RECENTLY, the World Bank issued its June 2018 Global Economic Prospects with a somewhat “scary” title: “The Turning of the Tide?” As global economy experiencing several upswing factors, it finally got out of the economic rut. In order not to return back to the rut, we must quickly surpass numerous looming headwinds before we are swept into the rut again.
It is undeniable that, for this year, the “synchronised” global economic growth will continue to propel overall economic growth as seen from global economic growth projection by World Bank and IMF of 3.1 per cent and 3.9 per cent respectively, the highest since 2012 in the post-Great Financial Crisis era. In addition, expansionary fiscal policy from the US will not only provide an extra boost to the US Economy but also spill over further growth momentum to other countries as well.
Though the 2018 growth forecasts are varied, both IMF and World Bank do jointly agree that this strong pace of economic growth will not last forever. Eventually, robust global growth will be softened over the next years as over the next several quarters, global risks will lean towards the downside from several reasons such as 1) tightening financial condition due to global monetary normalisation 2) heightening risks of shifting towards protectionist-trade policies which could hamper ongoing momentum of resilient global trade and investment and 3) emerging political risks as well as geopolitical strains.
So how these factors will contribute to global slowdown? More importantly, do we see any signal so far?
Out of the mentioned factors, it is clear the impact from tightening monetary policy has already started to materialise especially among emerging market countries such as Argentina, Turkey, Indonesia, Brazil and South Africa lately.
This was because the rising interest rate trend in the US has pushed up the cost of borrowing in US dollar. Moreover, attractive yields relative to risk and brightening economic outlook in the US will further induce more inflows to US assets which will lead to fewer inflows to EM or even worse huge capital flights as it has already happened.
Moreover, deluges of capital outflows could potentially weaken EM currencies as seen from ongoing “risk-off” activities.
Current Emerging Market turmoil as shown by continual fund outflows from both bond and stock markets and deeply depreciated currencies seemed to target emerging countries with “external vulnerability” ie countries with high short-term external debts and large current account deficits. For instance, Argentina seemed to be the most vulnerable country out of the five EM peers that took a hit as it had the lowest foreign reserves (excluding gold) to short-term external debt ratio (merely 0.8) and large current account deficit to GDP of -2.7 per cent.
In contrast to “vulnerable” emerging market countries, Thai external positions tend to be more resilient which reflected by significantly high foreign reserves to short-term external debt ratio of 2.9 and hefty current account surplus of around 10-11 per cent to GDP.
However, during the time of crisis, the panic can trigger large sell-off from all emerging countries regardless of how large each countries’ buffers are.
In fact, sharp disruption in EM financial market could lead to EM crisis if these EM central banks fail to adjust monetary policy such that investor confidence could not be recovered. Furthermore, if the problem starts to spread across EM or EM contagion. No doubt, EM financial crisis turmoil could lead to EM economic crisis like the Latin American debt crisis of the 1980s and the Asian financial crisis in the 1990s. Therefore, it is critically important to keep eyes on Emerging Market rout since it could develop into a more serious problem.
Typically, every year financial institutions will have to perform “stress testing” per central bank regulations to gauge impacts from certain extreme scenarios in addition to normal risk and prepare strategies to mitigate the risk. This beneficial concept should not be used by only financial institutions but also nonfinancial firms as it can provide more insights into companies’ weak points which could better the firms’ decision as well as improve their future business plan.
The legendary Sun Tzu once said in his “The Art of War” military treatise that “The art of war teaches us to rely not on the likelihood of the enemy’s not coming, but on our own readiness to receive him; not on the chance of his not attacking, but rather on the fact that we have made our position unassailable”. Now, it’s golden time for business to prepare for the worst-case scenario, regardless of when the tide will be turning.
Views expressed in this article are those of the author and not necessarily of TMB Bank or its executives. Contributed by DUANGRAT PRAJAKSILPTHAI and POON PANICHPIBOOL. They can be reached at firstname.lastname@example.org