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8/3/2019 SLEA Innauguration_Key Note_Dr Koshy Mathai
1/19
International Monetary Fund
World Economic
October 14, 2011
and
Some Thoughts on
Sri Lanka
8/3/2019 SLEA Innauguration_Key Note_Dr Koshy Mathai
2/19
Activity is under threat: internal and global demand
rebalancing are not advancing.
This is symptomatic of long-standing policy challenges
that ur entl need to be addressed:
More inter-temporal fiscal adjustment as well asbank and household balance sheet repair inadvanced economies;
More rebalancing of demand in key Asian surplus
economies.
2
8/3/2019 SLEA Innauguration_Key Note_Dr Koshy Mathai
3/19
RECENT DEVELOPMENTS
Bad newsmostly unexpected:
Euro area strains increasing dramatically.US Q1, Q2weaker underlying growth momentum, especially forconsumption.
Global stock market correction.
Good newsmostly expected:
Japan is recovering well.
EM growth is still strong.Oil prices have moderated.
3
8/3/2019 SLEA Innauguration_Key Note_Dr Koshy Mathai
4/19
Global activity has slowed noticeably.
World Trade(annualized percent change of three-month moving
average over previous three-month moving average)
20
40
60
Purchasing Managers Index (PMI)(index)
55
60
65
-80
-60
-40
-20
0
Trade value
CPB trade volume index
2000 04 Jun.
11
06 0802
4
30
35
40
45
50
Manufacturing:
advanced economiesManufacturing:
emerging economiesServices: advanced
economiesServices: emerging
economies
2007 Aug.
11
08 1009
8/3/2019 SLEA Innauguration_Key Note_Dr Koshy Mathai
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Equity markets have fallen sharply andvolatility has increased drastically.
Equity Markets(index; 2007=100; national currency)
100
120
140
DJ EURO STOXX
S&P 500
Asia
Latin America 70
80
90
U.S. (VIX)
Emerging
Markets (VXY)
Implied Volatility(percent)
May 10, 2010
0
20
40
60
80
2000 04 Sep.
11
06 0802
0
10
20
30
40
50
60
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Sep.
11 5
10
8/3/2019 SLEA Innauguration_Key Note_Dr Koshy Mathai
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Financial stability risks have increased dramatically,
especially in the euro area.
300
350
400Spain
Italy
Belgium
France
Government Bond Spreads(two-year yield spreads over German bunds;
basis points)
July 21, 2011
80
100
U.S. dollar
Euro
Interbank Spreads(three-month London interbank offered rate
minus three-month government bill rate;basis points)
July 21, 2011
6
-50
0
50
100
150
200
250
Jan-10 Jul-10 Jan-11 Jul-11
May 10, 20100
20
40
60
Jan-10 Jul-10 Jan-11 Jul-11Sep.
11
Sep.
11
8/3/2019 SLEA Innauguration_Key Note_Dr Koshy Mathai
7/19
Equity Fund Flows to Emerging Markets(billions of U.S. dollars, weekly flows)
Capital flows to EM have turned negative.
1.0
1.5
2.0
QE2 (Nov. 3)
4
6
8
EMEA
LatAm
Asia excl. Japan
Global
Total
QE2 (Nov. 3)
Bond Fund Flows to Emerging Markets(billions of U.S. dollars, weekly flows)
Source: EPFR Global. 7
-1.0
-0.5
0.0
0.5
Jan-10 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 May-11 Aug-11
Greece crisis
Ireland crisis
-8
-6
-4
-2
0
2
Jan-10 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 May-11 Aug-11
Ireland crisis
Greece crisis
8/3/2019 SLEA Innauguration_Key Note_Dr Koshy Mathai
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Oil prices have retreated but
are still above January 2011 levels.
Food and Oil Prices
130
140
110
120
Food
(index, 2010m1 = 100; left scale)
Jun. 11 WEO for 2012
8
90
100
110
120
70
80
90
100
Oil
(US dollars a barrel; right scale)
Jan. 11 WEO [for 2012]
Aug. 11 WEO [for 2012]
Jan.
2010
Aug.
11
Jul.
2010
Jan.
2011
8/3/2019 SLEA Innauguration_Key Note_Dr Koshy Mathai
9/19
Consumption in advanced economies is struggling to recover fromfiscal withdrawal, but M&E investment is still doing well.
