Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
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Speaker: And now onto today's show.
Speaker: Welcome to the Emerging Market Spotlight, a podcast series from HSBC.
Speaker: The emerging markets landscape is more complex than ever at a time of divergent monetary policy, high commodity prices, supply chain disruptions, and geopolitical tensions.
Speaker: Join us as we speak with world's leading institutional investors, experts, policymakers and thought leaders to explore the challenges and opportunities.
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Speaker: Thanks for listening.
Speaker: And now on to today's show.
Speaker: Hello everyone, and thank you for joining us and welcome to this panel on the best of HSBC's emerging market macro research.
Speaker: My name is Janet Henry.
Speaker: I'm HSBC's global chief economist, and I'm joined on this panel by Jing Liu, HSBC chief economist for China, Fred Newman, who's HSBC's chief economist for Asia, Simon Williams, our chief senior economist, and Anna Madeira, our chief economist for Brazil.
Speaker: Now, clearly, the array of global challenges is not an easy environment for most emerging market economies currently.
Speaker: Global growth is slowing, but there have been some glimmers of hope on the inflation front, with oil prices and even wholesale food prices edging a bit lower, and even some signs of easing of certain bottlenecks like shipping and even some semiconductors.
Speaker: There are now some signs that we may have already seen the peak
Speaker: in inflation in some places.
Speaker: But we will start by hearing from each of our speakers.
Speaker: They can briefly set out their key views on their regions of expertise.
Speaker: So I'll now hand over to Jing to talk about the outlook for China.
Speaker: Thank you, Janet.
Speaker: So for China, this year, we have seen that China has faced lots of headwinds, both externally and internally.
Speaker: And so far, it's fair to say the biggest challenges remain to be first, China's zero COVID policy, and second, the housing market strength.
Speaker: We have seen that China has vowed to stick to the zero COVID policy, at least by now.
Speaker: There's no sign of deviation.
Speaker: And obviously, in order to smooth out the health shock, China is paying quite some economic cost.
Speaker: We have seen, for example, in the past months, there's COVID cases flare up here and there, leading to the lockdown of the second mega city, Chengdu, the capital city of Sichuan, which has a population of more than 20 million people.
Speaker: And obviously, the lockdown and, you know, other kind of restrictions, maybe to a lesser extent,
Speaker: have, you know, inevitably weighed on the economic activity.
Speaker: We have seen the consumption continue to be very sluggish because of on and off restrictions here and there.
Speaker: And we have also seen, for example, some of the SMEs or even, you know, larger kind of enterprises
Speaker: hesitate to put down the investment because of the uncertainty for the future.
Speaker: But I think when compared to the lockdown we saw back in April and May, the good news is that at least this time around, there's a better coordination between central and local governments and also across different local governments to the extent that the disruption to logistics and supply chain
Speaker: has been limited.
Speaker: Another concern on the investor's mind is the housing market strength.
Speaker: We have seen the housing tightening starting in late 2020 have caused a slowdown in the housing transactions.
Speaker: And this year, in particular, the housing sales have all go down quite rapidly.
Speaker: And people start to wonder when the central government could
Speaker: possibly roll out some kind of plan to reinstall the confidence of the market.
Speaker: And we have seen different versions of rumors of what the bailout plan may look like.
Speaker: So far, we have seen some measures here and there try to stabilize the market, but we still believe a holistic solution from the central government and coordinated different parts needs to be rolled out in order to
Speaker: stabilize the whole housing market.
Speaker: That being said, I think on a positive note is that, first of all, unlike other major economies, China's inflationary pressure has remained quite limited.
Speaker: So that has given PBOC quite some space for policy easing.
Speaker: And on top of that, the fiscal policy in particular, the infrastructure investment has a
Speaker: obviously taken the central role in order to engineer the kind of the growth rebound.
Speaker: And with those policy stimulus in place, we think, you know, this year, although China cannot deliver its growth target of 5.5%, it still has a potential to have the steady rebound starting in the fourth quarter and going into next year.
Speaker: So I'll hand over to Fred.
Speaker: Thank you very much, Jing.
Speaker: And when it comes to Asia, it's really a tale of two stories here.
Speaker: You heard from Jing, the economic challenges that China is facing.
Speaker: If you look at the rest of the region, you really have seen upside surprises in economic growth over the past few quarters or so.
Speaker: And there are two reasons for this.
Speaker: One is the
Speaker: reopening domestically in many economies from lockdowns earlier in the year or last year.
