Growth in the face of headwinds by Standard Chartered

Growth in the face of headwinds Reflections from the 2018 Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group

Growth in the face of headwinds

Contents

Uncomfortably optimistic: Why China and Asia can support global growth

Indonesia: Rebalancing for growth

ASEAN and India: Fundamentals shield region from chaos

Africa: Financial and political reform key to economic progress

4 8 14 18

Reflections from the 2018 Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group

Foreword One message was clear following the 2018 IMF and World Bank Meetings in Bali – we are facing challenging economic times. Indeed, the IMF itself cut its global 2018 GDP forecast in October. Discussions at the meetings circulated around concerns of a US-China trade war, rising US rates and possible contagion effects on emerging markets.

And yet, there are still reasons to be optimistic. Positive discussions among those with the power to shape the short-term outlook should drive momentum that will ease tensions, according to officials. Moreover, we believe the global economy should have the strength to combat even a worse-case scenario (i.e. a full-scale trade war) – thanks in large part to strong fundamentals and continued growth in Asia Pacific. David Mann, Standard Chartered’s Global Chief Economist, explores such predictions in ‘Uncomfortably optimistic: Why China and Asia can support global growth’. Aside from China – which alone will contribute 31 per cent of global growth in 2018 – markets

like Indonesia will also play an important role in driving global economic growth. In ‘Indonesia: Rebalancing for growth’, Aldian Taloputra, Senior Economist, Indonesia for Standard Chartered, discusses expectations of riding out global pressures – including emerging-market contagion effects – and the opportunities ahead. India and many ASEAN markets undoubtedly face domestic economic issues. However, as Edward Lee – Chief Economist for ASEAN and South Asia at Standard Chartered – outlines in ‘ASEAN and India: Fundamentals shield region from chaos’, emerging markets, particularly in this region, should have the capacity to both overcome internal issues and withstand anticipated global shocks.

Finally, in ‘Africa: Financial and political reform key to economic progress’, Razia Khan, our Chief Economist for Africa and the Middle East, deliberates the region’s need to balance necessary investment costs with debt repayments. Despite this challenge and impact considerations from the global environment, the outlook here is ultimately positive too – with conditions remaining favourable for long-term growth.

Heidi Echtermann-Toribio Global Head, Banks and Broker-Dealers Standard Chartered

There are still reasons to be optimistic. Positive discussions among those with the power to shape the short-term outlook should drive momentum that will ease tensions, according to officials.

Growth in the face of headwinds

Uncomfortably optimistic: Why China and Asia can support global growth David Mann, Global Chief Economist, Standard Chartered

The global economy is set to grow at 3.9 per cent in 2018, the fastest pace in five years. As the news cycle keeps reminding us, there are considerable risks to this outlook, in particular the consequences of the end of the era of quantitative easing and the threat of a full-scale US-China trade war. Nonetheless, there are reasons to remain ‘uncomfortably optimistic’ about growth in 2018 and 2019, not least because of the leading role played by Asia-Pacific economies. Using purchasing-power parity (PPP) exchange rates Asia, ex-Japan will contribute nearly 60 per cent of global growth this year; China alone will contribute 31 per cent. Not only is this a huge change from a decade ago, but it is likely to remain the case for the next decade or two as well. Assuming the very worst tail risks do not transpire – which is not our forecast, nor currently expected by global markets

– Asia-Pacific economies are well placed to continue driving growth in the short term and beyond.

China’s robust economy Firstly, China has the means to counter the effects of the trade sanctions imposed by the US. To be sure, the economic impact is proportional to the severity of the measures taken: in the worst-case scenario (the US bans all imports

from China) losses could rise to 3.2 per cent of its GDP. However, factoring in the measures taken and approved so far, we still expect China’s economy will grow 6.6 per cent this year, only a modest slowdown from 6.9 per cent in 2017. This is partly because China has already adjusted its policies to support domestic demand. According to our calculations, if the

Reflections from the 2018 Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group

