global saving deficit and financing infrastructure in bric
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Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 0
Global saving deficit and
financing infrastructure in
BRIC economies
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 1
1. The World Economy
2012: New Cycle Means
New Risks?
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 2
1. The World Economy 2012: New Cycle Means New Risks?
Developed economies for a year stand on the brink of new economic cycle
But the progress falters under the burden of government and financial sector problems, provoking risk aversion for investors
Most likely, the cycle will proceed as new, and these problems will stay unresolved, bound to turn up later
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 3
While unsure, the recovery in developed countries is slowly
proceeding, the US heading headfirst and both Japan and EA lagging
1.1. Industrial production,
01/01/2000=100 1.2. Unemployment rate, %
Source: IMF International financial statistics Source: IMF International financial statistics
1. The World Economy 2012: New Cycle Means New Risks?
70
75
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115
120
2007
2008
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2011
US EA Japan
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2008
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2010
2011
US EA Japan
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 4
1.6. Total money base of largest developed countries, US$ tn
Source: IMF
The money base central banks issued most likely would stay even as
the credit multiplier increases
1. The World Economy 2012: New Cycle Means New Risks?
0
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US EA Japan growth rate % (right axis)
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 5
So far, the multiplier stays very low, though some increase in US is
visible
1.3. EA MB and M3 growth rates, % yoy 1.4. MB and M2 growth rates, % yoy
Source: ECB
1. The World Economy 2012: New Cycle Means New Risks?
-5
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35
2000
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USM2 USMB
Source: Fed
-5
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М3 зоны евро Денежная база зоны евроEAM3 EAMB
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 6
Corporate debt ratios for both US and EA are at 10-15-year lows
Trade balance stabilization and strong personal consumption in the US in 2011 suggest grounds for new growth cycle
Rates of growth in China won’t skyrocket as the government finishes deflating bubble, there are problems with shifting to consumption-based growth, but “low” still means 8+% for China (and not to forget expected US growth)
1. The World Economy 2012: New Cycle Means New Risks?
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 7
1.6. EBITDA for main US industries, 2000 prices, 31/03/00=100
Source: US Census Bureau
EBITDA for US has recovered, for EA lags behind but not totally subdued
1. The World Economy 2012: New Cycle Means New Risks?
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Durable goods production Manufacturing Mining (right axis)
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 8
1.7. US corporate debt, 2000 prices, 31/03/00=100
Source : US Census Bureau
…as the debt levels grow steadily…
1. The World Economy 2012: New Cycle Means New Risks?
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Durable goods production Manufacturing Mining (right axis)
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 9
1.8. Debt to EBITDA, main US industries
Source : US Census Bureau
Debt/EBITDA stays at 2000 lows.
1. The World Economy 2012: New Cycle Means New Risks?
1.0
2.0
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6.0
7.0
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Durable goods production Mining Manufacturing
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 10
1.10. Profit/Sales in US industries
Source : US Census Bureau
While profitability is already at expansion phase levels….
1. The World Economy 2012: New Cycle Means New Risks?
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Durable goods production Mining Manufacturing
-21
31
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 11
1.9. US household debt service ratios, % of income
Source: Fed
…household DSR has not reached the bottom
1. The World Economy 2012: New Cycle Means New Risks?
11.0
11.5
12.0
12.5
13.0
13.5
14.0
2000
2001
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2003
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2007
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2011
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 12
1.10. Delinquent credit in US banks, % of assets
And the 2008 wall of delinquencies is basically
overcome
1. The World Economy 2012: New Cycle Means New Risks?
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Total business loans consumer loans loans secured by real estate