Speaker: That's really providing enormous boost to domestic consumption and investment.
Speaker: And then, of course, also exports remain remarkably strong so far for much of the region.
Speaker: But our view is that actually on both counts, you will see growth headwinds stiffen.
Speaker: On the domestic side, there's clearly a sense that
Speaker: The reopening tailwinds will abate and the downturn or slowdown in consumption will be even strengthened or intensified by the shock of higher energy and food prices.
Speaker: So on the mystic side, certainly if you look from Korea to Southeast Asia to India, going into next year, consumer spending should begin to slow.
Speaker: But on the external side too, there are some question marks.
Speaker: And in particular, we believe that the trade cycle will cool.
Speaker: There are already signs that in the electronic sector, for example, new global orders for industrial and consumer orders have started to come off their pandemic highs.
Speaker: And if you look at some of the lead indicators for the manufacturing sector globally, there's clearly a slowdown in demand, which should weigh on Asian export growth going into next year.
Speaker: So that suggests that the growth headwinds for the rest of the region are stiffening as well.
Speaker: And central banks are therefore starting to turn their sides towards the growth risks.
Speaker: Yes, there is high inflation.
Speaker: Yes, we've seen a pickup in headline inflation.
Speaker: But most central banks still believe that they face a relatively benign core inflation challenge here.
Speaker: Yes, in some economies like the Philippines, core inflation is elevated.
Speaker: But broadly speaking, emerging Asia does not face the acute core inflation challenges that we've seen elsewhere in the world.
Speaker: And so with the growth risk mounting, central banks are perhaps starting to think more about the growth risks than continued rises in inflation pressures.
Speaker: And that would mean that, again, for most central banks in Asia, we do not believe that they will match the Fed fully in terms of the quantum of rate hikes that the Fed is delivering.
Speaker: Now that has clear implications that we've seen play out in FX markets as a result of Asian central banks not being as aggressive as the Fed.
Speaker: Many Asian currencies have come under pressure.
Speaker: And one of the questions we often receive in the last few weeks is whether that FX depreciation could exert greater financial pressure on local Asian markets, emerging markets across the region.
Speaker: Here, by and large, we do not think that the balance sheets broadly are vulnerable to an FX decline.
Speaker: We think that compared to the late 1990s, for example, the dollar borrowing component is much more manageable.
Speaker: We have higher FX reserves and there are no visible signs here of financial stress emerging.
Speaker: Also, the inflationary impact from weaker effects should be manageable in the broader context, particularly because oil prices have started to come off of late.
Speaker: That means that central banks will not react overly aggressively in the face of FX or exchange rate depreciation.
Speaker: A few countries where central banks might become a bit more defensive, like the Philippines, for example.
Speaker: By and large, this is not a depreciation that should cause overly big concern among monetary officials for the time being.
Speaker: But there are also some idiosyncrasies worth highlighting just in the last minute.
Speaker: Three countries I think worth subscribing.
Speaker: One is Korea.
Speaker: The second one is Indonesia and the third one India.
Speaker: In Korea, we actually believe that the external headwinds will be such that the Bank of Korea is nearing its end of the tightening cycle very soon and growth should, in fact, fall well below trend as of next year, meaning that the Bank of Korea will soon go on hold.
Speaker: In Indonesia, we just had the removal of energy subsidies that will add about 1.8 percentage point to inflation.
Speaker: But here too, it's not clear that the central bank has to move more aggressively and raise interest rates much higher when they were in 2019, such as the strength of the balance of payments.
Speaker: And lastly, in India, there's been a lot of concern early in the year about runaway inflation, but there are signs of stabilization.
Speaker: It doesn't mean that inflation is coming off rapidly, but it seems to be stabilizing on the back of better food prices in India.
Speaker: And that will allow the RBI also not to push too hard on the brakes going forward.
Speaker: And with that, I'll hand over to Simon Williams, our senior chief economist.
Speaker: Thank you, Fred.
Speaker: Well, across the CME, we cover 20 economies across the CME space, 20 enormously diverse economies.
Speaker: It's hard to pick out a single overarching story.
Speaker: But I think if there is a unifying theme, it's one of the economies that have been battered by external shocks, have exposed some very serious underlying domestic
Speaker: frailties that policymakers are struggling to contain and they're being forced to contain them against a backdrop of sharply slowing economic growth.
Speaker: I think there are a few different components to those risks.