2018 budget is fully implemented, the fiscal deficit will be 0.9 per cent of GDP (RMB1.1 trillion) higher than last year. We see this policy shift as a clear signal that the government is committed to achieving its 6.5 per cent growth target for 2018. It is true that China also faces domestic challenges – a housing market downtrend and deleveraging, for instance – but policymakers have skilfully managed the twin goals of stabilising corporate debt and delivering economic growth. This has been accompanied by a subtle change in policy from pure deleveraging to stabilising leverage, a shift from just 12 months ago to support demand. Remarkably, China needs only to achieve growth of 6.3 per cent annually between now and 2020 to reach its target of doubling 2010 real GDP by 2020, something we think can be relatively easily achieved. Another point in China’s favour is that the impact of the end of quantitative easing, which has put a range of emerging markets under pressure, is not an issue given its lack of external exposure of the kind that has hit Turkey, Argentina and others (i.e. severe current account and fiscal deficits, and large short-term foreign-currency external debt).

Though China may in fact see an annual current account deficit next year, owing to the strength of domestic demand, it faces a wave of inbound foreign investment rather than an exodus. As it continues to remove1 technical barriers to investing in its capital markets, and as mainland assets are included on benchmark indices as a result, global investors will be obliged to buy to adjust their underweight positions. No one expects RMB depreciation to be a one-way bet.

Trade war losers could also be winners (and vice-versa) Exchange rate flexibility is already playing a role in limiting the global economic impact of a trade war on other major economies, too. Considering that a 10 per cent increase in what US consumers would have to pay for imports from China would not be too different from the impact of a similar move in exchange rates (which in any event has been countered by USD/RMB moves this year), worries about the impact may have been overdone. It is also a fact that identifying which countries would win, and which would lose, from the fallout is far from easy given the immensely

complex supply chains and economic interrelationships that now underpin global trade. For instance, the dependence of the US economy on demand from China, by our estimates, is increasing (accounting for around 1 per cent of its GDP, triple the level of a decade ago) while China’s exposure to US demand is falling (accounting for around 3 per cent of GDP, half what it was ten years ago). Other research2 has shown that 1 in 5 jobs in the US is related to international trade, up from 1 in 10 25 years ago. A protracted trade war would therefore hurt the US proportionately more the longer it went on (though it is important to remember that politics, rather than rational economic decision-making, is likely to continue to drive US policy on this front). These new trade and demand inter-relationships are crucial in Asia-Pacific economies. Our research also finds that a trade war would have a wide impact on China’s supply chain partners in the region: in an extreme scenario where the US halts all China imports, Malaysia’s GDP, for instance, might be affected by 1.2 percentage points.

Though China may in fact see an annual current account deficit next year, owing to the strength of domestic demand, it faces a wave of inbound foreign investment rather than an exodus.

http://www.chinabondconnect.com/documents/NewsRelease2018-08-27EN-DVP.pdf

http://tradepartnership.com/reports/trade-and-american-jobs-the-impact-of-trade-on-u-s-and-state-level-employment-update-2016/

Growth in the face of headwinds

Figure 1

Who would be indirectly affected if the US stopped all imports from China? % of GDP

USD bn 20

2.0

1.8 1.6 1.4

Maximum impact, % GDP

Maximum impact, USD bn

16 14

1.2

1.0

0.8

0.6

0.4

0.2

2 0

0.0 TW

Source: CEIC, Standard Chartered Research

However, four of the top five ‘losers’ – Vietnam, Malaysia, Taiwan and South Korea – are also likely to be among the economies that

would gain most from export trade diversion due to targeted US tariffs on China. Vietnam, for instance,

could see exports diverted from China increasing by 2.2 per cent of GDP.

Figure 2

Vietnam, Malaysia and Mexico may benefit the most as US buyers source from alternative countries to China.

