Transcript
Speaker: This is HSBC Global Viewpoint, your window into the thinking, trends and issues shaping global banking and markets.
Speaker: Join us as we hear from industry leaders and HSBC experts on the latest insights and opportunities for your business.
Speaker: Thank you for listening.
Speaker: You're listening to the HSBC Global Research Macro Viewpoint, our weekly review of the key reports from our team of economists and strategists across the globe.
Speaker: Coming up today, we find out why 2022 could be a tough year for many emerging market currencies.
Speaker: We get an update on South Africa's economic outlook as the Omicron virus strain overshadows financial markets.
Speaker: And we consider the role that cities have in tackling climate change.
Speaker: This podcast was recorded on Thursday, the 2nd of December 2021.
Speaker: Our full disclosures and disclaimers can be found in the link attached to this podcast.
Speaker: Hello, I'm Piers Butler.
Speaker: And I'm Chris Brown-Humes.
Speaker: Downward pressures on EM currencies have been intensifying over the last few months.
Speaker: And with Fed rate hikes looming, 2022 looks set to be a challenging year.
Speaker: Let's hear more from Paul Mackle, Global Head of FX Research.
Speaker: Paul, it's been a tough time for emerging market currencies.
Speaker: What have been the biggest challenges?
Speaker: Well, that's right.
Speaker: It has indeed been quite challenging for a number of emerging market currencies.
Speaker: I mean, first of all, the dollar itself has been transitioning from a weaker state earlier this year into a stronger one.
Speaker: That's been pretty consistent with our thought process in terms of what we outlined nearly a year ago.
Speaker: There was always a question mark about the timing, but the direction of travel for us about a recovery in the broad dollar makes sense.
Speaker: And that's a very potent headwind for many emerging market currencies.
Speaker: The second feature and challenge for these currencies comes down to global growth.
Speaker: There's been a number of indicators that keep reminding us about how things continue to cool.
Speaker: So you got two pieces of the puzzle there that explain some of the lackluster price action.
Speaker: What are your thoughts on the direction of Fed policy and what that could mean for EMFX?
Speaker: It's a really good question because if you look at the history and how the dollar or emerging market currencies perform in the aftermath of the Fed first moving in terms of raising its policy rate, let's say that happens in June 2022, in the past the start of the Fed's hike cycle coincided with the dollar beginning to weaken and also a relief rally by emerging market currencies.
Speaker: That may play out temporarily, but I think we need to be very mindful about the cycle itself.
Speaker: As long as the Fed is raising interest rates, again, it's another potent headwind for emerging market currencies.
Speaker: History has shown us that typically it's those in the LATAM region that tend to face the biggest headwinds.
Speaker: Staying with central banks, you've been highlighting a catch-22 as you put it for EM central banks.
Speaker: What does that refer to?
Speaker: That's right.
Speaker: I mean, it's a play on word, obviously, for the coming year.
Speaker: But nonetheless, I mean, what we're trying to identify are these currencies where the central bank policy mix is prudent.
Speaker: That is, you're trying to balance the recovery and growth
Speaker: but also deal with quite strong inflationary pressures.
Speaker: On top of that, we also think that we can identify certain currencies which are buffered by healthier sources of inflows, the so-called core strength, a decent current account position and also strong FDI inflows.
Speaker: So currencies like the Indian rupee, the Indonesian rupiah and some others in the emerging world do stand out, but still next year is likely to be a bumpy path for many emerging market currencies.
Speaker: Any other currencies to highlight going into 2022?
Speaker: Definitely.
Speaker: We think that there's a number of currencies which could still be quite resilient next year, including the Russian ruble, the Israeli shekel, and even a belief that some of the other CE currencies could benefit eventually from tighter monetary policy.
Speaker: This is very much a view that Murat Toprak has been highlighting for some time.
Speaker: In LATAM, one of our preferred currencies would be the Mexican peso.
Speaker: Paul, thanks very much.
Speaker: Thank you very much.
Speaker: South Africa's economy has been facing a whole range of challenges, and that was before the discovery of the new Omicron COVID-19 strain in the country recently.
Speaker: David Faulkner is our Chief Economist for South Africa and Sub-Saharan Africa, and he joins us from Cape Town.
Speaker: David, Southern Africa is the region where the Omicron variant was discovered.
Speaker: What's the latest on the spread of the virus in South Africa itself?
Speaker: Well, we've seen a very sharp pickup in new COVID-19 cases in recent weeks.
Speaker: We'd had a significant decline after our third wave in July and August.
