Walter Molano | 2020 Vision
OP-ED CONTRIBUTION: EMERGING MARKET ADVISER
After one of the worst years we’ve had in a long time, we look at what lies ahead.
In hindsight, 2019 was expected to be challenging, but for different reasons. The United States Federal Reserve was in the midst of a tightening cycle, and this should have been bad for the emerging world. The electoral calendar was relatively thin, with elections scheduled in Argentina, Bolivia and Uruguay.
However, fears of a global slowdown, due to the escalating trade war, the effects of Brexit and the ongoing deceleration of the Chinese economy, forced central banks around the world to ease monetary policy.
By the second half of the year, the Federal Reserve jumped on the bandwagon and began cutting rates. This should have brightened the outlook. However, the unexpected results of the Argentine presidential primary, PASO, in mid-August plunged the market into chaos. The damage was mainly limited to Argentine assets, but there was spillover to weaker credits, such as Ecuador.
The capital markets also closed, shutting off the inflow of capital into the region. Given the collapse in 2019, it is reasonable to believe that 2020 will be much better.
The initial signs from the new Fernandez administration have been positive. The new economic team is competent and it has done a good job in communicating its intentions. Although a debt restructuring is in the works, there has also been a commitment to remain current in order to avoid a disorderly hard default.
The government has said it wants to complete the exchange by March, when it faces a large wave of amortisations. It has also said that it wants to take advantage of the Collective Action Clauses, or CACs. Therefore, we can expect a rather amicable form of restructuring in order to secure broad-based support.
Fortunately, the markets will be helped by loose global monetary conditions, but without further disruption in the global economy. Bond traders are expecting two more cuts in Fed Funds in 2020, which should generate more demand for high yielding emerging market assets.
However, as the United States presidential elections loom closer, Washington will not be in any mood to cause any disruptions. On the contrary, the completing of the USMCA Treaty should end the trade spat in North America, and a US-China trade deal is also imminent. Moreover, fears about a global downturn are fading. Even though the US economic expansion is now the longest on record, it shows no sign of abating.
On the political side, there should not be much noise out of Latin America. Bolivia is the only country scheduled to hold presidential elections in 2020. Peru and Venezuela are supposed to have legislative elections this year.
While both countries are currently experiencing political instability, the Venezuelan elections will be the most important. The recent attempt to block Juan Guaido as the president of the National Assembly, led to a great deal of political drama. In the end, he was re-elected. However, President Maduro will continue to manoeuvre to get him out of the way.
Still, the year will not be without risks. One of the serious concerns is the health of the Chinese economy. The IMF expects it to grow 5.8 per cent y/y in 2020.
As China becomes more prosperous, it will naturally trend towards its equilibrium growth rate, which tends to be the average population growth rate. The problem is that the country’s population growth rate is only 0.59 per cent. This means that the economy will decelerate further before reaching equilibrium. Hence, China will not contribute as much to global growth as it did during the last two decades.
There were hopes that India would fill the void, as the growth in the Chinese economy levelled off. Unfortunately, that has not been the case. Although Prime Minister Narendra Modi was swept into power with high expectations to galvanise the Indian economy, he has been a major disappointment.
Several economic experiments, such as the demonetisation of the Indian economy in 2016, failed miserably. The economy has been struggled to grow more than 4 per cent y/y in 2019, and it will be lucky if it cracks through the 5 per cent barrier in 2020.
Even though India has enormous promise, with a population growth rate of 1.1 per cent and the very young median age of 28, it will not contribute as much to global economic demand in 2020.
In sum, 2020 is lined up to be better than last year. Beside the recent spike in oil prices, are no other events on the horizon that could trigger surprises.
The global monetary environment remains favourable and hopefully the Iran noise will soon subside.
Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.