Estimated rise in exports from China’s competitors due to US tariffs on China % of GDP 2.5

USD bn 20

USD bn

% of GDP

18 16

2.0

14 12

1.5

10 8

1.0

6 4

0.5

2 0

0.0 VN

Source: CEIC, Standard Chartered Research

Reflections from the 2018 Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group

Another consequence is that these economies could see some diverted investment, as companies seek to reduce their exposure to China and diversify their production around the region. ASEAN nations (as well as Mexico) are particularly well positioned for this, assuming they could shift to selling directly to the US rather than participating in the supply chain to the US via China. Rising wages in China means this is already happening. Then there is the fact that demand within the region is likely to keep growing: ASEAN-China is the trade corridor with the most exciting growth potential, part of the reason we expect to see the region powering global GDP growth for years to come.

Belt and Road and the new trade order China’s attempts to promote global trade networks and open up links between Asia and the rest of the world via the Belt and Road initiative underlines this expectation. It also serves as a counterpoint to the protectionism that has been rising since the global financial crisis, demonstrated most dramatically by President Trump’s anti-globalisation, America-first agenda. Criticisms of China’s push for globalisation have risen in parallel with the growing scale and importance of China’s economy.

However, China remains far from dominating the agenda, in part due to the lack of a multilateral platforms to drive its ambitions: the likes of the Asian Infrastructure Investment Bank (AIIB) or Regional Comprehensive Economic Partnership (RCEP) have yet to match their well-established counterparts in the International Monetary Fund (IMF), World Bank or World Trade Organization (WTO). The Belt and Road has also been facing its own challenges that require China to become more transparent by better aligning itself with prevailing international standards in areas such as cross-border debt and procurement policies. Regardless, we see a stronger and more immediate impact from China by being a more positive force in stimulating international cooperation and trade via the Belt and Road. Of course, the risks to this outlook cannot be ignored. While the global economy is likely to show its resilience in 2018 and 2019, how a protracted trade war will affect sentiment and investment plans remains to be seen. Longer term, growth will slow: if China reaches its 2020 GDP target, the policy focus on growth will be eased, while the impact of the US fiscal stimulus will be waning. The demographic drag in Asia throughout the 2020s will also be acute. But regardless, the importance of the Asia-Pacific region in powering global growth will continue to rise.

China’s attempts to promote global trade networks and open up links between Asia and the rest of the world via the Belt and Road initiative underlines this expectation. It also serves as a counterpoint to the protectionism that has been rising since the global financial crisis, demonstrated most dramatically by President Trump’s anti-globalisation, America-first agenda.

Growth in the face of headwinds

Indonesia: Rebalancing for growth Aldian Taloputra, Senior Economist, Indonesia, Standard Chartered

The next few months will be crucial for Indonesia’s economy. The country faces rising global headwinds in the form of potential contagion from concern about emerging markets in the post-QE (quantitative easing) era, and a worsening trade war between some of its biggest trading partners, as well as a degree of uncertainty over the 2019 general election. However, these are principally short-term factors. In our view Indonesia’s fundamentals remain sound and the opportunities good for the country to pursue structural reform. With the aim to rebalance the economy away from a reliance on volatile commodity prices, efforts to build out infrastructure, bolster human capital, develop value-added export-oriented sectors and raise foreign direct investment should in the longer term put its economic growth model on a more robust footing.

Macroeconomic headwinds We expect Indonesia’s economy to grow 5.1 per cent in 2018 and 5.1 per cent next year. Although tighter 3

Source: BKPM, February 2018

monetary policy, cautious private investment and moderating exports are likely to weigh on growth, 5 per cent plus are still a comparatively good performance. Importantly, Indonesia’s position is relatively sound compared to other emerging markets that have come under pressure in recent months from a reduction in US dollar liquidity with the winding down of QE by the US Federal Reserve. While it is true that Indonesia has been scrutinised for twin currentaccount and fiscal deficits (forecast at 3 per cent and 2.1 per cent of GDP this year) and maintains a degree of reliance on external funding (short-term external debt

is USD57 billion, around 16 per cent of total external debt), its vulnerability remains modest. Strong FDI inflows (up from USD628 million in 2015 to USD3.4 billion last year3), a commitment by the government to control spending and reduce import costs (for instance, expediting a programme to blend biodiesel into diesel fuel to reduce fuel imports by USD2 billion to USD4 billion per year), and co-ordinated policies by Bank Indonesia (the central bank) to tackle currency weakness support our view. Inflation remains well under control, even accounting for some pass-through of higher fuel prices.