Speaker: But in recent weeks, you've seen the number rise from less than 300 a day to 8,500 in terms of the latest number, with Omicron being the dominant variant.
Speaker: in that those cases are certainly concentrated in the commercial hubs of Johannesburg and Pretoria and Haoteng.
Speaker: And so there's not really a national spread at this stage, but it has been a large pickup in cases.
Speaker: And do you expect this to have an economic impact?
Speaker: Well, at this stage, our growth forecasts are for just over 5% growth this year and then a fairly marked slowdown to 2.3% growth in 2022.
Speaker: I would certainly think that this adds a fresh layer of downside risks to our growth numbers, particularly or perhaps more pronounced for 2022 than in the current year.
Speaker: I mean, for one reason is that we haven't actually seen a tightening of domestic lockdown restrictions as yet.
Speaker: That may well be something that comes in the coming days.
Speaker: At the moment, it's more around international travel bans and restrictions around the movement into and out of South Africa, where we've seen a tightening of curbs.
Speaker: And that will obviously impact tourism.
Speaker: We're just about to be entering our main tourist season.
Speaker: And we have been seeing a little bit of a nascent recovery in tourism arrivals.
Speaker: And this, I think, is going to significantly disrupt that and weigh on the ability to see tourism come back in South Africa in the near term.
Speaker: And what are the other challenges that the economy is facing?
Speaker: Well, I think on top of a fourth wave of COVID infections, the one that really jumps out right now is around the energy situation.
Speaker: The past four to six weeks, we've seen much more severe load shedding and power outages.
Speaker: These are scheduled power outages by ESCOM around the grid.
Speaker: That's going to be dampening the economic outlook, dampening business confidence.
Speaker: I think it puts a fairly low ceiling on the ability to grow next year.
Speaker: Another key risk I think has been evident in the latest labour market data that showed unemployment rise to almost 35%.
Speaker: That actually masked, I think, a much more significant disruption when you look at the jobs side of things.
Speaker: 660,000 jobs lost
Speaker: in the third quarter, about a 4.5% decline.
Speaker: A lot of this is related to the unrest that we experienced in July and the economic contraction that we're likely to see in the GDP data next week for the third quarter.
Speaker: But those two factors are certainly additional downside risks for the growth outlook.
Speaker: There has been some good news though, hasn't there, as we saw in the recent budget, with high commodity prices and strong corporate tax receipts have actually given some comfort to the government.
Speaker: Well, the high level of commodity prices, the big gains for the terms of trade have been a big positive for the economy through the course of this year, boosting the trade surplus, boosting the current account position.
Speaker: And as you say, supporting large scale mining tax receipts and corporate tax receipts that has improved the budget deficit and the budget balance.
Speaker: The government was able to outline a significant reduction in that deficit forecast in the medium term budget policy statement.
Speaker: But there's risks around that commodity prices have come off something like 30 to 35 percent from their peak in May.
Speaker: And when we look into next year, there's also quite a lot of pressure around increasing spending that may well put some pressure on the deficit going forward.
Speaker: And finally, David, I know South Africa recently joined the list of emerging market countries that are increasing interest rates.
Speaker: What was the reason for their decision to lift policy rates?
Speaker: So we have seen a rise in inflation, but it's only just above the midpoint of the SARV's target range.
Speaker: I think what really is driving the decision is that the risks to the outlook are very much skewed to the upside, whether that's higher oil prices, the depreciating RAN, the pickup in global and local producer prices.
Speaker: All of this, I think, is fostering a concern.
Speaker: the inflation dynamics are worsening.
Speaker: And given a very accommodative policy stance, the Saab needed to take an initial step to start raising rates.
Speaker: So a 25 basis point hike in November, we think that measured removal of policy stimulus continues through the course of 2022.
Speaker: David, thank you very much for that summary.
Speaker: Thank you.
Speaker: Let's finish with a look at one of our nine key themes here at Global Research, future cities.
Speaker: And in our latest report on the topic, James Pomeroy, global economist, has been looking at how cities are at the forefront of the battle against climate change.
Speaker: He joins me now.
Speaker: James, welcome to the podcast.
Speaker: Thanks for having me.
Speaker: So James, in this report that you've just published, can you give us firstly a sense of why cities are so important in this battle against climate change?
Speaker: So it's an interesting topic where over the course of the last few weeks and months, of course, around COP26, clearly climate policies led to the
Speaker: David O' front of a lot of people's minds and cities are really, really crucial in that battle because approximately 60% of global greenhouse gases.
