Coface Country Risk Conference 2016
This year, at the 20th Coface Country Risk Conference held on January 26, 2016, J. M. Pillu, former CEO of Coface, highlighted the similarities between current economic and political issues and those discussed at the first conference. In 1997, the topics addressed were as follows. What path will Russia take to recover? Has oil found its equilibrium price? Are there still uncertainties surrounding the peace process in the Middle East? What is missing in Latin America? How could Asian growth slow down? Twenty years on, these issues still remain. Today, the global economy is facing multiple crises (economic, political, social) with reduced visibility as economic cycles seem to be disappearing.
What does the future hold for European integration?
Europe perfectly illustrates this phenomenon of multiple crises: the refugee crisis, Greece, the announcement of a referendum on the United Kingdom’s membership of the European Union (EU), etc. These events have cast a shadow over the future of European integration. However, according to Jacques de Larosière, former governor of the IMF, it is essential for European countries to come together. Otherwise, taken individually, these countries will no longer be present in the G7 by 2050 and will therefore no longer be able to exert influence on the international stage. This is especially true given that the old continent has already been the weak link in global growth since 2009 and a two-speed Europe seems to have emerged, not to mention the rise of nationalism and the lack of resources, which is hindering the European project. In this context of multiple crises and growing mistrust of Europe, progress has nevertheless been made to strengthen the Union, such as the recent banking union. However, French economist Daniel Cohen believes that the initial poor design of the EU is illustrated, among other things, by the banking union, which should have been created at the same time as the monetary union.
Similarly, the Schengen area is being called into question due to the lack of a common border policy. The refugee crisis will be one of the main sticking points in the negotiations between the UK and the EU on Brexit. Michala Marcussen, chief economist at Société Générale CIB, estimates that the cost of the UK leaving the Union would be 0.5 to 1 percentage point of GDP over ten years for the UK, compared with 0.25 percentage points of GDP for the EU. Brexit could therefore be an opportunity, given the economic cost it would entail in a context of moderate potential growth. It could be an opportunity to reform and reinvigorate the European debate by changing the perspective on the Brexit issue. According to J. de Larosière, this debate would provide an opportunity to review the European legislative and regulatory framework with a view to simplifying it.
The fragmentation of the political scene and the rise of nationalist parties in Europe could weigh on investor confidence in the short term, affecting EU growth. In addition to political risk (which has increased significantly worldwide), two other factors are the main reasons why global economic growth will not pick up in 2016, according to Julien Marcilly, chief economist at Coface. On the one hand, China’s economic slowdown is weighing on the global economy through several channels: commodity prices, industrial production, etc. On the other hand, low oil prices are destabilizing emerging countries and increasing volatility in financial markets.
What impact will China’s economic slowdown have on the region?
Chinese GDP growth averaged 6.9% in 2015, compared with 9.5% in 2011. Some economists believe that the slowdown will be more pronounced (hard landing), with GDP growth of between 2% and 4%. These estimates are based on leading indicators such as electricity consumption, cement consumption, and freight traffic. Given that the service sector now accounts for more than 50% of GDP (with consumption of education, health, and leisure services rising sharply in recent years), these leading indicators seem obsolete for measuring economic activity, according to Bei Xu, global strategist at Exane.
Although highly concentrated (public banking and construction sectors), the increase in Chinese corporate debt is nonetheless one of the main risks for the authorities. A deleveraging cycle (which could lead to a further slowdown in activity) combined with a faster-than-expected rise in Fed rates (not anticipated) could weigh on growth in Southeast Asian countries, but unevenly. Malaysia, Hong Kong, and Taiwan are likely to be the most affected countries. Conversely, the Philippines, Vietnam, Indonesia, and India are expected to maintain a similar pace of growth to 2015.
Furthermore, China’s economic slowdown could be offset by infrastructure projects, particularly large-scale binational initiatives. China’s » One Road, One Belt » initiative is therefore likely to be a new source of growth in the medium term for Southeast Asian countries. This project will also enable China to establish its companies locally, thereby expanding its influence, while exporting its short-term excess stock capacity. The impact of the Chinese slowdown is therefore not very visible on Southeast Asian economies at this stage.
What is the outlook for oil prices?
Low oil prices are having a severe impact on oil-producing countries. In the short term, low oil prices are likely to force oil-producing countries to readjust their budgets in order to avoid a surge in debt (Saudi Arabia’s public deficit is expected to reach 20% of GDP in 2016). This is particularly true given that many oil-producing countries have overestimated the price per barrel on which their budgets are based. Some countries may therefore be forced to stop publicly subsidizing certain goods, which could also generate social tensions. High oil prices (in the mid-2000s) should have encouraged oil-producing countries to diversify their economies. However, the current low prices could force these countries to redirect some of their investments to the non-oil sector, which would be beneficial in the medium term. Looking ahead, several factors are likely to influence oil prices: (i) the extent of the slowdown in US shale production, (ii) OPEC’s response to oil prices, (iii) the strength of demand (which doubled in 2015 compared to 2014), and of course (iv) Iran. The lifting of sanctions on Iran will have a considerable impact on oil production. Excess supply is therefore likely to increase in the short term, but downward pressure on oil prices should nevertheless be limited, as the market has already priced in this return.
What is the situation in Latin America?
Latin America could be affected by the three main risks mentioned above. First, the end of the commodities boom has significantly worsened the region’s terms of trade, which are closely correlated with economic growth. In 2015, Latin America as a whole was in recession. Can we talk about a new lost decade for Latin America? There is a wide disparity between countries in the region. Peru and Colombia, for example, posted good GDP growth figures (2.8% each). A peace agreement between the Colombian government and the FARC could also increase the country’s GDP by 1%. Chile also has a healthy economy, although it is not very diversified. Conversely, Ecuador has fallen into recession, suffering the double effect of the appreciation of the dollar (dollarized economy) and low oil prices. Argentina is likely to be affected by the lifting of capital controls by the new president Macri in the short term, but should see more robust growth in the medium term. The recession in Latin America therefore reflects Brazil’s dominant weight in the region and the fall in GDP in Venezuela. The situation in both countries is very worrying: in Brazil, the recession is expected to continue in 2016 (-3% forecast for 2016) andimpeachment proceedings against President Rousseff are underway; Venezuela (-10% forecast for 2016) is the country most likely to default this year.
Conclusion
Risks will therefore continue to weigh heavily in 2016. Global economic growth in 2016 is likely to be constrained by the slowdown in China, low oil prices, and rising political tensions. Growth in advanced economies is expected to stabilize in 2016, given the slight slowdown forecast in the United States and the United Kingdom, offset by acceleration in the eurozone. Developing countries, however, are expected to grow at a slightly faster pace.
E.D
