Transcript Document

Global saving deficit and
financing infrastructure in
BRIC economies
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia
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1. The World Economy
2012: New Cycle Means
New Risks?
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia
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1. The World Economy 2012: New Cycle Means New Risks?
 Developed economies for a year stand on the
brink of new economic cycle
 But the progress falters under the burden of
government and financial sector problems,
provoking risk aversion for investors
 Most likely, the cycle will proceed as new, and
these problems will stay unresolved, bound to
turn up later
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1. The World Economy 2012: New Cycle Means New Risks?
1.1. Industrial production,
01/01/2000=100
1.2. Unemployment rate, %
120
11
115
10
110
9
105
8
100
95
7
90
6
85
5
80
4
75
Source: IMF International financial statistics
EA
Japan
US
EA
2011
2010
2009
2008
2011
2010
2009
2008
2007
US
2007
3
70
Japan
Source: IMF International financial statistics
While unsure, the recovery in developed countries is slowly
proceeding, the US heading headfirst and both Japan and EA lagging
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1. The World Economy 2012: New Cycle Means New Risks?
1.6. Total money base of largest developed countries, US$ tn
4
20
3
15
2
10
1
5
0
0
2007
US
EA
Japan
2011
25
2010
5
2009
30
2008
6
growth rate % (right axis)
Source: IMF
The money base central banks issued most likely would stay even as
the credit multiplier increases
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1. The World Economy 2012: New Cycle Means New Risks?
1.3. EA MB and M3 growth rates, % yoy
1.4. MB and M2 growth rates, % yoy
35
35
30
30
25
25
20
20
15
15
10
10
5
5
0
0
Source: ECB
USM2
Денежная
EAMB база зоны евро
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
М3
зоны евро
EAM3
2000
-5
-5
USMB
Source: Fed
So far, the multiplier stays very low, though some increase in US is
visible
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1. The World Economy 2012: New Cycle Means New Risks?

Corporate debt ratios for both US and EA are at 10-15year lows

Trade balance stabilization and strong personal
consumption in the US in 2011 suggest grounds for new
growth cycle

