The BNP Paribas Roundtable is an event which takes place at the time of the IMF/World Bank meetings and focuses on the most crucial issues facing a range of countries across emerging and frontier markets.
The overall tone was pessimistic, according to BNP Paribas’ Marcelo Carvalho, Global head of Economics, and Luiz Peixoto, Emerging Markets Economist at Markets 360, who listened to over 200 speakers during the International Monetary Fund (IMF) and World Bank conferences and seminars from 10-16 October, and the BNP Paribas Roundtable discussions on 14 October.
Below is a roundup of their key takeaways – an aggregation of views from the central bankers, policy makers, senior investors and analysts, and economic observers attending the event – showing that there is concern about the spill-over of policy mistakes to the global economy and markets.
Attendees expressed the view that the Federal Reserve took “too long” to respond to inflation pressures (which were initially dismissed) and thus lagged the curve, and now is trying to catch up. The broader sentiment was that correcting this policy mistake might now cost the US economy a recession.
The recent political turmoil and ensuing tension in the gilt market and with UK pension funds illustrate how policy mistakes can spark unforeseen side effects and complicate the job of the Bank of England, as the mini-budget met universal criticism from markets, analysts and international organisations such as the IMF.
Similarly to the UK, recent announcements of fiscal stimulus, including in Germany (and the associated funding needs) appear to be perceived as being at odds with the European Central Bank’s effort to restrict demand in order to contain inflation pressures, not to mention the potential for policy tensions within the EU.
The tone in most discussions about China was not upbeat. Besides the property sector difficulties, the key short-term cyclical concern on the table is the continuing Covid-situation.
In the longer term, there is also a growing perception that rising geopolitical tensions could undermine China’s potential growth in coming years.
Emerging Markets (EM)
Perhaps ironically, the concern seems to be more about negative spill-overs from perceived policy mistakes in advanced economies – as opposed to major mistakes from within EM.
That said, as always, idiosyncratic country-specific factors can vary widely across countries and regions. Within the EM asset class, there is investor sympathy for countries that now provide sufficient carry and which benefit from elevated commodity prices, such as Brazil. In other words, policy mistakes matter. And if policy mistakes in one country spill over negatively to others, the global impact can be larger than the sum of the individual parts.
IMF global view
The fund’s outlook has become even more downbeat. October revisions reduce GDP projections for over 90% of countries for 2022 and 2023, with a 0.4pp cut this year globally, and around 1.0pp in 2023. Developed markets look particularly hard-hit, with at least 1pp projection cuts in both years. In the eurozone, the IMF projects 2023 growth close to nil, with Germany and Italy in recession.
If in Europe the focus is on the fallout from the Russia-Ukraine conflict, in Asia the focus is still on Covid, with the risks stemming from China’s zero-Covid policy: the main reason for a 1pp cut to the region’s output projection this year. It is not all bad news, however, as the fund expects EM Asia to retain the highest projected rate of output expansion in 2023 (4.9% y/y).
The Middle East and central Asia are the highlights for 2022, with the highest regional rate of growth this year (5.0% y/y), driven by loose fiscal policies and boosted energy exports, while commodity exporter Latam is a positive surprise, with a 1pp increase in its 2022 forecast.
The IMF saved its sharpest remarks for inflation. The fund flags that disinflation will not be easy to achieve. While the fund encourages central bankers to remain focused on anchoring inflation expectations, it also flags the risks from the rising interest burden on households and companies, which could trigger even swifter cutbacks in consumer spending. Continued price pressures in developed markets also raise the likelihood of tighter liquidity conditions stemming from core markets.
One phrase in particular was repeated in both the Fiscal Monitor and General Outlook: “risks from rising debt piles and a jump in spending ratios are expected by the Fund to ring noisier alarm bells for creditors than in yesteryear. Britain is one example of this, which makes the situation particularly challenging for high-debt, high-tax EMs – the fund argues for fiscal consolidation, but, in a change of stance, also advocates for targeted subsidies in consumer staples and for the poorest in society, to avoid political instability and cushion economic growth from consumption plunges”.