classic emerging market problem – currency mismatch on the balance sheet of EM firms. • A move toward tighter US monetary policy could expose these vulnerabilities. • Unsurprisingly, China is again the major player with real estate, finance and oil & gas the main sectors.
  • 9. The problems are more than debt alone • Having previously grown much faster than the pace of global GDP growth, world trade growth is now slower. • Emerging markets hoped for a strong rebound in export growth following the crisis but it never materialised. It’s not just due to the Eurozone. • China’s slowdown is transmitting across other emerging markets as reduced demand for their exports.-20% -10% 0% 10% 20% 30% 40% 2003 2005 2007 2009 2011 2013 2015 Export Volume (% Y/Y Change) Emerging Economies Emerging Asia Source: CPB Pre-crisis average: 10% Post-crisis average: 4% -15% -5% 5% 15% 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Global GDP Growth v Global Trade Growth (% Y/Y Change) Global Trade Growth Global GDP Growth
  • 10. Here comes the deflationary wind • Emerging markets pushed investment in productive capacity, housing & infrastructure in response to the global slowdown. • The global economy benefitted because developed economies pulled back. 70 80 90 100 110 120 2007 2008 2009 2010 2011 2012 2013 2014 2015 Investment as Share of GDP (2007 = 100) Developed Economies Euro Area Emerging Economies Source: IMF -4 6 16 26 36 China S. Korea Philippines Taiwan Singapore Malaysia Months in Producer Price Deflation (Overpast 36 months) Source: Macrobond • Too much investment. Too much capacity. Lots of price deflation. • That deflation gets exported to the developed world.
  • 11. Falling productivity, but room for reform 0.0 1.0 2.0 3.0 4.0 1970s 1980s 1990s Pre-Crisis 2011-2012 2013-2014 EM Labour Productivity per Person Employed(% Y/Y Change) Source: Conference Board • Emerging market productivity growth has slowed substantially. • It’s another sign that investment in many emerging markets, particularly China, has been targeted at the wrong areas. Capital has been misallocated. • And emerging markets, generally speaking, are relatively difficult places to do business. • They remain a long way behind the great emerging market success story – S.Korea. 40 50 60 70 80 90 Ease of Doing Business (Distance toFrontier of Best Practice, 100=best) Source: World Bank
  • 12. Less favourable demographics have arrived 30 40 50 60 70 80 90 1950 1960 1970 1980 1990 2000 2010 2020 2030 Population Dependency Ratio China India S.Korea Source: UNRatio of population aged 0-14 and 65+ per 100 aged 15-64 Forecast 40 50 60 70 80 90 1950 1960 1970 1980 1990 2000 2010 2020 2030 Population Dependency Ratio SelectedEmerging Economies DevelopedEconomies Ratio of population aged 0-14 and 65+ per 100 aged 15-64 Source: UN Forecast • China’s dependency ratio has started to rise (more dependents per working-age person). The change to the one-child policy may have come too late in the day. • South Korea’s is also beginning to rise. But South Korea is a much richer country. • A falling dependency ratio has thus far boosted growth. Those days are over for many emerging markets. • India remains in the midst of its ‘demographic dividend’.
  • 13. Consequences… • The issues facing emerging markets, are deep-rooted & unlikely to disappear soon. Consequently their drag on global growth, trade & inflation will likely persist. • In response, the US Fed & the Bank of England may have to keep interest rates lower for longer. The ECB and the Bank of Japan will likely expand their Quantitative Easing (Buying for longer).
  • 14. …and yet more consequences • All the while emerging markets will likely remain a source of financial vulnerability. Periodic bouts of financial stress like those seen in recent months should be considered the norm. • China’s policy response to its debt problems will be a crucial influence on the fortunes of the global economy in the coming years. Either it cleans up its banks and rebalances growth toward services and consumption (of which there is so far little or no evidence) or it doesn’t & risks heading into financial stress.
  • 15. Follow us on Twitter 15 @RBS_Economics https://twitter.com/rbs_economics
  • 16. 16 Disclaimer This material is published by The Royal Bank of Scotland plc (“RBS”), for information purposes only and should not be regarded as providing any specific advice. Recipients should make their own independent evaluation of this information and no action should be taken, solely relying on it. This material should not be reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation or warranty (express or implied) of any kind, as regards the accuracy or completeness of this information, nor does it accept any responsibility or liability for any loss or damage arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any views, forecasts, or estimates are solely those of RBS’s RBS Economics Department, as of this date and are subject to change without notice. The classification of this document is PUBLIC. The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. The Royal Bank of Scotland plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. © Copyright 2015 The Royal Bank of Scotland Group plc. All rights reserved