Speaker: David O' come from urban areas and, of course, a growing share of the world's population live in urban areas and those two things together mean the cities are one going to be more important in terms of.
Speaker: the emissions that are coming out of them, but also going to be more vulnerable to some of the challenges that climate change creates, be that higher temperatures, greater risk of flooding, or the greater risk of adverse weather events.
Speaker: Cities are generally much more vulnerable to those things.
Speaker: And given that there's more people living there, there's also a clearer risk to both health and economic implications.
Speaker: And so what can cities do to counteract this?
Speaker: There's a lot of things that they can do.
Speaker: The first is really in terms of the mitigation approach.
Speaker: How can cities stop emitting so much in terms of greenhouse gases?
Speaker: This comes in a number of ways, but a lot of the policies that are likely to be useful on this front are going to be around transportation.
Speaker: A lot of
Speaker: cities are heavily congested, heavily polluting because of private transportation and any effort to see a shift towards both public transportation, electric vehicles, but also walking and cycling would be a huge step in the right direction.
Speaker: And some of that's going to be involving investment to make it easier to do the latter or making it more appealing for people to own electric vehicles, either in terms of cutting the cost or making it easier in terms of charging points, as well as on the public transportation side
Speaker: thinking about how we can provide adequate, safe, efficient public transportation networks that people want to use.
Speaker: But beyond that, you've also got to think about the energy mix that's feeding urban areas as well as buildings too, and how can we make them greener and more effective essentially in terms of not emitting as many greenhouse gases, but also acting as potential sponges by using a lot of greenery on those buildings too.
Speaker: So buildings can be repurposed as well as thinking about transportation.
Speaker: Now, a lot of what you talked about just now is to do with mitigation.
Speaker: Tell us a bit more about this whole aspect of adaptation.
Speaker: yeah so mitigation gets all the headlines and that's where a lot of the spending goes in terms of um climate action so about 95 of global funding goes on mitigation that leaves about five percent of course uh left in terms of what's happening for adaptation but we're in a world today where temperatures are going to keep rising and these challenges um for cities are only going to get much more important much more damaging and so what we're likely to have to see is is cities across the world invest in
Speaker: early warning systems against adverse weather events in terms of investing in protecting themselves against extreme heat.
Speaker: All of these different investments can help to minimize the impact the higher temperatures are going to have, because even if we do see some success in terms of these mitigation strategies, temperatures are still going to rise and adverse weather events are still likely to be more common, at least in the near future.
Speaker: Yes, and there is this great chart in your report about the top 10 cities exposed to coastal flooding.
Speaker: And some of them are very big cities that are in developed economies.
Speaker: Exactly.
Speaker: And I think this is something that we've all got to be aware of.
Speaker: A lot of people live in cities and a lot of those cities are on coastlines.
Speaker: And if we start to see higher sea levels, the implication in terms of
Speaker: people's lives is likely to be much more felt in these urban areas on coastlines.
Speaker: And I think this is a huge challenge that cities are waking up to.
Speaker: Now, you talked about funding.
Speaker: How is all of this going to get funded?
Speaker: It's not going to be cheap, is it?
Speaker: Not at all and it's something we've written about in terms of cities a lot over the past few years in terms of the need for urban investment.
Speaker: To be fair, we are starting to see more and more go towards sort of improving infrastructure in cities and we're starting to see more commitments from cities in terms of what's going to be
Speaker: built or put into place.
Speaker: But as you say, that's going to need funding.
Speaker: And that funding, we think, comes from a mixture of sources, both from national governments in terms of their broader national remits and policies they're putting in place on climate change.
Speaker: Also, in terms of local authorities themselves, we think we're likely to see spending diverted towards making cities cleaner and greener as a way of trying to appeal to people, that geographically mobile workforce.
Speaker: But also, we think that the green bond market will play a role and private financing
Speaker: here could play a role in supporting projects that help to clean up cities, cut emissions, and hopefully play a key role in the fight against climate change.
Speaker: James, thank you very much.
Speaker: Thank you.
Speaker: So that's all from us today.
Speaker: Thank you to our guests, Paul Mackle, David Faulkner, and James Pomeroy.
Speaker: From all of us here, thanks for listening.
Speaker: We'll be back again next week.
Speaker: Thank you for listening today.
Speaker: This has been HSBC Global Viewpoint, Banking and Markets.
Speaker: For more information about anything you heard in this podcast or to learn about HSBC's global services and offerings, please visit gbm.hsbc.com.