Reflections from the 2018 Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group

Figure 3

Budget deficit to narrow further in 2019 Budget deficit

Total revenue, expenditure, % y/y

2 Expenditure

20 1 Revenue

1.0 10 -1 5 -2

0 Budget balance

-3 2010

2011

2012

2013

(5) 2014

2015

2016

2017

2018

2019

Source: CEIC, MoF, Standard Chartered Research

Figure 4

More spending budgeted to support purchasing power and macro stability Central government expenditure, % of total expenditure 70

Other Subsidy

Interest 40

Social Capital

Material 20

Personnel

0 2017

2018

2019

Source: CEIC, Standard Chartered Research

Growth in the face of headwinds

The risks of a potential trade war with the US, meanwhile, appear to be moderating. In April the US Trade Representative’s office said it was reviewing Indonesia’s inclusion on the US Generalised System of Preferences (GSP), covering around USD2 billion4 of Indonesia’s USD17.8 billion worth of exports to the US. While no decision has been made on the GSP, it emerged recently that the US has decided5 to exempt 19 Indonesian steel products from its 25 per cent tariffs. Of course, the indirect impact of the US trade dispute with China could yet be significant, both in terms of supply chain disruption and investor sentiment. However, as we analyse elsewhere, the ASEAN region is well placed to benefit both from diverted investments should manufacturers seek to reduce their exposure to China, as well as

from robust demand in China and diversifying trade links via the Belt and Road (B&R) initiative.

Rebalancing the economy Encouraging such investment and developing broader trade links are part of the government’s bid to diversify exports and rebalance the economy away from a reliance on commodity shipments. During the commodity ‘supercycle’ that lasted until around 2011, almost two-thirds of Indonesia’s export earnings came from commodities, while around quarter of the government’s revenue was also related to extractive industries. While this has dropped quite a bit, to around two-fifths and one-tenth respectively, Indonesia remains exposed to volatile commodity prices.

The good news is that given the size and importance of domestic demand – accounting for around 60 per cent of the economy – and the policies undertaken by the government, the country has rebounded from a period of low commodity prices and is set to put growth on a more sustainable footing. The drive to bolster FDI and diversify exports encompasses a variety of initiatives from building out infrastructure, developing the country’s human capital through education, simplifying investment rules and promoting different sectors such as manufacturing, maritime sectors, and lifestyle industries such as e-commerce and tourism, (for instance through initiatives like President Jokowi’s ‘10 New Balis’6 campaign).

Of course, the indirect impact of the US trade dispute with China could yet be significant, both in terms of supply chain disruption and investor sentiment. However, as we analyse elsewhere, the ASEAN region is well placed to benefit both from diverted investments should manufacturers seek to reduce their exposure to China, as well as from robust demand in China and diversifying trade links via the Belt and Road (B&R) initiative.

https://www.reuters.com/article/us-usa-trade-indonesia/indonesia-lobbies-u-s-to-maintain-special-tariff-treatment-idUSKBN1KQ04P

http://www.thejakartapost.com/news/2018/09/03/indonesian-steel-products-get-tariff-exemption-from-us.html

https://www.straitstimes.com/asia/jokowi-plans-to-replicate-balis-success-in-10-other-indonesian-spots

Reflections from the 2018 Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group

Figure 5

10 new Balis South China Sea Malaysia Lake Toba

Celebes Sea

Singapore

Indonesia

Sumatra

Kalimantan Tanjung Kelayang Kepulauan Seribu

Indian Ocean

Tanjung Lesung Jakarta

Morotai Island

Java Borobudur temple

Sulawesi

Java Sea Mount Bromo Mandalika

Labuan Bajo

Wakatobi

Source: Straits Times

Building the future Infrastructure underpins much of this drive: improved transport links are vital to raise competitiveness and attract the kind of foreign investment in tourism, technology and value-added manufacturing that is necessary to rebalance the economy. Progress under the Jokowi administration has been significant, since the government first identified 222 ‘national strategic projects’7 involving roads, railways, bridges, power stations and other schemes. Of these, 127 are under construction and over 20 have been completed. On top of this, the government has identified 15 new special economic zones,

with nine under construction and six to be developed by 20198. The spending is expected to continue. Infrastructure spending for 2019 is budgeted to increase to IDR421 trillion, up 4 per cent year on year. This consists not only of direct spending, but also of investment in the government’s infrastructure arms (including capital injections to state-owned companies and land funds) to speed up infrastructure development.