Rates of growth in China won’t skyrocket as the
government finishes deflating bubble, there are
problems with shifting to consumption-based growth,
but “low” still means 8+% for China (and not to forget
expected US growth)
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1. The World Economy 2012: New Cycle Means New Risks?
1.6. EBITDA for main US industries, 2000 prices, 31/03/00=100
150
350
140
300
130
250
120
110
200
100
150
90
80
100
70
50
60
Durable goods production
Manufacturing
2009
2008
2007
2006
2005
2004
2003
2002
2001
0
2000
50
Mining (right axis)
Source: US Census Bureau
EBITDA for US has recovered, for EA lags behind but not totally subdued
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1. The World Economy 2012: New Cycle Means New Risks?
1.7. US corporate debt, 2000 prices, 31/03/00=100
120
350
300
110
250
200
100
150
100
90
50
Durable goods production
Manufacturing
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0
2000
80
Mining (right axis)
Source : US Census Bureau
…as the debt levels grow steadily…
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1. The World Economy 2012: New Cycle Means New Risks?
1.8. Debt to EBITDA, main US industries
7.0
6.0
5.0
4.0
3.0
2.0
Durable goods production
Mining
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1.0
Manufacturing
Source : US Census Bureau
Debt/EBITDA stays at 2000 lows.
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1. The World Economy 2012: New Cycle Means New Risks?
1.10. Profit/Sales in US industries
30
31
25
20
15
10
5
0
-5
-21
Durable goods production
Mining
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
-10
Manufacturing
Source : US Census Bureau
While profitability is already at expansion phase levels….
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1. The World Economy 2012: New Cycle Means New Risks?
1.9. US household debt service ratios, % of income
14.0
13.5
13.0
12.5
12.0
11.5
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
11.0
Source: Fed
…household DSR has not reached the bottom
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1. The World Economy 2012: New Cycle Means New Risks?
1.10. Delinquent credit in US banks, % of assets
10
9
8
7
6
5
4
3
2
1
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Total
business loans
consumer loans
loans secured by real estate
Source: Fed
And the 2008 wall of delinquencies is basically
overcome
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1. The World Economy 2012: New Cycle Means New Risks?
1.11. Loan to deposit ratio
1.10
1.05
1.00
0.95
0.90
0.85
US
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0.80
EA
Source: Fed, ECB
At the same time, credit activity at US and EA banks
is clearly subdued
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1. The World Economy 2012: New Cycle Means New Risks?
1.12. Credit portfolio as a share of total assets
0.75
0.70
0.65
0.60
0.55
US
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
0.50
EA
Source: Fed, ECB
Liquid assets are preferred to credits as risk aversion is
strong
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1. The World Economy 2012: New Cycle Means New Risks?
1.13. Capacity utilization vs unemployment, %
Source: Fed, ECB
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
Jan-08
Jul-07
Jan-07
Jul-06
12
Jan-06
60
Jul-05
10
Jan-05
65
Jul-04
8
Jan-04
70
Jul-03
6
Jan-03
75
Jul-02
4
Jan-02
80
Jul-01
2
Jan-01
85
Jul-00
0
Jan-00
90
US Capacity utilization
Euro area capacity utilization survey (quarterly, intrapolated)
US Unemployment SA inverted, right axis
EU-27 unemployment inverted, right axis
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1. The World Economy 2012: New Cycle Means New Risks?
1.14. Baltic Dry and Harpex indices
Source: Baltic Exchange, Harpers
Baltic Dry
0
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-06
Jan-06
0
Apr-09
250
Jan-09
100
Oct-08
500
Jul-08
200
Apr-08
750
Jan-08
300
Oct-07
1000
Jul-07
400
Apr-07
1250
Jan-07
500
Oct-06
1500
Jul-06
600
HARPEX (container costs, right axis)
While dry bulk costs were untouched by the slowdown of
2011, container costs were sharply down
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1. The World Economy 2012: New Cycle Means New Risks?
1.15. Main economic forecasts for 2012
GDP yoy, %
UN
IMF
WB
2011
World (PPP)
3.6
3.3
3.4
3.8
US
1.5
1.8
2.2
1.7
EA
0.4
-0.5
-0.3
1.6
Japan
2.0
1.7
1.9
-0.9
China
8.7
8.2
8.4
9.2
India
7.7
7.0
6.5
7.5
Brazil
2.7
3.0
3.4
2.9
Russia
3.9
3.3
3.5
4.1
Oil, $/b
100.0
99.1
98.2
104.2
Source: UN, IMF, WB
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2. Global savings: from
“glut” to deficit?
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2. Global savings: from “glut” to deficit?
 Three arguments for less saving in the long-term:
 world population ageing, esp. in developed countries,
increases retired-to-workers ratio;
 losses the pension savings took after the financial crisis
of 2008 and probable sovereign debt crises of 2008-2011
 forgone investment gains, e.g. negative real rates as a
consequence of ZIRP+QE in reserve currencies
 One argument for less money going to emerging
markets:
 developed world needs more money to refinance
growing public debt and restart new credit cycle
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2. Global savings: from “glut” to deficit?
2.1. Retired-to-working ratio, world, %
25
20
15
10
Source: UN
2030
2025
2020
2015
2010
5
Мир
World population ageing, esp. in developed
countries, increases retired-to-workers ratio
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia
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2. Global savings: from “glut” to deficit?
2.2. Global liquid financial asset structure, %
2006
2010
$ tn
%
$ tn
%
Equity market cap
55
30.7
54
25.6
Sovereign debt
28
15.6
41
19.4
Financial institutions debt
35
19.6
42
19.9
Nonfinancial institutions debt
7
3.9
10
4.7
Securitised credit
14
7.8
15
7.1
Nonsecuritised credit
40
22.3
49
23.2
Total
179
100.0
211
100.0
Source: MGI.
Losses the pension savings took after the financial crisis
of 2008 and probable sovereign debt crises of 2008-2011
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2. Global savings: from “glut” to deficit?
“What incentive does a US bank have to extend
maturity to a two- or three-year term when
Treasury rates at that level of the curve are below
the 25 basis points available to them overnight
from the Fed?
What incentive does PIMCO or banks have to
buy five-year Treasuries at 75bp when the
maximum upside capital gain is 2 per cent of par
and the downside substantially more?”
- Bill Gross, PIMCO
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2. Global savings: from “glut” to deficit?
 As more and more sovereign debt in developed
countries needs refinancing, emerging markets will
experience outflow of capital sourced in developed
markets, i.e. “home bias” for the debt will strengthen
 This means governments should concentrate on
stimulating the potential of internal savings rather
than seeking overseas financing, especially financing
for the emerging markets
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2. Global savings: from “glut” to deficit?
2.3. Financing needs of
developed countries in 2012,
$ bn
United States*
30
United States*
471
Japan*
2.4. Financing needs of
developed countries in 2012,
% GDP
Japan*
359
59
601
21
France
France
Italy
Italy
538
Germ any
24
11
Germ any
389
United Kingdom
United Kingdom
15
383
324
Spain
Portugal
54
Portugal
Greece
51
Greece
Ireland
22
17
Ireland
32
0
21
Spain
100
200
300
400
500
*10 млрд.
долл
600
14
0
5
10
15
20
25
30
35
40
45
50 55 60
*10 млрд.
Source: IMF, Fiscal Monitor 2011
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia
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2. Global savings: from “glut” to deficit?
2.5. Saving and investment rates avg. 2006-2010, % GDP
Gross national
saving
Gross fixed capital
formation
Compare to:
FDI*
Brazil
19.3
18.1
2.2
Russia
28.0
20.6
3.5
India
34.2
31.7
2.3
China
Compare
to: EU
52.0
41.9
3.7
21.3
20.4
4.1
Not all BRIC countries have internal resources for investment, thus
more investment in infrastructure may mean less investment elsewhere
except for the FDI increase
*not directly comparable as FDI is part of balance of payments, not national accounts data
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2. Global savings: from “glut” to deficit?
 Can FDI help? Many studies suggest FDI are the
source of quality governance and tech transfer, not so
much a financing tool
 For 2006-2010, average yearly FDI inflow into BRIC
countries was less than 3% GDP or less than 10% of
investment
 Two differing systems of attracting the funds to longterm investment (including infrastructure) are
widespread (e.g. Walsh, Park and Yu 2011), socalled centralized and decentralized
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2. Global savings: from “glut” to deficit?
 Centralized system is either government investment
or its advanced version, directed loan-based:
 used in China with public banks+PBC, in Brazil with
BNDES (esp.after PAC)+pensions
 Centralized form reqs:
 healthy budget (little evidence of investment in
infrastructure to create short-term budget net gains)
 concentrated banking system
 + creating off-budget development institutions not tied by
system-wide banking regulations, like BNDES or VEB
 some insulation from external shocks as banking system
becomes distorted and vulnerable as it takes on risks
connected to directed long-term loans (infrastructure)
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2. Global savings: from “glut” to deficit?
 Decentralized is based on a mature market for long-term
debt and equity instruments
 Increasingly used in China (highway SPV), much less for
Brazil, in the debt part – basic for Chile and Korea
 Decentralized long-term financing reqs:
 Large long-term internal funds (i.e. fully-funded pension
scheme or the like) Institutional environment for long-term
open market financing

