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Economic analysis 29 May 2018

A quick look at emerging economies at the IIF spring meeting

Emerging economies were amongst the topics addressed at the Institute of International Finance’s (IIF) spring meeting, held in Brussels last week. This BBVA-sponsored event convened financial institutions, regulators and public bodies to debate some of the industry’s most pressing issues, including the economic and political outlook, regulation and fintech.

BBVA Research Chief Economist, Jorge Sicilia, took part in a panel discussion which focused on emerging markets. Joining BBVA’s representative were Andreas Billmeier, Chief Economist of Stone Milliner Asset Management; Arend Kapteyn, managing director and global head of economic research at UBS; and Elina Ribakova, Chief Economist EEMEA at Deutsche Bank. The panel was moderated by Sergi Lanau, Deputy Chief Economist of IIF.

Argentina’s negotiations to secure support from the International Monetary Fund (IMF) were a pivotal point of the debate. Asked about his view on the country’s situation, Jorge Sicilia first went over some of the events that have led to its current situation. So far, the current government has defined two clear goals in its normalization process after a few lost years: Recovering access to foreign markets and opening up Argentina to international trade.  However, and despite the adequate design of its economic policy, Macri’s government has struggled to get this through Parliament, where it hasn’t had, and still lacks, the majority it needs.

Also, “the policy of reining in the fiscal deficit was relatively solid at the beginning,” but over time, the government decided to “slow down a bit.” With less support from the fiscal policy to control inflation, the central bank was forced to keep interest rates high to meet its ambitious inflation target, which led to the appreciation of the real exchange rate and increased the economy’s foreign trade imbalance. The risk of a sudden loss of access to the market led the president to request assistance from the IMF.

Jorge Sicilia, Chief Economist of BBVA and DIrector of BBVA at the Institute of International Finance’s spring meeting.

According to the Head of BBVA Research, judging by Christine Lagarde’s words and the report of Article IV on the country published a few months ago, the IMF is willing to “help Argentina.” However, the institution will probably demand the country enact a stricter fiscal policy, a better combination of policies and a more flexible exchange rate.

Jorge Sicilia also underscored that while the IMF has already singled out the structural reforms that Macri’s government needs to pursue – the labor market and the pension system –  it is still not clear whether they will be made mandatory requirements for receiving finance. All in all, the Monetary Fund and the Argentine government are likely to strike an agreement, which, according to his estimates, should be sealed by mid-June for a total of between $30 and $40 billion. The loan could prevent Argentina from having to resort to international markets to cover its public funding needs, allowing the private sector to continue to tap finance for its needed expansion. In any case, this situation will lead to slightly lower growth rates in the coming quarters.

The panel on emerging economies also addressed China’s situation. As Jorge Sicilia explained, things are starting to change in the Asian giant. One of the main signs of this change is that the government has announced it will look for a more balanced economic growth structure. Also, after some years of adjustment, the authorities now seem ready to resume their financial liberalization program.

During his address, Jorge Sicilia said that China is “taking steps” in the right direction away from a highly imbalanced, indebted position, even if offset by high internal saving rates. The country has also shown it can control capital account flows, which a couple of years ago became a source of weakness. These measures have more chance of crystalizing than any other initiative in recent years.

This change of course in the economic policy also aims to reduce the economy’s levels of indebtedness, particularly among SMEs and the financial sector. Although he expects the debt/GDP ratio to remain this year at levels similar to last year’s, he believes the impact of deleveraging could start to show through from 2020. Inflation and, therefore, higher nominal growth will also help.

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