China Research

A discussion forum on emerging markets, mainly China – from a macro, micro, institutional and corporate angle.

Brazil – a country of the future as usual?

May 24, 2016

10-15 years ago, many analysts were hoping that Brazil finally was about to establish itself on the right track for more sustainability of economic growth.

Since 2001, the so-called BRIC markets (Brazil, Russia, India, China) received increasing attention by (international) investors, mainly based on good growth expectations for all four countries – despite the fact that they clearly had different fundamental preconditions. In the past few years, however, Brazil’s economy was more and more disappointing.

Having dealt with Brazil for quite some years, I had my doubts about Brazil ‘s economic growth prospects already around 2005 or so, i. e. during the latter part of the first Lula regime which altogether with the second term had a number of promising years between 2003 and 2010 all the same.

Unfortunately, Lula’s successor Dilma Rousseff never got on the right track with all necessary reforms. Real structural progress was not noted in the first 5 1/2 years of her presidency which in the past two years was determined by power conservation without major future-oriented changes, accompanied by a GDP decline of 8 percent in the past 24 months (however, also caused by declining global commodity prices).

No wonder that markets reacted positively when Rousseff recently was suspended from office the other day, now facing an impeachment. Brazil’s currently acting president Michel Temer on the other hand seems to be quite impopular already now and hardly able to win direct presidential elections, particularly if he really will implement tough measures against Brazil’s rapidly rising government debt. Sensitive areas such as labor markets, social benefits and pensions could be hit by possibly coming austerity measures.

Sorry to say: my long-time lasting experience has been confirmed again: Brazil remains unable to achieve sustained good economic growth. It is really an “up- and-down economy” – with variable periods of ups and downs.

This distorting phenomenon will not be wiped out before Brazil really can manage far-reaching and continuous reforms regarding a broad and good human capital formation, better institutions and a fairer distribution of income – accompanied by much more effective and future-oriented political leaders all over the country.

This is what both experience and economic research tells us.

In my early days as an economist, Brazil was often introduced as a country of the future. It still is! Forever?

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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Argentina – better this time?

May 18, 2016

This time, I change the content of my blog and turn to South America. Argentina is currently trying to reorganize and restructure its economy – not one single day too early. Now again, long-term observers of the Argentine economy may add.

The Kirchners certainly failed as presidents (2003-2015). Argentina’s relatively new president and former mayor of Buenos Aires – Mauricio Macri – is now trying to restore international confidence in his country by a much more market-oriented policy than the Kirchners were conducting. Some success can already be seen, for example by bringing back Argentina to international capital markets – though at a high interest rate and after an international compromise about the old government debt and the return to a floating currency system against the U.S.dollar (which led to a significant but unavoidable weakening of the peso).

Despite these and some other positive signals, the outlook for Argentina remains very uncertain. The country is still in a recession. Risks for social unrest are still in place.The budget deficit is high, and so is inflation after the abolition of important price regulations and the weaker exchange rate. Trying to give a better balance to the economy remains difficult.

In other words: l am not sufficiently convinced that Argentina will achieve sustainable progresss in its fight against the burdening economic hangover after the Kirchner era. My own analytical experience from Argentina and its economy makes me doubtful.

At least we can now see the start of a better economic policy for the fascinating country of Argentina. Let’s hope for the best ! But Macri and his team are still very far from the goal.

In the meanwhile, we can always watch all these wonderful fotboll players from the country of the pampas. They use to give us fun also during difficult times in Argentina’ economy. By the way, President Macri once was the head of Boca Juniors, the creator of many superstars of Argentine fotboll (soccer). Now he is the president of Argentina.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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China – bad loans could become a malign neglect

May 16, 2016

Recently, I read again that more skeptical analysts nowadays exaggerate their concerns about China. These words came – not very surprisingly – from a prominent hedge fund manager. I guess that this guy never had looked somewhat deeper into the Chinese debt problem.

I easily can agree that Chinese non-performing loans are a conundrum. However, the risks are most probably much more on the worse side than to the better. The Chinese have a gigantic debt problem which has been increasing during and in the aftermath of the subprime crisis to unsustainable levels, currently 200 percent according to official estimates and may be around 250-260 percent of GDP according to private sources. Nobody knows the exact number because of unclear definitions of loans, unknown local debt amounts in reality, implicit central government debt and hidden credit volumes of the shadow banks. I feel worried about this black box, particularly when considering that the above-mentioned credit ratio in 2008 still was as low as around 115 percent.

The credit boom contributed to artificial or doped GDP growth in the past seven years or so which certainly cannot be maintained anymore. Still, financing Chinese debt is not in danger since the money is created domestically without net borrowing abroad (as a result of the positive balance on current account). But what happens the day when China possibly cannot create surpluses in the current account anymore and/or the capital balance has been widely or completely deregulated? In a bad or worst case scenario – with free cross-border capital movements and debt crisis – bank refinancing could become much more difficult or even impossible.

There are, consequently three major risks arising from the Chinese credit boom:

¤  reduction of GDP growth if/when credit growth is slowing down,

¤  delayed or even strongly reduced deregulation plans of the cross-border capital balance and other financial reforms,

¤  explosion of an asset price bubble (property markets?).

Sure, nobody knows the end of this story. In my eyes, however, the analysis of the Chinese debt problem is widely a malign neglect, supported by the obviously too politically driven – quite benign – China analysis of the IMF.

Hubert Fromlet
Senior Professor of International Economics, Linnaeus University
Editorial board

 

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