(i.e. market-makers + risk management regulatory practices)
 Institutional environment for long-term open market
financing

(i.e. market-makers + risk management regulatory practices)
 Framework for private involvement (PPP, concessions etc.)
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3. The case of Russia –
a path to decentralized
financing model
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3. The case of Russia




Gross fixed capital formation rate is relatively low (20+%
GDP) for an emerging economy
Significant difference (8% GDP) between gross savings
and investment
Banking system has very small share of long-term
deposits, almost all are redeemable at notice
Bond market has plenty of long-term bonds, but most
long-term have embedded call after 2 years, making them
de facto lower-medium-term instead of long-term
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia
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3. The case of Russia
 Currently, the system is highly centralized:






main infrastructure investment is budget-sourced
development institution (VEB) is the primary non-budget
financing source
almost no long-term debt market
most pension savings are legislatively locked into lowyield government bonds
banking system is deconcentrated (CR5=50%) while
syndication market is underdeveloped
rates are unstable due to exchange-rate targeting policy
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia
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3. The case of Russia
 The way to decentralized system is unlocking pension
savings and the funds dispersed inside banking system to
engage in financing of large long-term projects
 Market for long-term lending needs to be created:

VEB (DI) should co-finance market-makers both for the longterm bond market and standardised syndicated loan market
 The industry standards (lex mercatoria) need to be developed:
•
Self-regulating organizations (like LMA/LSTA/ APLMA),
debt covenants
•
Market makers are instrumental in creating the market
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia
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3. The case of Russia



As the market makers emerge and long-term bond and credit
syndication secondary markets (e.g. by using credit mutuals)
are made liquid:
– money managers (including VEB) may be allowed to use
mandatory pension savings to ramp up the markets for
syndication and long-term bonds
The experience is based on case studies of financial market
developments by EBRD (in CEE), KfW (in Germany),
BNDES (in Brazil), NAFIN (in Mexico)
Solntsev et al. (2011) estimate this will lead to 100% credit
syndication market growth in Russia to $25 bn a year in 3
years, at the cost of $15 bn (0.2% GDP a year) in credits, LT
bond stimulus is comparable
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Conclusions
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Conclusions
 The economy in 2012 looks to the upside and ZIRP is
on the side of long-term international investment in
emerging markets
 However, the long-term prospects are more gloomy:
 the global savings glut could turn into deficit in
10-15 years
 developed markets will consistently need more
long-term funds to fix sovereign debt problems
than today, ergo home bias for the debt markets
 Thus, perspectives of international capital going into
the infrastructure are not impressive
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia
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Conclusions
 However important, FDI flows and international
financing are insufficient to finance long-term
investment in developing countries
 Thus, developing countries should finance long-term
development, including infrastructure, out of internal
sources
 The potential for increase in investment is present
almost in all BRIC countries
Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia
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Conclusions
 Most investment in long-term investment projects in
BRIC is centralized via development institutions,
government funds or pet banking systems
 pension savings are utilized in China and Brazil,
much less in India and Russia
 elements of decentralized model are present in all
BRIC countries, but all of them lack a complete
set of elements
 the decentralized model is an infrastructure in
itself, and thus is a long-term prospect to build
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