Source: Fed
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 13
1.11. Loan to deposit ratio
Source: Fed, ECB
At the same time, credit activity at US and EA banks
is clearly subdued
1. The World Economy 2012: New Cycle Means New Risks?
0.80
0.85
0.90
0.95
1.00
1.05
1.10
2000
2001
2002
2003
2004
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2008
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2011
US EA
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 14
1.12. Credit portfolio as a share of total assets
Liquid assets are preferred to credits as risk aversion is
strong
1. The World Economy 2012: New Cycle Means New Risks?
Source: Fed, ECB
0.50
0.55
0.60
0.65
0.70
0.752000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
US EA
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 15
1.13. Capacity utilization vs unemployment, %
1. The World Economy 2012: New Cycle Means New Risks?
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1260
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US Capacity utilizationEuro area capacity utilization survey (quarterly, intrapolated)US Unemployment SA inverted, right axisEU-27 unemployment inverted, right axis
Source: Fed, ECB
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 16
1.14. Baltic Dry and Harpex indices
While dry bulk costs were untouched by the slowdown of
2011, container costs were sharply down
1. The World Economy 2012: New Cycle Means New Risks?
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Baltic Dry HARPEX (container costs, right axis)Source: Baltic Exchange, Harpers
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 17
1. The World Economy 2012: New Cycle Means New Risks?
GDP yoy, % UN IMF WB 2011
World (PPP) 3.6 3.3 3.4 3.8
US 1.5 1.8 2.2 1.7
EA 0.4 -0.5 -0.3 1.6
Japan 2.0 1.7 1.9 -0.9
China 8.7 8.2 8.4 9.2
India 7.7 7.0 6.5 7.5
Brazil 2.7 3.0 3.4 2.9
Russia 3.9 3.3 3.5 4.1
Oil, $/b 100.0 99.1 98.2 104.2
1.15. Main economic forecasts for 2012
Source: UN, IMF, WB
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 18
2. Global savings: from
“glut” to deficit?
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 19
Three arguments for less saving in the long-term:
world population ageing, esp. in developed countries,
increases retired-to-workers ratio;
losses the pension savings took after the financial crisis
of 2008 and probable sovereign debt crises of 2008-2011
forgone investment gains, e.g. negative real rates as a
consequence of ZIRP+QE in reserve currencies
One argument for less money going to emerging
markets:
developed world needs more money to refinance
growing public debt and restart new credit cycle
2. Global savings: from “glut” to deficit?
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 20
5
10
15
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25
2010
2015
2020
2025
2030
Мир
2.1. Retired-to-working ratio, world, %
2. Global savings: from “glut” to deficit?
World population ageing, esp. in developed
countries, increases retired-to-workers ratio
Source: UN
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 21
2.2. Global liquid financial asset structure, %
2006 2010
$ tn % $ tn %
Equity market cap
55 30.7 54 25.6
Sovereign debt 28 15.6 41 19.4
Financial institutions debt 35 19.6 42 19.9
Nonfinancial institutions debt 7 3.9 10 4.7
Securitised credit 14 7.8 15 7.1
Nonsecuritised credit 40 22.3 49 23.2
Total 179 100.0 211 100.0
Source: MGI.
2. Global savings: from “glut” to deficit?
Losses the pension savings took after the financial crisis
of 2008 and probable sovereign debt crises of 2008-2011
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 22
“What incentive does a US bank have to extend
maturity to a two- or three-year term when
Treasury rates at that level of the curve are below
the 25 basis points available to them overnight
from the Fed?
What incentive does PIMCO or banks have to
buy five-year Treasuries at 75bp when the
maximum upside capital gain is 2 per cent of par
and the downside substantially more?”
- Bill Gross, PIMCO
2. Global savings: from “glut” to deficit?
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 23
As more and more sovereign debt in developed
countries needs refinancing, emerging markets will
experience outflow of capital sourced in developed
markets, i.e. “home bias” for the debt will strengthen
This means governments should concentrate on
stimulating the potential of internal savings rather
than seeking overseas financing, especially financing
for the emerging markets
2. Global savings: from “glut” to deficit?
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 24
2.3. Financing needs of
developed countries in 2012,
$ bn
2.4. Financing needs of
developed countries in 2012,
% GDP
Source: IMF, Fiscal Monitor 2011
2. Global savings: from “glut” to deficit?
32
51
54
324
389
538
359
471
601
383
0 100 200 300 400 500 600
Ireland
Greece
Portugal
Spain
United Kingdom
Germany
Italy
France
Japan*
United States*
*10 млрд.
долл
14
17
22
21
11
24
21
59
30
15
0 5 10 15 20 25 30 35 40 45 50 55 60
Ireland
Greece
Portugal
Spain
United Kingdom
Germany
Italy
France
Japan*
United States*
*10 млрд.
