The World Bank’s latest Global Economic Prospects update paints a picture of an anaemic economic environment, with many of the world’s emerging markets shouldering unsustainable credit burdens whilst being hampered by low commodity prices.
A significant increase in private sector credit — fuelled by an era of low interest rates and rising financing needs — raises potential risks for several emerging market and developing economies, the report finds. These risks seem conspicuously concentrated in and around China, where private sector credit to non-financial companies rose to 180% of GDP at the end of 2015.
The BRIC countries offer a mixed bag in terms of performance. China’s growth is forecast at 6.7% this year, slightly lower than the 6.9% seen in 2015, while Brazil and Russia are projected to remain in deeper recessions than forecast six months ago, shrinking by 4% and growing just 1.2% in 2016 respectively. Growth in India, meanwhile, is expected to hold steady at 7.6%, as the positive momentum gained from reforms continue apace.
“As advanced economies struggle to gain traction, most economies in South and East Asia are growing solidly, as are commodity-importing emerging economies around the world,” said World Bank Chief Economist and Senior Vice President Kaushik Basu in a statement.
“One development that bears caution is the rapid rise of private debt in several emerging and developing economies. In the wake of a borrowing boom, it is not uncommon to find non-performing bank loans, as a share of gross loans, to quadruple.”
South Africa, which recently avoided a credit rating downgrade by S&P Global Ratings, is forecast to grow at 0.6% in 2016, about 0.8% more slowly than forecasted in January; growth in Sub-Saharan Africa is forecast to slow again in 2016 to 2.5%, down from an estimated 3.0%.
Alarm Bells Sounding on Latin America
Latin America is one of the more troubled regions, and will see its economy contract by 1.3% in 2016 after a 0.7% decline in 2015, the first back-to-back years of recession in more than 30 years according to the World Bank.
The declines are led by Brazil and Venezuela, which will see their economies shrink by 4% and 10% this year respectively. This is in contrast with Mexico, which will see growth stabilise at 2.6%.
Argentina, which has implemented a raft of market-friendly reforms since its incumbent President Mauricio Macri took power in December 2015, will see its economy shrink by 0.5% this year and return to growth in 2017, putting in an estimated 3% increase in output.
“Reform has been a major theme in both Brazil and Argentina over the past 4 months, which is encouraging – so the silver lining might be an end to the populist policies that were largely funded by a commodities boom,” explained Neil Shearing, Chief Emerging Market Economist at Capital Economics.
Mirroring some of positive momentum seen in Argentina, Brazilian interim President Michel Temer has kickstarted a series of reforms including changes to the mandatory retirement age and public pension scheme; reducing funding earmarks within the budget to make allocation more flexible; and reigning in the state-backed development bank, BNDES.
“The reality is, without another boom in commodity prices, and given the severe lack of diversification among many of the region’s economies, you’re looking at a tough hole to climb out of.”
The report was published as Latin America experienced one of the busiest weeks in primary market activity, with significant issuances from Mexico including the country’s Treasury and corporates like Fibra Uno and CEMEX, Colombia’s Ecopetrol, Brazil’s Vale, Argentina’s Cablevision and the Province of Buenos Aires, with at least seven other issuances and re-taps in the pipeline. The recent spate of issuances have prompted some to look at the region’s markets through rose-tinted glasses, particularly in the case of Brazil, where some asset prices have dropped substantially in recent weeks.
Shearing said Latin American economies need to continue down the path of implementing structural reforms – but avoid moving too quickly. Striking a balance between the two is likely to put lawmakers in a tough spot, particularly those more recently taking office in Brazil, Argentina, and Peru; drawing reform processes out can often lead to a loss of the political capital required to pass key pieces of legislation, but passing large packages of reforms at once can often exacerbate market distortions.
“I would be concerned about any market liberalisation efforts that end up accelerating credit growth as it tends to be more destabilising than anything else,” he added.