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1、Global Research 4 March 2019EconomicsEmerging MarketsBhanu Ba we j aStrategist +44-20-7568 6833Arend KapteynEconomist +44-20-7567 0531Rohit AroraStrategist +65-6495 5232Alexey OstapchukStrategist +44-20-7567 0239EM Economic PerspectivesEM by the Numbers: A nervy test ofthe /darkest before dawn thesi
2、sA bottom in sight, but with little clarity on the strength of the reboundUBS Q1 EM Nowcast shows some stabilisation, but only at a 3.5% growth - much weaker than expected - and with no help from Asia, where numbers remain weak. Markets have rallied hard expecting a decent growth rebound, but few le
3、ading indicators point in this direction yet. Domestic demand in EM is generally strong, except in the one country that matters most for external demand in the others - China. Weak external growth has kept investment and industrial production weak. EM ex-China IP is growing at 1.5% y/y. Chinas own I
4、P is stronger at 5.7%, but this is the second percentile of its 20-year distribution. A modest recovery may not be good enough.Not your garden variety slowdown in tradeUnlike 2015, when the slowdown in trade growth was weak due to a collapse in (commodity) prices, today, both trade volumes and value
5、s are weakening on a y/y basis. Trade volume growth has not been this weak since the GFC. This slowdown has been about China domestic demand, and secondarily about Europe; less so about US tariffs. The big question is the degree of growth response from China as monetary policy now turns looser.Short
6、-term liquidity has surprised the most as China has opened the tapThe large rise in Chinas total social financing flow for January does confirm the turn in policy preferences from limiting leverage towards growth. The surprise in the number really lies in short-term financing. Corporate bond financi
7、ng improved to a degree as well, which does suggest better transmission of easier policy, and implies lower left-tail risks. Long-term financing was in line with seasonals, however, and does not make a very strong case for an imminent and sustained growth improvement. We will watch long-term financi
8、ng, commodity and automobile import volumes, housing investment and China five-year rates to assess the scale of data improvement and confidence in reflation.Playing policy, not growthWe have argued that looser liquidity will most directly help Chinese assets through improved valuations. This round
9、of stimulus will be less import-intensive (infrastructure as opposed to housing), and should be played in the underlying (China), not in derivative trades elsewhere. One must also bear in mind the long lags between Chinese liquidity provision and data improvement elsewhere. The correlation between E
10、M earnings and China credit is maximised at a lag of 12-18 months. We expect EM eamirgs growth estimates to continue to decline at least until Q2. Both because liquidity will improve well before growth, and also due to a more domestically-focussed spending this time, we believe it is better to play
11、Chinas stimulus directly in China.This report has been prepared by UBS AG London Branch. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 29.InflationWhat the numbers sav： Through 2016, to which many parallels are made today, China PPI rose by 13 percentage points from -6.1% y/y to 6.8%
12、y/y. By contrast, China PPI growth has now entered into the negative territory again. This backdrop is really consequential for profitability of firms in China and in EM. While China real GDP growth will likely fall by 0.4 percentage points to around 6.1% in 2019, nominal growth is likely to fall by
13、 a full 2 percentage points. Rising markets could get expensive quite quickly amidst falling nominal earnings growth. Weak growth is a bigger risk than inflation in EM, in our view. Poland and the Czech Republic, which saw their output gaps close two- three years ago, are still not seeing any core i
14、nflation pressure, similar to closed-output-gap economies in developed markets, such as Japan and Sweden. What they CPI inflation in EM remains in check at a median level of 2.3%; 17th percentile of its 20-year distribution. Towards the end of 2018, sequential inflation in most countries, particular
15、ly in Asia, was reported below the respective y/y figures, suggesting downward room for the latter. The two exceptions here were South Africa and Russia, where sequential inflation is annualising between 6% and 7%. Median core inflation in EM is at 2.6%, a minor 20bp higher than a year ago. Similart
16、o headline inflation, core inflation is also at very low levels in Asia: Korea, Taiwan, China, Singapore and Thailand are all annualising between -2% and 1% core inflation rates. Core inflation remains high between 4-6% in India, South Africa, the Philippines, Russia and Mexico. Hungary, with much h
