Perspectives on Emerging Economies Growth Vincenzo D’Apice Observatory on Emerging Economies,...

Perspectives on Emerging Economies Growth

Vincenzo D’Apice

Observatory on Emerging Economies, Luiss 22-Feb-2011

Observatory on Emerging Economies,

Luiss, 22 Febbraio 2011 Vincenzo D’Apice

1. A framework for Boom & Bust Cycles: The Minsky

Model

2. Perspectives on Emerging Market Economies Growth

Agenda

Starting Point:-Low inflation

-Low unemployment

Positive Shocks:-Deregulation

-Financial innovation-Capital inflows

Banking Sector:-Demand for credit rises-Risk underestimation-Supply of credit rises

Financial Markets:-Asset prices rise

(shares & real estate)-Wealth increases-Debt increases

Real Economy:-Consumption rises-Investment raises

-Lower savings-Rising current account deficit

Boom:-Economy overheats

-Real and/or financial imbalances grow-Financial structure becomes fragile

Politicians & economiststheorize the beginning

of a new Era(e.g. New Economy)

Balance sheet channelLending channel

Financial accelerator(Bernanke-Gertler,’95)

Animal spirits(Keynes 1937) Global Imbalances

(Bernanke ’07)

-Covered-Speculative

-Ponzi

The Great Moderation(Bernanke ’04)

The Minsky model Boom stage



Starting Point:-Rising interest rates

-Sudden change in expectations

Negative Shocks:-Capital flows away from more

speculative investment

Banking Sector:-Pessimistic evaluation of risk

-Demand for credit falls-Supply of credit falls (crunch)

Financial Markets:-Asset prices fall

-Wealth falls-Debt deflation

-Real debt increases

Real Economy:-Consumption falls-Investment falls-Rising savings

-Lower current account deficit

Bust:-Banking crisis (bank runs)

-Recession

Debt Spiral a la Fisher 1933 Deflationary Spiral

-Central Bank-Government-Regulation

Default of Ponzi units

Minsky model Bust stage

Vincenzo D’ApiceObservatory on Emerging

Economies,Luiss, 22 Febbraio 2011



• The outlook is:

• U-shaped recovery in advanced economies

• V-shaped recovery in emerging-market countries

Output Growth (%) 2010 2011 2012World 5.0 4.4 4.5Advanced Economies 3.0 2.5 2.5Emerging Economies 7.1 6.5 6.5

What is the Outlook for the Global Economy?



•The role of EEs will be even stronger in the next decade (BRICs + N-11):

$37t

$27t

$10t

45%

30%30%

What Will Be the Role of Emerging Economies?



•One of the more striking story will be the rise of the new BRICs middle

class:

Import of low value added goods

Import of high value added goods (car, technology)

2010 middle-class consumers purchasing power $7 trillion

2020 middle-class consumers

purchasing power $20 trillion*

What Will Be the Role of Emerging Economies?



• The first risk is further financial contagion in Europe:

Spread over German 10y-bunds

Jan-2010 (A)

Jan-2011 (B)

Diff.(B-A)

Greece 2.1% 8.0% 5.9%Ireland 1.3% 6.0% 4.7%Portugal 0.8% 4.0% 3.2%Spain 0.8% 2.2% 1.4%Italy 0.8% 1.8% 1.0%

What Are the Downside Risks in This Scenario?



• The second risk is the negative effects of Fed QE:

• FED QE* is subjecting the emerging economies to a flood of capital,

rising commodity prices, inflation, and (possibly) asset bubbles:

Aug-2007 Feb-20110.9 2.5 1.6 178%

Memo US GDP 14.6 trillion

Fed Total Assets (trillion)

Stock Growth




• The third risk is that capital inflows to emerging markets will be

mismanaged, thus fueling credit and asset bubbles:

Capital Flows to Emerging Markets (% of world GDP)

Capital Flows to Emerging Markets

(% of world GDP)

2006 2008 2010

Net liabilities 6,5% 1% 4%

• Drivers:• Asset allocations• Carry trades




• Flows into debt and equity mutual funds have been strong:

• Risk of asset price bubbles

• So, back to the twin crises of 90s? Yes & No

• Yes, b/c the bust of the bubble can trigger a banking crisis

• No, b/c the risk of currency crisis is low thanks to the accumulation of intl. reserves

Annual Retail Flows to Emerging Market Debt and Equity Mutual Funds

($ billion)




•The fourth risk is inflation in emerging markets:




•The fifth risk is currency tensions (currency war):

• Global imbalances will remain large

• Deficit countries need a currency depreciation

• But, surplus countries don’t want to accept a currency appreciation

Global Imbalances (% of world GDP)

• Deflation in deficit countries

• Higher risk of debt default (via Fisher spiral)




•The sixth risk is geopolitical (Korea, Pakistan, Tunisia, Egypt, Libya).

• This risk is putting pressure on the price of commodities:

• This, in turn, will put further pressure on inflation




• For example, the shadow banking system is still “shadow”:

$16t

$13t

By the Way, Don’t Forget the Causes of the Recent Crisis



EEs Strong Growth

Rising Middle-Class

EU DebtCrisis

Fed QE

Capital Inflows

Inflation

Global Imbalances

Geo-Political

EmergingBanking System

Why Do We Need Monitoring the Emerging Banking Systems?



Thank You

Contacts:

Vincenzo D’Apice

[email protected]

[email protected]

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