Currently the capacity to absorb infrastructure spending has not been optimal – capital spending realisation is low compared to other spending categories – and in response the government is allocating more to non-physical spending such as education, social assistance and subsidies. In 2019 the budget for education spending was increased substantially to IDR487 trillion (up around 10 per cent year on year), with the aim of improving access and quality of education.

Building the future needs more than just pouring concrete. To realise Indonesia’s potential the country must also upgrade its workforce.

https://www.economist.com/asia/2018/05/05/indonesias-leader-jokowi-is-splurging-on-infrastructure

Source: BKPM

Growth in the face of headwinds

Figure 6

Increase in education spending outpaces that in infrastructure spending Infrastructure, education, IDR tn

Growth, % y/y

600

500

Infrastructure

Education

infrastructure growth

Education growth

60 50

400

40 30

300

200

10 100

-10 2010

2011

2012

2013

2014

2015

Source: CEIC, Standard Chartered Research

Figure 7

Capital spending absorption has been relatively low Spending realisation, % of budget 120 106 100

93 91

98 88

96 94 Average 2017

30 18

0 Personnel

Material

Capital

Interest

Subsidies

Social

Other

Source: CEIC, Standard Chartered Research

The effects of this drive are already being seen in terms of FDI flows toward projects that are helping restructure Indonesiaâ&#x20AC;&#x2122;s growth profile. Chinese investment for B&R 9

Source: BKPM

projects is perhaps the epitome of these trends. Significantly, over two-thirds of Chinese investment into Indonesia during 2015-17 (which totaled USD6.7 billion)

was in secondary (manufacturing) projects; primary sector activity accounted for just 4 per cent9.

Reflections from the 2018 Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group

Figure 8

Four integrated areas are proposed for the Belt and Road North Sumatera, North Kalimantan, North Sulawei, Bali Total investment opportunities

USD10.6 billion

Total investment opportunities

North Sulawesi

USD26.5 billion

Tourism Manado - Bitung

North Kalimantan Total investment opportunities

USD17.2 billion North Sumatera Tourism Lake Toba

Industrial zones Alumina

Industrial zones Bitung (Agroindustry, logistic, fisheries)

Connectivity Port

Connectivity Port, toll road, airport, railway

Hydropower plant, LNG

Industrial zones Sei Mangke, Kuala Tanjung Connectivity Port, toll road, airport, railway

Total investment opportunities

USD10.3 billion Bali Tourism Ubud, Kuta, Nusa Dua, Nusa Penida, Benoa Connectivity Port, toll road, airport, railway

International hub port

Marine highway hub route

Hub port

Marine highway feeder route

Feeder port

Railway development Toll road development

Note The government of China has agreed to offer RMB130 million (USD18.89 million) as a grant to the government of Indonesia, to be used for feasibility study for those four areas. Source: BKPM

The multiplier effect Completing the planned infrastructure build-out will take time and focus. For the new administration in 2019 (we are forecasting another Jokowi victory) challenging external conditions mean the need to reprioritise spending and policy is all the more pressing. When ambitious

infrastructure plans were first formulated, money was still cheap and commodity prices expensive: these trends have both reversed (though oil is on another upward curve).

that will truly have a multiplier effect is more acute. The good news is that despite some challenging headwinds, Indonesia is still well placed to achieve its objectives and realise its economic potential.