Speaker: Some of it is still about inflation and Janet rightly highlighted that some of the external supply side shocks have begun to fade but we have significant FX weakness across much of the EMEA space which means those import costs are
Speaker: are still high.
Speaker: And what we're also seeing in much of the EMEA space is signs that those external shocks have faded through into domestic crisis, into domestic wages, into expectations and into labor markets in particular.
Speaker: I think those inflation risks are especially pronounced across Central and Eastern Europe, where the ongoing consequences of the Russia-Ukraine conflict are particularly
Speaker: pronounced but also where I think policymakers were especially slow to move in response to those initial inflationary impulses and where domestic labour market conditions in particular are so tight and that there is a real risk of an accelerating wage price inflation spiral starting to build even as some of the external pressures start to fade away I'd say across the we're probably
Speaker: most relaxed, I'm not sure that's quite the right word.
Speaker: Easiest about the outlook of the Czech Republic where we think the downturn activity is going to be especially severe.
Speaker: We're probably more concerned though about Poland where we think the policy settings particularly ahead of next year's elections being those domestic inflationary pressures and the risk of the loot coming out of control is especially pronounced.
Speaker: Alongside the inflation risks we have growing worries over external funding risks, particularly in the lower rated sovereigns that we cover.
Speaker: Those external funding pressures were building well before the Russia-Ukraine conflict hits, and they were a result in many cases about policy settings that were too loose and in some cases too rigid.
Speaker: But clearly, the Russia-Ukraine conflict is compounded
Speaker: those external vulnerabilities partly by pushing commodity prices higher but also by leading to that souring of global market risk appetite that's led to a funding drought for many of those lower rated solvers in some cases it's made the external funding pressures more pronounced because it's triggered heavy capital flight in an environment like this one where higher commodity prices
Speaker: keeping the trade bill wide and where risk appetite is making it so hard to access stable sources of funding, it's difficult to see how those funding pressures ease quickly.
Speaker: The IMF clearly has a role to play in this, but it's really striking at the moment that an IMF deal or even the prospect
Speaker: of an IMF deal doesn't necessarily bring with it ready market access.
Speaker: Now, many of the economies that we're most concerned about, I guess they sit in Africa, and we're worried about a place like Ghana and Kenya, Egypt as well is high on our list, but I guess Turkey leads those where we think the vulnerabilities are most pronounced.
Speaker: For the commodity producers, a third set of our economies across the across the Semia space hasn't been as bad.
Speaker: They're the ones that have enjoyed the gains, the pain being suffered elsewhere in particularly in EMEA.
Speaker: But even for the commodity producers, there's a big gap depending on the kind of commodities and the export and the commodity intensiveness of the economies.
Speaker: South Africa has undoubtedly has some additional
Speaker: greenfield maneuver because of the improvement in their terms of trade.
Speaker: But you can see in those Q2 current account numbers, some of those gains starting to roll away, and that hasn't been enough, or the high commodity prices haven't been enough to give growth much support.
Speaker: For the oil producers, it's undoubtedly been easier, and in Africa, I'd highlight somewhere like Angola as being one of the big oil producers.
Speaker: oil gainers.
Speaker: The Middle East too has done well over the last six months from that run up in oil prices.
Speaker: But the Middle East, again, I would argue there's a big difference between the super rich of the region and those who are only enjoying temporary relief from the pickup in oil prices.
Speaker: I'd also say that oil prices, well, at the moment they look a bit soft and there are other rigilities in the Middle East, particularly around the currency regime that are starting to create some headwinds.
Speaker: So that's where we sit.
Speaker: A region I think is still struggling to come to terms with those external shocks.
Speaker: I fear a very difficult six to 12 months ahead.
Speaker: Anna, how's that, Anne?
Speaker: Fantastic, Simon.
Speaker: Thank you very much.
Speaker: So moving on to Brazil.
Speaker: I mean, the big question and the big focus in Brazil this year is obviously the elections.
Speaker: We are going to have the presidential elections in October.
Speaker: When we look at the opinion polls, they show a very polarized election with two main leading candidates.
Speaker: Those are the incumbent president Jair Bolsonaro and the former president Lula.
Speaker: Now, some may argue that the setup might be quite different this time around, simply because we have very well-known candidates.
Speaker: And when you look at the polls, they show that the odds of seeing a third candidate
Speaker: making it to the second round appear very low at the moment.
