China: Credit risks still rising

Brazil

• A crucial turning point ahead

Despite uncertainty over the new government's reform programme, the markets and investors reacted positively to the political changes of the past few months. The same cannot be said for the local population, who fears a shift towards liberalism and the hardships of reforms, after weathering the turmoil of the political and economic crisis over the past two years. Squeezed by a sluggish labour market, a decline in purchasing power eroded by inflation and a heavy debt burden, household consumption is unlikely to make a positive contribution to the economic recovery for several more months. Even so, the economy could benefit from a gradual rebound in private investment.

Russia

• A painful recovery

The Russian economy is getting a bit better. In the second quarter, GDP growth contracted by only 0.6% and manufacturing activity accelerated slightly. In addition, the business sector started to rebuild inventories and survey results have been positive. However, the recovery is fragile. Household consumption remains depressed by falling real wages and the government does not have sufficient fiscal rooms for manoeuvre to support the economy. The consolidation of public finances has become its priority. To achieve this, it is ready to freeze spending for the next three years. It hopes to reduce the budget deficit by 1 point of GDP per year, bringing it to no more than 1.2% of GDP in 2019.

India

• A major advance

Two years after taking power, the Narendra Modi government managed to pass a unified VAT bill. Even though it will take a few years to feel the positive effects of this reform, the bill is a major advance. The government estimates the gains in terms of potential growth at between 0.9 and 1.7 points. Even though the country still faces enormous structural weaknesses, the business climate is improving. According to the latest competitiveness report, India gained 16 ranks last year and is now ahead of Indonesia. The rating agencies have turned a blind eye to these changes so far. A high public debt continues to block any improvement in India's sovereign rating.

China

• Credit risks still rising

The slowdown in China's economic growth has paused since the second quarter of 2016 thanks to stimulus policy measures. The stabilisation in industrial production growth, the upturn in the real estate market and monetary loosening could help reduce pressures on corporates and local governments by easing their liquidity constraints in the very short term. However, their solvency is not improving, their debt levels have become even more excessive over the last year and their capacity to service their debt remains weak. In this context, credit risks in the financial sector continue to increase and the performance of commercial banks deteriorates gradually.

Taiwan

• New reality

The DPP's victory in the presidential and general elections last January rode on a wave of dissatisfaction with the poor economic performances of recent years, even though growth is expected to rebound in the short term thanks to the recovery in the global electronics cycle and the stabilisation of Chinese growth. The election results also reflect the people's resistance to an overly close alignment with China. Yet tensions with its neighbouring giant could make it harder for the government to negotiate trade agreements with new partners, and even risks slowing the development of very high value-added sectors, at a time when Taiwan must deal with its decelerating growth potential and reduce its dependence on Chinese demand.

Thailand

• An unstable equilibrium

The vote in favour of the draft constitution proposed by the military junta, in power since May 2014, is not good news. It does not resolve any of the political or social conflicts, while anti-democratic measures in the draft text suggest that the new constitution will not last much longer than the previous ones. Political uncertainty was clearly exacerbated by the king's recent death, and is bound to last several more years. In the meantime, economic growth is picking up feebly, buoyed by tourism revenues and public spending. Yet Thailand's competitiveness and attractiveness continue to erode, while competition with other countries in the region is increasingly straining FDI inflows.

Malaysia

• A delicate transition

Malaysia's economic situation has deteriorated. Growth has slowed, the current account surplus is shrinking, and the 1MDB corruption scandal has sparked a domestic political crisis and the loss of confidence of international investors. The political situation could remain muddled for several more years. Yet Malaysia's medium-term prospects are still favourable. If the country's political situation stabilises and the business climate improves, Malaysia's integration in the regional economy and its upmarket shift in global supply chains could make it one of the main beneficiaries of the new Trans-Pacific Partnership (TPP) free trade agreement.

Turkey

• Another economic stress test

Culminating a series of (geo) political shocks over the past three years, the aborted military coup of 15 July triggered a spontaneous outpouring of national support for President Erdogan. Yet the massive repression of institutions and the private sector that followed has created a growing sense of unease. Although the financial markets reacted relatively mildly, political tensions have severely strained economic growth in Q3, after a sharp slowdown in Q2 driven by a contraction in private consumption. Several support factors should keep the economy from collapsing, but there are growing concerns about the medium-term deterioration in public finances, which are rather healthy for the time being.

Poland

• In the mood to spend more

Squeezed by the reduction in European transfers, investment growth is slowing. Consumption, in contrast, is holding up well, bolstered by public spending, which is paving the way for a soft landing. Solid exports have brought the current account into positive territory for the first time in 20 years. The increase in public spending has not fuelled inflation. The government has launched a family allowance programme as part of efforts to boost the birth rate, expecting to lift the country's long-term growth potential. The cost of these policies will be covered by higher taxes on banks, large retailers and state-owned energy companies. There is also a big temptation to increase debt in the current environment of very low interest rates.

Egypt

• A necessary but insufficient devaluation

The Egyptian pound needs to be devalued due to the deterioration in the country's export competitiveness and the squeeze on foreign-currency liquidity. As previous devaluations show, not only in Egypt but also in Argentina, it is necessary to have a sufficient liquidity shield to maintain control over the forex market. Past devaluations also show that improvements in external accounts depend on numerous factors that are not directly linked to exchange rates. Thanks to external financial support, the Central Bank of Egypt (CBE) should have enough liquidity to successfully carry out the devaluation. Yet external accounts are unlikely to improve before the energy deficit has been significantly reduced from 2018.

Algeria

• Economic growth on life support

Although the economy is hitting hard, it has not contracted, at least not yet. By the end of the year, the oil stabilisation fund will be likely depleted, while the upturn in oil prices – assuming it is confirmed – will be not sufficient to restore the sustainability of public finances. Public debt is low, which leaves some manoeuvring room. Yet there are still concerns about the government's future investment capacity. Reforms are advancing, but very gradually. In the midst of a sustained shock, more will have to be done to remove the constraints on private sector development. Although the financial system's stability is not threatened, liquidity is coming under greater pressure.

South Africa

• Political noise and addiction to external financing

The Q2 rebound is likely to be short lived since the economy still lacks a powerful growth engine. Recent political tensions could trigger renewed volatility in the financial markets and reduce the availability of external financing, especially if South Africa's foreign currency sovereign rating is downgraded to speculative grade. This would have a particularly negative impact on growth given the country's substantial financing needs and apparently limited adjustment mechanisms.

 

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