With a concomitant reduction in liquidity to emerging markets, the imperative to be selective and focus on those investments and sectors

Growth in the face of headwinds

ASEAN and India: Fundamentals shield region from chaos Edward Lee, Chief Economist, ASEAN & South Asia, Standard Chartered

Emerging markets are back in the spotlight as their financial systems deal with the convergence of several negative global events. Stock markets and currencies have fallen10 across the developing world, confronted by a resurgent US dollar11 even as the US-China trade war threatens to escalate and central banks in developed countries begin to unwind years of quantitative easing12 that fuelled a recovery in global growth13 since the global financial crisis. Now, fears are growing of the contagion spreading from economies such as Argentina and Turkey all the way to Asia. Amid the negativity, however, it is our view that Asia’s emerging markets, particularly those in ASEAN and India, have the capacity to withstand the turmoil and continue to grow.

Lessons learned ASEAN and India have both made significant progress since their respective domestic crises over two decades ago. In India, a serious balance of payments shortfall14 in 1991 eventually led to

the liberalisation of its economy, kickstarting growth that continues to this day. Meanwhile the Asian Financial Crisis of 1997-98 ravaged ASEAN, forcing the region’s economies to implement wideranging reforms15 that have helped place the region on a sustainable growth trajectory.

to excessive reliance on foreign funding. Conversely, fundamentals such as favourable demographics, credit growth, healthy levels of local currency debt, functioning legal and regulatory frameworks, robust financial institutions and an independent central bank are the markers of a strong economy.

During a sell-off in emerging market assets, it is helpful to analyse some key metrics that help distinguish between the vulnerable and the resilient. Weak economies are afflicted by high twin deficits, significant levels of external foreign currency debt and small domestic capital markets that lead

Fortunately, India and ASEAN score positively compared to their counterparts in other emerging markets around the world on all these issues. The region’s currencies have also proven to be more resilient to contagion risks than their peers.

https://www.reuters.com/article/emerging-markets/emerging-markets-trade-war-rumbles-hit-emerging-stocks-indian-rupeeplumbs-record-low-idUSL5N1VW1EG

https://www.ft.com/content/a111b01e-a161-11e8-85da-eeb7a9ce36e4

https://www.ft.com/content/34bf4d1e-a787-11e8-926a-7342fe5e173f

https://www.nasdaq.com/article/imf-reaffirms-record-high-global-growth-rate-in-2018-5-picks-cm992187

https://www.imf.org/external/pubs/ft/wp/2000/wp00157.pdf

https://aric.adb.org/pdf/aem/jul09/Jul_AEM_special.pdf

Reflections from the 2018 Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group

Growth in the face of headwinds

Figure 9

Asia has been more resilient than Europe, the Middle East and Africa (EMEA), Latin America (LATAM) FX depreciation against USD, % as of Aug 15 2018 40 YTD

More depreciation

MTD

25 20 15 10 5 0 -5 TRY

ZAR

ARS

RUB

BRL

INR

MXN

IDR

PKR

MYR

PHP

THB

GHS

Asia, the Middle East, LATAM and EMEA economies are shown in their respective colours Source: Bloomberg, Standard Chartered Research

Figure 10

Asia FX is much more resilient to contagion than emerging market peers

TRY ZAR Last 5 days

RUB

YTD INR PHP IDR MYR Spot returns, % as of Aug 15 2018

THB -45

_-40

-35

-30

-25

-20

-15

-10

-5

Source: Bloomberg, Standard Chartered Research

Reforms â&#x20AC;&#x201C; short-term pain, long-term gain More specifically, India should ride out the current crisis on the back of ample forex reserves cushioning 16

its large external debt. Meanwhile, an independent central bank, with a newly-minted explicit inflation targeting mandate, should keep inflation in check.

The country has also witnessed major reforms in recent months. While the verdict is still out on the true impact of the demonetisation undertaken in late 2016, the

Reflections from the 2018 Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group

introduction of the goods and services tax, or GST, which seeks to streamline a convoluted, decades-old tax system, will undoubtedly bring significant benefits in coming years.

We expect the region to grow at a rate of 5.2 per cent this year. At the same time, the region is working to attract a bigger share of the higher-value-added manufacturing business from the world.

