In your latest note that, you are making a case that global growth is at risk as several key economies withdraw their stimulus programme. What are the other factors which could be of concern to emerging markets at this point of time?
There are a number of factors that will contribute to slower growth globally including for the emerging markets. This includes tightening of financial conditions that has already started in 2018 and will continue in the course of next year. It also includes higher oil prices for oil importing economies as well as the impact of lower trade as trade tensions between the US and China in particular continue throughout next year.
These factors combined will see global growth slow down to below 3% next year, from around 3.3% in the last couple of years. For G20 emerging market economies, that will mean growth will slow down to 4.5% next year from around 5% this year.
If global growth eases from here, does that mean crude oil prices which have fallen about 20% from the recent high, are already pricing in contraction in demand? If global growth eases, what will be the trajectory for crude?
As global growth slows, oil demand will probably slow as well. We are starting from a position when oil markets are relatively tight and geopolitical risk premia are probably affecting oil prices. Over the medium term, our assumption is that oil prices will fluctuate in a range of $50-70 and that is really the range at which we expect demand and supply to settle. In near term, there is probably some pressure on oil importers in terms of inflation and in terms of current account but over time, we would expect oil prices to move towards that $50-70 range.
Would this tightening be a gradual or a faster process? How far will it impact the EM currencies which have been battered big time in the last 12 months?
We expect a gradual monetary policy tightening by the US and later by the European central bank. But the impact of that tightening on emerging markets may not be as gradual. We have already seen a number of currencies depreciate. We have seen capital flows slow or reverse and spreads widen and interest rates rise. We expect that for the more vulnerable markets, in particular those with current account and budget deficits, and those where policy credibility is not so well established, that tightening in financial conditionals will continue and maybe in some cases, be less gradual than the monetary policy tightening by central banks.
Have the trade war related issues ebbed in your view? Could it resurface near term?
As a base line, we expect the tensions between the US and China to continue and even worsen. We expect further measures will be taken. For instance, a 25% increase in tariffs has probably been announced already that that could become effective from January next year. It will have an impact on trade flows and on growth across the board.
The downside risks from that are further increase in tensions and broadening in tensions to encompass with the relationships in general between the US and China. That would be negative for growth globally and for emerging markets in particular because they would risk slowing or disincentivising investments across the globe corporates.
That in turn is likely to be translating into either delays or postponement in investment and that is really where we expect the economic impact to materialise.
India has just started to come back from its own domestic liquidity issues. How did you analyse that situation and do you see that having impact on GDP growth next year?
In case of India, there is a combination of global factors. The increase in oil prices is relevant and we have seen the rupee depreciate from earlier in the year already and more recently, domestic factors like tightening of liquidity in the wake of pressure on the NBFC sector. We expect that tightening liquidity and tightening availability of credit will continue as the non-bank financial sector in particular remains under pressure and that will have an impact on the economy. We have revised our forecast for the GDP growth down slightly to 7.3% for next year in 2020 as a result.
This is the anniversary of the demonetisation move done by the government to crack down on black money and trigger formalisation of the economy. How has the Indian economy coped and was it a hit or a miss in your view?
The economy seems to have adjusted to demonetisation. From the start, it will be a somewhat protected process and it has taken a few months but the money growth has come back and companies and individuals have adjusted to the new system.
As for whether demonetisation achieved its objective of addressing the shadow economy, that is yet to be seen. It will be revealed over a number of years. Also, demonetisation was implemented in conjunction with other measures by the Indian government to try to address that issue and removing cash transactions across the board, for a range of goods and services to that purpose and for targeting benefits more directly. The benefits are yet to be seen and from sovereign credit analysis perspective, if it does achieve its purpose, we would see it reflected in terms of higher revenue collection and that would help reduce deficit for the Indian government.