global saving deficit and financing infrastructure in bric economies
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Global saving deficit and financing infrastructure in BRIC economies. 1. The World Economy 2012 : New Cycle Means New Risks?. 1. The World Economy 2012 : New Cycle Means New Risks?. Developed economies for a year stand on the brink of new economic cycle - PowerPoint PPT PresentationTRANSCRIPT
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia1
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Global saving deficit and financing infrastructure in
BRIC economies
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia2
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1. The World Economy 2012: New Cycle Means
New Risks?
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia3
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1. The World Economy 2012: New Cycle Means New Risks? 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, Russia4
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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? 1. The World Economy 2012: New Cycle Means New Risks?
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Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia5
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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? 1. The World Economy 2012: New Cycle Means New Risks?
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US EA Japan growth rate % (right axis)
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia6
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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? 1. The World Economy 2012: New Cycle Means New Risks?
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М3 зоны евро Денежная база зоны евроEAM3
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Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia7
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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? 1. The World Economy 2012: New Cycle Means New Risks?
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia8
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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? 1. The World Economy 2012: New Cycle Means New Risks?
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Durable goods production Manufacturing Mining (right axis)
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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? 1. The World Economy 2012: New Cycle Means New Risks?
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Durable goods production Manufacturing Mining (right axis)
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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. The World Economy 2012: New Cycle Means New Risks?
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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? 1. The World Economy 2012: New Cycle Means New Risks?
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Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia12
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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? 1. The World Economy 2012: New Cycle Means New Risks?
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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? 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, Russia14
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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? 1. The World Economy 2012: New Cycle Means New Risks?
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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? 1. The World Economy 2012: New Cycle Means New Risks?
Source: Fed, ECB
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Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia16
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1.13. Capacity utilization vs unemployment, %
1. The World Economy 2012: New Cycle Means New Risks? 1. The World Economy 2012: New Cycle Means New Risks?
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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, Russia17
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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? 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, Russia18
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1. The World Economy 2012: New Cycle Means New Risks? 1. The World Economy 2012: New Cycle Means New Risks?
GDP yoyGDP yoy, % , % UNUN IMFIMF WBWB 20112011
World (PPP)World (PPP) 3.6 3.3 3.4 3.8
USUS 1.5 1.8 2.2 1.7
EAEA 0.4 -0.5 -0.3 1.6
JapanJapan 2.0 1.7 1.9 -0.9
ChinaChina 8.7 8.2 8.4 9.2
IndiaIndia 7.7 7.0 6.5 7.5
BrazilBrazil 2.7 3.0 3.4 2.9
RussiaRussia 3.9 3.3 3.5 4.1
Oil, $/bOil, $/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, Russia19
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2. Global savings: from “glut” to deficit?
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia20
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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?2. Global savings: from “glut” to deficit?
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia21
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2.1. Retired-to-working ratio, world, %
2. Global savings: from “glut” to deficit?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, Russia22
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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?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, Russia23
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“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?2. Global savings: from “glut” to deficit?
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia24
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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?2. Global savings: from “glut” to deficit?
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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?2. Global savings: from “glut” to deficit?
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Ireland
Greece
Portugal
Spain
United Kingdom
Germany
Italy
France
Japan*
United States*
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Ireland
Greece
Portugal
Spain
United Kingdom
Germany
Italy
France
Japan*
United States*
*10 млрд.
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2. Global savings: from “glut” to deficit?2. Global savings: from “glut” to deficit?
Gross national Gross national savingsaving
Gross fixed capital Gross fixed capital formationformation
CompareCompare to: to: FDI*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, Russia27
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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?2. Global savings: from “glut” to deficit?
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia28
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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?2. Global savings: from “glut” to deficit?
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia29
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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?2. Global savings: from “glut” to deficit?
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3. The case of Russia – a path to decentralized
financing model
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia31
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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 Russia3. The case of Russia
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia32
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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 Russia3. The case of Russia
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia33
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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 Russia3. The case of Russia
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia34
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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 Russia3. The case of Russia
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia35
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Conclusions
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia36
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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
ConclusionsConclusions
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia37
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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
ConclusionsConclusions
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia38
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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
ConclusionsConclusions