In the near term, both these measures have held back growth, fuelling some criticism of the government. Regardless, most polls point to Modi’s Bharatiya Janata Party staying in power — thanks to the lack of a credible opposition — albeit with the help of coalition partners, unlike the historic majority win the party enjoyed in 2014. Reforms like GST are expected to remain in place, because they have the buy-in of a political system that has come to recognise the importance of investor-friendly policies.

Indonesia, ASEAN’s largest member nation, boasts healthy fundamentals. And, despite the rupiah underperforming other currencies in the region, the country’s institutions are making a concerted effort to address any weakness, enabling the economy to fend off any contagion risks.

Other issues that India has worked to address in recent months include the longstanding blight of nonperforming assets and loans at the country’s banks – exacerbated by an overly-leveraged corporate sector. New bankruptcy laws16 and a recapitalisation programme17 to address bad loans at public sector banks are significant steps. Meanwhile, other long-term challenges such as job creation and the expansion of its manufacturing base need to be addressed.

Slowing yet solid Meanwhile, ASEAN continues to outperform global growth, albeit at a slower pace than before, as it continues to be hampered by an investment overhang fuelled by the commodities boom of recent years.

In the Philippines, the fiscal deficit (at approximately 3 per cent of GDP) and the current account deficit (approximately 1 per cent of GDP) are not high enough to be of concern. The central bank has taken strong measures to try to contain inflation; combined with healthy growth led by increased infrastructure development and limited foreign participation in the bond market. The country is fairly well-shielded from external shocks. Across the rest of ASEAN, while the region’s economies could be expected to experience shortterm spasms of weakness, strong domestic institutional frameworks and healthy fundamentals should help withstand the ill winds blowing across other emerging markets.

Trade trials While the risk of a full-blown trade war is still uncertain, there is always potential for escalation. Its impact features high on the list of concerns for many businesses, especially in

Asia’s manufacturing hubs of China, Singapore and Taiwan. Taking the worst-case view, if USChina trade grinds to a stop, China could suffer economic losses of as much as approximately 3 per cent of GDP while the US could be hit for approximately 1 per cent of its GDP. In such an event, ASEAN countries, especially Malaysia, Singapore and Vietnam, will be affected as significant portions of their exports to China eventually find their way to the US. However, some of the affected countries also stand to benefit if they can effectively step in to fill the gap in exports left behind by a tariffhit China. Still, final demand loss from a protracted trade war will adversely affect global growth.

Domestic bliss ASEAN and India stand apart from emerging markets in other parts of the world because of their domestic strengths, such as their awareness of and preparedness to deal with external shocks, the independence of their financial authorities and their ability to act decisively. These economies also benefit from solid fundamentals such as manageable inflation, higher real interest rates, and sufficient forex reserves providing a buffer from external vulnerabilities. While it is important to recognise that no economy can be totally impervious to global risks, and investors should rightfully remain cautious in these uncertain times, ASEAN and India offer plenty of reasons to be positive.

https://www.ft.com/content/7babd578-493e-11e8-8ae9-4b5ddcca99b3

https://www.livemint.com/Industry/CH9RmlyxD81Qjb6XxtnGiO/Recapitalisation-of-5-public-sector-banks-credit-positive-M.html

Growth in the face of headwinds

Reflections from the 2018 Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group

Africa: Financial and political reform key to economic progress Razia Khan, Chief Economist, Africa & Middle East, Standard Chartered

Africa is home to some of the world’s fastest-growing18 economies. While the continent’s long-term future holds promise, some of its emerging markets face the twin challenges of financing expensive, capital expenditure-heavy projects essential to maintaining growth while arranging new loans to repay old debt. Compounding their difficulties are global financial conditions that look to tighten significantly as developed market central banks unwind their quantitative easing programmes and raise interest rates, effectively cutting off the easy money that has fuelled global growth since the financial crisis. Meanwhile, depreciating local currencies threaten to further raise the debtto-GDP ratios of the continent’s more vulnerable economies that had previously increased external borrowing.

