Global saving deficit and financing infrastructure in BRIC ...

Center for Macroeconomic Analysis and Short-term Forecasting, Moscow, Russia 0

Global saving deficit and

financing infrastructure in

BRIC economies


1. The World Economy

2012: New Cycle Means

New Risks?


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


While unsure, the recovery in developed countries is slowly

proceeding, the US heading headfirst and both Japan and EA lagging

1.1. Industrial production,

01/01/2000=100 1.2. Unemployment rate, %

Source: IMF International financial statistics Source: IMF International financial statistics


70

75

80

85

90

95

100

105

110

115

120

2007

2008

2009

2010

2011

US EA Japan

3

4

5

6

7

8

9

10

11

2007

2008

2009

2010

2011

US EA Japan


1.6. Total money base of largest developed countries, US$ tn

Source: IMF

The money base central banks issued most likely would stay even as

the credit multiplier increases


0

1

2

3

4

5

6

2007

2008

2009

2010

2011

0

5

10

15

20

25

30

US EA Japan growth rate % (right axis)


So far, the multiplier stays very low, though some increase in US is

visible

1.3. EA MB and M3 growth rates, % yoy 1.4. MB and M2 growth rates, % yoy

Source: ECB


-5

0

5

10

15

20

25

30

35

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

USM2 USMB

Source: Fed

-5

0

5

10

15

20

25

30

35

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

М3 зоны евро Денежная база зоны евроEAM3 EAMB


Corporate debt ratios for both US and EA are at 10-15-year 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)



1.6. EBITDA for main US industries, 2000 prices, 31/03/00=100

Source: US Census Bureau

EBITDA for US has recovered, for EA lags behind but not totally subdued


0

50

100

150

200

250

300

350

50

60

70

80

90

100

110

120

130

140

150

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Durable goods production Manufacturing Mining (right axis)


1.7. US corporate debt, 2000 prices, 31/03/00=100

Source : US Census Bureau

…as the debt levels grow steadily…


0

50

100

150

200

250

300

350

80

90

100

110

120

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Durable goods production Manufacturing Mining (right axis)


1.8. Debt to EBITDA, main US industries


Debt/EBITDA stays at 2000 lows.


1.0

2.0

3.0

4.0

5.0

6.0

7.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Durable goods production Mining Manufacturing


1.10. Profit/Sales in US industries


While profitability is already at expansion phase levels….


-10

-5

0

5

10

15

20

25

30

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Durable goods production Mining Manufacturing

-21

31


1.9. US household debt service ratios, % of income

Source: Fed

…household DSR has not reached the bottom


11.0

11.5

12.0

12.5

13.0

13.5

14.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011


1.10. Delinquent credit in US banks, % of assets

And the 2008 wall of delinquencies is basically

overcome


0

1

2

3

4

5

6

7

8

9

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Total business loans consumer loans loans secured by real estate

Source: Fed


1.11. Loan to deposit ratio

Source: Fed, ECB

At the same time, credit activity at US and EA banks

is clearly subdued


0.80

0.85

0.90

0.95

1.00

1.05

1.10

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

US EA


1.12. Credit portfolio as a share of total assets

Liquid assets are preferred to credits as risk aversion is

strong


Source: Fed, ECB

0.50

0.55

0.60

0.65

0.70

0.752000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

US EA


1.13. Capacity utilization vs unemployment, %


0

2

4

6

8

10

1260

65

70

75

80

85

90

Jan

-00

Ju

l-00

Jan

-01

Ju

l-01

Jan

-02

Ju

l-02

Jan

-03

Ju

l-03

Jan

-04

Ju

l-04

Jan

-05

Ju

l-05

Jan

-06

Ju

l-06

Jan

-07

Ju

l-07

Jan

-08

Ju

l-08

Jan

-09

Ju

l-09

Jan

-10

Ju

l-10

Jan

-11

Ju

l-11

US Capacity utilizationEuro area capacity utilization survey (quarterly, intrapolated)US Unemployment SA inverted, right axisEU-27 unemployment inverted, right axis

Source: Fed, ECB


1.14. Baltic Dry and Harpex indices

While dry bulk costs were untouched by the slowdown of

2011, container costs were sharply down


0

250

500

750

1000

1250

1500

0

100

200

300

400

500

600

Jan

-06

Ap

r-06

Ju

l-06

Oct-

06

Jan

-07

Ap

r-07

Ju

l-07

Oct-

07

Jan

-08

Ap

r-08

Ju

l-08

Oct-

08

Jan

-09

Ap

r-09

Ju

l-09

Oct-

09

Jan

-10

Ap

r-10

Ju

l-10

Oct-

10

Jan

-11

Ap

r-11

Ju

l-11

Oct-

11

Jan

-12

Baltic Dry HARPEX (container costs, right axis)Source: Baltic Exchange, Harpers



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

1.15. Main economic forecasts for 2012

Source: UN, IMF, WB


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

2. Global savings: from “glut” to deficit?


5

10

15

20

25

2010

2015

2020

2025

2030

Мир

2.1. Retired-to-working ratio, world, %


World population ageing, esp. in developed

countries, increases retired-to-workers ratio

Source: UN


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


“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



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



2.3. Financing needs of

developed countries in 2012,

$ bn

2.4. Financing needs of

developed countries in 2012,

% GDP

Source: IMF, Fiscal Monitor 2011


32

51

54

324

389

538

359

471

601

383

0 100 200 300 400 500 600

Ireland

Greece

Portugal

Spain

United Kingdom

Germany

Italy

France

Japan*

United States*

*10 млрд.

долл

14

17

22

21

11

24

21

59

30

15

0 5 10 15 20 25 30 35 40 45 50 55 60

Ireland

Greece

Portugal

Spain

United Kingdom

Germany

Italy

France

Japan*

United States*

*10 млрд.



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 52.0 41.9 3.7

Compare

to: EU 21.3 20.4 4.1

2.5. Saving and investment rates avg. 2006-2010, % GDP

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


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 long-

term investment (including infrastructure) are

widespread (e.g. Walsh, Park and Yu 2011), so-

called centralized and decentralized



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)



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.)



3. The case of Russia –

a path to decentralized

financing model


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

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

low-yield government bonds

banking system is deconcentrated (CR5=50%)

while syndication market is underdeveloped

rates are unstable due to exchange-rate targeting

policy



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 long-term 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



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



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

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

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

Conclusions

Global saving deficit and financing infrastructure in BRIC ...

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