Speaker: So at the end of the day, in terms of the candidates, you end up having the feeling that there might be less uncertainty on the elections outcome.
Speaker: Now, the big fear, however, with the elections is the usual suspect, which is the fiscal.
Speaker: What's going to happen to fiscal policy, to the fiscal regime?
Speaker: When you look at the policy views of the two leading candidates, the biggest difference that you can find is on fiscal policy and what each of them see as being the right role for the state within the economy moving forward.
Speaker: Now, if we move on to the macro backdrop, I like to say, if only it weren't for the uncertainty of the elections, because you look at it and you see bright skies.
Speaker: Let's start, for example, with growth.
Speaker: At the beginning of the year, the expectations was that growth for this year in Brazil was going to be close to 0.3%.
Speaker: Some economic agents expected strongly that we would even see a recession in Brazil this year because of the tightness of the monetary policy.
Speaker: And now when you look at expectations, they are moving closer to 3%, positive 3% for 2022.
Speaker: When you look at 2023, the same trend is following.
Speaker: A little bit more timid, but it is following.
Speaker: A couple of months ago, the expectation was for half a percentage points of growth for next year, and now it is also moving higher.
Speaker: You turn to the labor market, very solid labor market.
Speaker: Just to give you an idea, pre-pandemic unemployment rate close to 12%.
Speaker: Right now, unemployment is close to 9%, so even lower than the pre-pandemic level.
Speaker: So of course, this is giving a big support to the overall economic activity resiliency that we are seeing in Brazil.
Speaker: Now you move on to inflation.
Speaker: Even then, dynamics are improving.
Speaker: For the case of Brazil, it feels that the peak of inflation actually happened in April.
Speaker: After that, inflation has continuously decelerated on an annual basis.
Speaker: A few factors help explain that.
Speaker: So you had tax cuts promoted by the government on gasoline, diesel, electricity prices, etc.
Speaker: And you also had price cuts promoted by the state-owned company Petrobras on the back of the decline in international oil prices.
Speaker: So again, in the first half of this year, the expectations that Brazil would have an inflation, annual inflation, close to 8-9% by the end of this year.
Speaker: And now the expectations have fallen to something closer to 6% for the end of this year.
Speaker: And of course, this means a better inertia for inflation for next year as well.
Speaker: So inflation expectations for 2023 have also started coming down.
Speaker: More timidly, at the end of the day, we do have an election in the middle, but they have also started coming down.
Speaker: Now, where does this leave monetary policy?
Speaker: Well, for Brazil, we believe that we are very, very close to the end of the tightening cycle.
Speaker: The famous first in first out, indeed, Brazil was one of the first to start the hiking cycle in 21, March 21, and they have done quite a bit.
Speaker: At the beginning, the CELIC rates, the monetary policy rate was at 2%.
Speaker: We are now close to 14%.
Speaker: And what does that mean?
Speaker: It means that we believe Brazil is also well positioned to start the easing cycle in the second quarter of next year.
Speaker: So thank you very much.
Speaker: I'll hand it back to John.
Speaker: Thank you very much, everyone.
Speaker: And before I say goodbye, I am going to go around and ask for the single biggest upside or downside risk to their areas of expertise.
Speaker: One line answers, everyone.
Speaker: Upside or downside risk, which country or region?
Speaker: Fred?
Speaker: Upside risk for Asia.
Speaker: China bounces back and you get that big reopening trade.
Speaker: Downside risk is watch food prices.
Speaker: Yes, they've come off a little bit.
Speaker: But if there's another spike, watch rice, for example, then we'll have a bigger inflation problem.
Speaker: Simon?
Speaker: Yeah, alongside China, I guess US inflation turns over and global risk appetite comes back.
Speaker: That's probably my biggest upside, downside.
Speaker: It's those imbalances, inflation and externals, Poland and Central Europe, Ghana, I guess, Egypt and Turkey in that fragile fall as well.
Speaker: Anna?
Speaker: So the downside risk is, as usual, suspect, so a much bigger fiscal expansion than anticipated.
Speaker: But the upside risk is actually the much better macro backdrop that the next president is going to inherit.
Speaker: This is relevant because you're going to have less pressure, most likely, to do expansionary fiscal policy, especially with more social spending and more benefits.
Speaker: Thank you all very much.
Speaker: I hope you found it useful.
Speaker: Thank you very much for joining us.
Speaker: Goodbye.
Speaker: Thank you for joining us for this episode of Emerging Market Spotlight.
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