Elections set the tone Two of the continent’s biggest economies – Nigeria and South Africa – are preparing for key elections in 2019. In oil-rich Nigeria, growth has disappointed, following the 2014 slump in oil prices. Despite a homegrown package of reforms – Nigeria’s Economic Recovery and Growth Programme, that aims to boost non-oil growth through increased development spending,

actual progress has been slow. With elections approaching, the risk is that private sector longerterm investment decisions will be delayed until after the polls. With higher oil prices however, recovery is in sight. The challenge will be not to become complacent about diversification. South Africa, at the other end of the continent, is working to resurrect a weak economy – the country slipped into recession19 in H1 2018 – despite an improving political climate, and the appointment of a reformist new president, Cyril Ramaphosa. We believe the growth slowdown will likely be temporary, with hopes that 2019 elections will deliver a stronger mandate for much-needed structural reform, able to drive faster trend growth in the future.

outlook remains robust (thanks to rising oil and gas production) even given near-term headwinds: still-weak domestic credit growth and tightening external financing conditions. Having successfully tightened policy, Ghana’s next challenge will be to achieve its much-desired transformation, putting in place the building blocks for meaningful industrialisation, while maintaining investor confidence. In Kenya, strong performance in the agriculture sector raised H1-2018 GDP growth, while better-behaved inflation allowed the central bank to deliver a rate cut in July. A lifting of loan rate caps is still needed for the economy to perform to its potential. Nonetheless, investor confidence has improved markedly since the 2017 elections.

Sentiment starts to shift

Trade war impact

Ghana has been a strong performer under its International Monetary Fund (IMF) programme, which ends early next year. The growth

Global trade tensions, while not yet a major concern for Africa, help shine a light on a long-term solution: intra-Africa trade.

https://www.weforum.org/agenda/2018/05/ethiopia-africa-fastest-growing-economy/

https://www.reuters.com/article/safrica-economy-gdp/update-2-south-africa-in-recession-for-first-time-since-2009-rand-slumps-idUSL8N1VQ25G

Growth in the face of headwinds

So far, promoting trade between African countries has been a slow process. There are a number of reasons for this. First, much of Africa’s external trade remains dominated by commodities, with few complementarities between neighbouring or even sub-regional economies that find themselves in the same trade bloc. Second, intra-African trade has not been well-served by the lack of enabling infrastructure, especially in remote regions, far removed from the continent’s commercial centres. Solving for this will be a lengthy, expensive process, but deeper intra-regional trade ties will drive important welfare gains. Current global trade tensions, as well as the renewed effort to establish a continental free trade area, will increasingly shift the focus to where it is most needed. To attain greater resilience to potential external shocks, African economies must trade more with each other, and reduce dependence on their very narrow export bases.

China in Africa China has been a key source of financing for infrastructure projects across Africa, along with multilateral institutions such as the World Bank, African Development Bank, and others. A new emphasis on Belt and Road projects suggests that China-Africa engagement will continue to grow. Even as global financial conditions tighten, African economies will benefit from a more diverse investor base. However, China’s interests in the region are still largely commercial, and in this respect, do not differ greatly from other commercial creditors. Economies that borrow will still need to focus on debt sustainability, with transparency in their debt management practices, in order to benefit.

Long-term optimism There is no doubting Africa’s potential. The region benefits from a young demographic profile, the promise of future consumption, is urbanising rapidly and continues

to leapfrog technologically. All of this is evident, in addition to having significant, untapped resource potential. Some care is needed regarding near-term headwinds however. A strong demonstration of reform will be required to maintain investor confidence through more difficult external conditions. Reassuringly, conditions remain favourable for long-term growth. In most countries, governments are working to deepen domestic revenue-raising capabilities and strengthen fiscal institutions. A deepening of financial intermediation, with greater access to financing for the private sector and governments alike, will help boost this long-term trend. These are promising signs. An increasing number of countries in Sub-Saharan Africa are directly confronting their challenges, using them as a catalyst for meaningful reform. Ultimately, this should deliver faster growth and greater prosperity in the future.

Reflections from the 2018 Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group

There is no doubting Africaâ&#x20AC;&#x2122;s potential. The region benefits from a young demographic profile, the promise of future consumption, is urbanising rapidly and continues to leapfrog technologically.

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