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 25
2. Global savings: from “glut” to deficit?
Gross national
saving
Gross fixed capital
formation
Compare to:
FDI*
Brazil 19.3 18.1 2.2
Russia 28.0 20.6 3.5
India 34.2 31.7 2.3
China 52.0 41.9 3.7
Compare
to: EU 21.3 20.4 4.1
2.5. Saving and investment rates avg. 2006-2010, % GDP
Not all BRIC countries have internal resources for investment, thus
more investment in infrastructure may mean less investment elsewhere
except for the FDI increase *not directly comparable as FDI is part of balance of payments, not national accounts data
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 26
Can FDI help? Many studies suggest FDI are the
source of quality governance and tech transfer, not so
much a financing tool
For 2006-2010, average yearly FDI inflow into BRIC
countries was less than 3% GDP or less than 10% of
investment
Two differing systems of attracting the funds to long-
term investment (including infrastructure) are
widespread (e.g. Walsh, Park and Yu 2011), so-
called centralized and decentralized
2. Global savings: from “glut” to deficit?
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 27
Centralized system is either government investment
or its advanced version, directed loan-based:
used in China with public banks+PBC, in Brazil with
BNDES (esp.after PAC)+pensions
Centralized form reqs:
healthy budget (little evidence of investment in
infrastructure to create short-term budget net gains)
concentrated banking system
+ creating off-budget development institutions not tied by
system-wide banking regulations, like BNDES or VEB
some insulation from external shocks as banking system
becomes distorted and vulnerable as it takes on risks
connected to directed long-term loans (infrastructure)
2. Global savings: from “glut” to deficit?
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 28
Decentralized is based on a mature market for long-term
debt and equity instruments
Increasingly used in China (highway SPV), much less for
Brazil, in the debt part – basic for Chile and Korea
Decentralized long-term financing reqs:
Large long-term internal funds (i.e. fully-funded pension
scheme or the like) Institutional environment for long-term
open market financing
(i.e. market-makers + risk management regulatory practices)
Institutional environment for long-term open market
financing
(i.e. market-makers + risk management regulatory practices)
Framework for private involvement (PPP, concessions etc.)
2. Global savings: from “glut” to deficit?
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 29
3. The case of Russia –
a path to decentralized
financing model
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 30
Gross fixed capital formation rate is relatively low
(20+% GDP) for an emerging economy
Significant difference (8% GDP) between gross
savings and investment
Banking system has very small share of long-term
deposits, almost all are redeemable at notice
Bond market has plenty of long-term bonds, but most
long-term have embedded call after 2 years, making
them de facto lower-medium-term instead of long-
term
3. The case of Russia
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 31
Currently, the system is highly centralized:
main infrastructure investment is budget-sourced
development institution (VEB) is the primary non-
budget financing source
almost no long-term debt market
most pension savings are legislatively locked into
low-yield government bonds
banking system is deconcentrated (CR5=50%)
while syndication market is underdeveloped
rates are unstable due to exchange-rate targeting
policy
3. The case of Russia
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 32
The way to decentralized system is unlocking pension
savings and the funds dispersed inside banking system to
engage in financing of large long-term projects
Market for long-term lending needs to be created:
VEB (DI) should co-finance market-makers both for
the long-term bond market and standardised
syndicated loan market
The industry standards (lex mercatoria) need to be
developed:
Self-regulating organizations (like LMA/LSTA/
APLMA), debt covenants
Market makers are instrumental in creating the
market
3. The case of Russia
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 33
As the market makers emerge and long-term bond
and credit syndication secondary markets (e.g. by
using credit mutuals) are made liquid:
– money managers (including VEB) may be
allowed to use mandatory pension savings to ramp
up the markets for syndication and long-term bonds
The experience is based on case studies of financial
market developments by EBRD (in CEE), KfW (in
Germany), BNDES (in Brazil), NAFIN (in Mexico)
Solntsev et al. (2011) estimate this will lead to 100%
credit syndication market growth in Russia to $25 bn
a year in 3 years, at the cost of $15 bn (0.2% GDP a
year) in credits, LT bond stimulus is comparable
3. The case of Russia
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 34
Conclusions
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 35
The economy in 2012 looks to the upside and ZIRP is
on the side of long-term international investment in
emerging markets
However, the long-term prospects are more gloomy:
the global savings glut could turn into deficit in
10-15 years
developed markets will consistently need more
long-term funds to fix sovereign debt problems
than today, ergo home bias for the debt markets
Thus, perspectives of international capital going into
the infrastructure are not impressive
Conclusions
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 36
However important, FDI flows and international
financing are insufficient to finance long-term
investment in developing countries
Thus, developing countries should finance long-term
development, including infrastructure, out of internal
sources
The potential for increase in investment is present
almost in all BRIC countries
Conclusions
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 37
Most investment in long-term investment projects in
BRIC is centralized via development institutions,
government funds or pet banking systems
pension savings are utilized in China and Brazil,
much less in India and Russia
elements of decentralized model are present in all
BRIC countries, but all of them lack a complete
set of elements
the decentralized model is an infrastructure in
itself, and thus is a long-term prospect to build
Conclusions
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