17、igher wage growth, is, however, an exception within the CEE region. The decline in core inflation in Turkey has been sharp, but only after it rose much higher than expected. 12month outlook: Weak growth and an early flattening out of the nascent credit impulse mean that higher EM inflation will like
18、ly only come through FX weakness and higher energy prices, neither of which have been an issue over the last three months. Median inflation is likely to remain within 2.5-3% range over the next 12-24 months, while weighted average inflation (including Turkey) looks set to decline to 3.5% in 2020 aft
19、er coming in at 4.3% in 2019. Overall, similarto developed markets, inflation is not a problem in EM, but growth is.Figure 3: EM headline and core inflation (% y/y)Figure 2: CPI inflation by regionSource: Haver, UBSSource: Haver, UBSFigure 4: EM headline and core inflation (sequential*)20%15%10%5%0%
20、-5% Headline Inflation Core InflationSource: Haver, UBS * Represents a 6-month trimmed mean saar.Figure 5: EM CPI headline y/y and EM CPI sequential (ann)Source: Haver, UBS.* Represents a 6-month trimmed mean saar.Figure 6: Headline CPI EM vs DM (MSCI-weighted)Source: Haver, UBSFigure 7: PPI inflati
21、on in EM countriesSource: Haver, UBSSource: Haver, UBSSource: Haver, UBS *AII series are GBI-weighted.Industrial ProductionWhat the cumbers sa”： Headline EM industrial production (IP) growth has slowed from a recent peak of 5.5% (3mma y/y) in early 2018 to 3.4% in December (latest available data). E
22、xcluding China, the deceleration is more dramatic: from 4.4% to 1.5% (3mma y/y). By region, the slowdown is most significant in EMEA (-421 bp deceleration in IP growth since its recent peak in Q1 2018, in large part due to an 18pp deterioration in Turkey), followed by LatAm (-339bp), and Asia ex-Chi
23、na (-184bp). And in historical percentile terms, IP growth in the three regions is now running, respectively, at the 17th, 29th and 26th percentiles, while IP growth for EM as a whole is running in the 16th lowest historical percentile measured over the last two decades. Relative to its own history,
24、 the weakest EM country in our 22-country sample is actually China, which in December had IP growth of 5.7% - good by EM standards but the second lowest percentile for the country itself. Although the slowdown in IP growth is widespread, it is not universal: Colombia, Indonesia, the Philippines (neg
25、ative growth but the December 2017 base was even weaker), Russia (strong improvement in mining/petroleum production) and Taiwan all saw IP growth rates improve during 2018. The largest 2018 slowdowns in IP were in Turkey, Kazakhstan, Brazil, the Czech Republic and Poland. What they mea/7： The deteri
26、oration in EM production broadly mirrors the slowdown in global trade. Global import volume demand, for instance, fell from a peak of around 5.5% (3mma y/y) in early 2018 to 1.1% by the end of the year, leading EM export volume demand growth to halve over the same period (from 6% to 3%). Volatility
27、in global import volume demand tends to be closely correlated with changes in IP growth (correlation 0.82 over the last two decades) - as demand falls, EM producers reduce production/capacity/borrowing. The mirror image of that dynamic is visible in our global Nowcast model, where 75% of the growth
28、deterioration over the last year in EM ex-lndia/China can be attributed to a bucket of external variables. The weakness in the trade cycle itself is something we have attributed largely to the fading commodity cycle (three quarters of the nominal trade deterioration comes from weakening deflators, w
29、hich are largely a function of FX movements and commodity prices), but it has been exacerbated by a series of idiosyncratic shocks: (i) the currency issues in Turkey/Argentina (which further tightened financial conditions); (ii) the trade dispute between the US/China, which affected supply chains an
30、d global confidence; and (iii) other shocks, such as the emissions testing bottlenecks in Europe for global car production/sales, etc. 12-month outlook: We expect the trade cycle (and with it EM production) to bottom towards the end of Q1 or beginning of Q2 based on the recovery in metal and oil pri
31、ces and relatively benign currency dynamics. Whether that is a hard* or soft* bottom will likely depend on (i) the progress in US/China trade talks (needed to improve sentiment), (ii) what action the US decides to take under its Section 232 investigation into the auto industry (a potential source of
32、 further disruption to global trade/IP), (iii) and how quickly we see a turnaround in Turkey (a quarter of EM*s IP slowdown) and China (also roughly a quarter of the slowdown), where we expect stimulus to start to gain traction soon.Figure 1: EM, US and EU industrial production ex construction-2504
