Sunday, 4 January 2015

Year-end global mini turbulence and what to expect in 2015

Arisyi Fariza Raz
The Jakarta Post
29 December 2014

Available at:
http://www.thejakartapost.com/news/2014/12/29/year-end-global-mini-turbulence-and-what-expect-2015.html

Toward the end of 2014, it seems like the global economy wants its own notable ending following the occurrence of some issues.

The first is regarding the possibility of monetary tightening in the US through the US Federal Reserve fund-rate hike next year in response to strengthening US economic conditions. Prior to the Fed’s meeting last week, the global market had feared the Fed rate would increase earlier next year following strengthening US macroeconomic indicators.

As a consequence, hot money flew back to the US from all over the world, resulting in a sharp appreciation of the US dollar against many other currencies. Some fragile emerging economies (those with current account and fiscal deficits) might have experienced much worse than that. Rapid capital outflows might affect their investment accounts in the balance of payments, which corrected their asset prices and further pressured their currencies against the US dollar.

Fortunately, Janet Yellen, the Fed’s chief, expressed a more “dovish” statement during the meeting by saying that the Fed could be patient on the rate rise. This statement finally eased the shock for the time being — at least until next year.

Secondly, in a different place, the global oil oversupply has caused economic turbulence in oil-dependent economies, particularly Russia. The tumbling price of oil, which is its main export, has affected Russia’s economy severely. Its central bank forecasts that gross domestic product (GDP) may shrink by around 5 percent next year if the price does not show any significant improvement.

Following falling exports, its currency, the ruble, depreciated sharply against the US dollar. To respond to this issue, the central bank raised its interest rate from 10.5 to 17 percent,  hoping that this could stop the falling ruble.

China and Japan have their own problems. China’s economic growth is expected to slow to 7.1 percent in 2015 from an expected 7.4 percent this year. This was mainly propelled by slowing export growth amid the global economic slowdown. Some economists have also recommended the government to cut its growth target to around 7.0 percent from 7.5 percent in 2015.

Meanwhile, Japan is still threatened by economic recession and its re-elected Prime Minister Shinzo Abe has yet to finish structural reform to put its economic growth back on track.

All of these phenomena, albeit happening in the different parts of the globe, are somehow posing the same risks to emerging economies, because of a more interconnected global economy and the influence of global sentiment on domestic markets.

It means that emerging economies will start 2015 with a lot of work to do. First, the Fed fund-rate hike next year will pose another wave of threats to emerging economies. Also, the falling oil price and the condition of oil-exporter economies, particularly Russia, may spread negative sentiment to other emerging economies, which could trigger further capital outflows and depreciate their currencies.

Therefore, emerging economies, particularly the fragile ones, need to pay more attention to these threats. To prevent another shock due to a wave of capital outflows when the Fed fund rate finally increases, emerging economies must strengthen their structural economic conditions. For instance, they have to maintain their trade balance to minimize the risk of sharp currency depreciation.

On top of that, similar to previous years, the global economy is expected to grow very slowly next year. Even though the US economy is showing some improvements, other economic centers (such as China, Japan, the UK and Europe) are still struggling to grow faster.

Hence, the prolonged slowdown of these economic giants may reduce the exports of emerging economies to these economies. Therefore, industrialization has to be carried out immediately to shift from commodity led exports to industry led exports, which have more value-added and export competitiveness. Value-added and competitive exports are expected to improve export performance and the current account balance.

Amid these possible risks, fortunately, falling oil prices might give some advantages to some emerging economies that import oil and/or whose fiscal budgets are burdened with oil subsidies. This will give them some fiscal room and potential to minimize its trade balance.

To conclude, emerging market economies will welcome 2015 with caution due to some possible risks (whether carried over from 2015 or some new threats that will be anticipated in 2015) that are expected to happen throughout the year.

However, they have seen gloomier years. There is a chance that these economies will look better next year compared to 2014.
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The writer, a graduate of the University of Manchester, the UK.

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