33、05 06 07 08 09 10 11 12 13 14 15 16 17 18 19Figure 2: Industrial production ex construction by regionSource: CPB, Haver, UBSSource: CPB, Haver, UBSFigure 3: Industrial Production (BRIC) (%y/y, 3mma)Figure 4: Industrial production: EM ex-China vs DMex-US (% y/y, 3mma)Figure 5: EM IP growth: (3mma % y
34、/y, latest vs 6m ago)Source: Haver, UBSMoney and Credit growthWhat the lumbers say: Headline EM credit growth (y/y), onan FX-adjusted basis, has edged down from a recent peakof nearly 10.5% early last year to around 9.5% by the end of 2018. EM ex-China similarly has slowed from its recent mid-year p
35、eak of 9.2% to 8.8%. Among the large economies, credit growth improved over the last year in India, Korea, Russia and Brazil, but deteriorated elsewhere - particularly in Turkey, where it declined from nearly 23% coming into the year to 0% by the year end (note that the extent of this deterioration
36、is not visible in the unadjusted data, in which the large depreciation inflates the FX loan stock). Indeed, Turkey*s slowdown accounts for two-thirds of the loss of credit momentum in EM and the changes elsewhere are relatively modest, in sharp contrast to the large moves visible in the IP/trade/con
37、fidence data. What rep mean: The relatively modest decline in EM credit growth (ex-Turkey) reflects two opposing forces. On the one hand, the turn in the global trade cycle has led manufacturing producers to scale back capacity and investment plans, as they adjust to weaker external demand. On the o
38、ther hand, the domestic part of EM looks a lot healthier, with still decent employment growth, and relatively stable consumption and consumer confidence. That said, the level of credit growth is subdued in historical percentile terms, in line with current subpar economic growth momentum: EM credit g
39、rowth is running in only the 9th lowest historical percentile, EM ex-China is in the 25th percentile, and Asia (exChina), EMEA and LatAm are in, respectively, the 50th, 17th and 13th percentile. The credit impulse (second derivative to measure acceleration/deceleration) shows a more visible turn in
40、credit momentum in EM: over the last six months (roughly equal to 1% of GDP in EM ex-China, or a -0.6 standard deviation shift) with most countries now showing deceleration. The most visible deterioration is again in Turkey, but Mexico also stands out (partly pay-back for elevated levels of debt iss
41、uance and manufacturing loans earlier in the year when NAFTA negotiations went into the home stretch, and partly policy rate hikes starting to bite). China is the big positive outlier - the banks only credit impulse has improved by 4% GDP over the last six months, and the other variations of the cre
42、dit impulse are also starting to turn, helped by increased policy stimulus and some easing up on shadow bank deleveraging. 12month outlook: EM credit growth is sensitive to global demand conditionsand confidence, both ofwhich are facingheadwinds. The longer the soft patch lasts, the greater the risk
43、 that weakness in the external sector starts to spill over into domestic sectors. In the case of Turkey, lending rates have declined substantially with currency stability, likely helping credit growth to trough soon, and we expect adjusted TSF growth in China to increase by another 150bp or so as th
44、e stimulus comes on line. Against that, there has been some tightening in Russia (higher risk weights for consumer loans + CBR hiking), lagged effects from hikes in Mexico could weigh further on credit growth, and we still expect Brazil to start tightening in Q3. Incremental changes in credit growth
45、 are likely to depend largely on those countryspecific factors and the speed with which the global cycle turns and confidence starts to improve.Source: Haver, UBSFigure 2: M2 growth in EM*Source: IMF, Haver, UBS. * GDP-weightedFigure 3: Credit impulse (% of GDP): DM vs EM (ex. China)Source: Haver, U
46、BSSource: Haver, UBSFigure 5: Private sector debt service ratio (%)Source: Haver, CEIC, IMF, UBS estimatesAfricaAsiaM2 growth (by region)*45%40%35% 30%25%20%15%10%5%0%03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18Source: Haver, CEIC, IMF, UBS estimates *GDP weightedPrivate sector credit growth (3mm
47、a, % y/y)03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18Figure 8: Domestic credit growth by regionPrivate credit growth by region50%40%30%20%10%Source: Haver, CEIC, IMF, UBS estimatesSource: Haver, CEIC, IMF, UBS estimatesFigure 9: Loans-to-deposit ratioFigure 10: Domestic credit-to-GDP ratio (3mma)
48、Source: Haver, CEIC, UBSFigure 11: China - Total social financing (% of GDP)Source: Haver, UBSFigure 12: China - Yearly increment in TSF (% of GDP)Source: Haver, UBSFigure 13: Private credit growth (3mma % y/y, latest vs 6m ago)Source: Haver, CEIC, UBSTradeWhat the cumbers saw The trade recession is well underwaywith (MSCI-weighted) EM exports downjust under5%on a sequential smoothed basis. The more open economies in Asia - Korea, Singapore, and, to a lesser