6
9
12
Emerging
economies2
Real Private Consumption(annualized percent change from preceding quarter)
0
10
20
Emerging
economies2
Real Gross Fixed Investment(annualized percent change from preceding quarter)
-6
-3
0
3
Advanced
economies
1
092007 08 10 11:
Q2
-40
-30
-20
-10
Advanced
economies1
092007 08 10 11:
Q2
9
of which:
machinery and
equipment
1Australia, Canada, Czech Republic, Denmark, euro area, Hong Kong SAR, Israel, Japan, Korea, New Zealand, Norway, Singapore, Sweden, Switzerland, Taiwan Province of China, United Kingdom, and United States.2Argentina, Brazil, Bulgaria, Chile, China, Colombia, Hungary, India, Indonesia, Latvia, Lithuania, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Romania, Russia, South Africa, Thailand, Turkey, Ukraine, and
Venezuela.
8/3/2019 SLEA Innauguration_Key Note_Dr Koshy Mathai
10/19
Employment presents major challenges to recoveryU.S. in new territory.
48
52
United States
Employment-Population Ratio
(percent)
1
2
Family Income Expectations1
(percent)
32
36
40
44
Euro area
901960 80 10200070
10
-4
-3
-2
-1Euro area
United
States
901980 95 Jun.
11
2000851U.S. data are from Reuters/University of Michigan Surveys of Consumers and represent the
difference between the percentage of people who think family income will go up and those who
think it will go down. EU data are from the family financial situation index in the European
Commission Business and Consumer Surveys. Both series are smoothed and harmonized.
05 10
8/3/2019 SLEA Innauguration_Key Note_Dr Koshy Mathai
11/19
WEO FORECAST AND RISKS
Key assumption underlying the baseline: financial
recovery delayed but not derailed.
1. Euro area crisis does not run out of control.
2. Global financial volatility does not escalate.
3. No major tightening of bank lending conditions.
11
8/3/2019 SLEA Innauguration_Key Note_Dr Koshy Mathai
12/19
6
8
10
12
Emerging Asia
MENA6
8
10
12
More uneven recovery: > 6 percent growth in EM
< 2 percent growth in AE
= 4 percent global growth.Real GDP Growth
(percent change from a year earlier)
Advanced Economies Emerging Economies
-12
-10
-8
-6
-4
-2
0
2
4
MENADev. AsiaLAC
2011 2012
4.0 3.6
8.2 8.0
4.5 4.0
Current WEO
Latin America
-12
-10
-8
-6
-4
-2
0
2
4
United StatesEuro area
Japan
2011 2012
1.5 1.81.6 1.1
-0.5 2.3
Current WEO
2000 02 04 1006 08
12
2000 02 04 1006 08 12 12
8/3/2019 SLEA Innauguration_Key Note_Dr Koshy Mathai
13/19
Downward revisions are larger for AE than EM.Various EM have policy space to counteract the slowdown.
Revisions(percent; current-June 2011 Quarterly Update )
0.5
1.02011
2012
United States Euro area Japan Middle East and
North Africa
Developing Asia Latin America and
the Caribbean
-1.0
-0.5
0.0
13
8/3/2019 SLEA Innauguration_Key Note_Dr Koshy Mathai
14/19
Inflation has begun to moderate.
Headline Inflation(Annualized percent change of three-month moving
average over previous three-month moving average)
6
8
10
12
Core Inflation(Twelve-month change)
6
8
10
WorldAdvanced economies
Emerging market economies
062002 04 Jul.
11
08-6
-4
-2
0
2
4
WorldAdvanced economies
Emerging market economies
14
10-2
0
2
4
062002 04 Jul.
11
08 10
8/3/2019 SLEA Innauguration_Key Note_Dr Koshy Mathai
15/19
3
4
5
6
World GDP growth2
2
3
4ROW CHN+EMA OCADC
DEU+JPN Oil exporters U.S.
Global demand rebalancing is stuckEM not making up for less AEconsumption. Structural reforms and XR adjustment are needed.
Global Imbalances1
(percent of world GDP)
Country Contributions to Global Consumption
Growth1 (percent)
-3
-2
-1
0
1
2
India
China
Other emerging and developing economiesAdvanced economies
-3
-2
-1
0
Discrepancy
1996 2000 04 08 121 CHN+EMA: China, Hong Kong SAR, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan Province
of China, and Thailand; DEU+JPN: Germany and Japan; OCADC: Bulgaria, Croatia, Czech Republic, Estonia,
Greece, Hungary, Ireland, Latvia, Lithuania, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain,
Turkey, and United Kingdom; ROW: rest of the world; US: United States.
16
15
2005 07 09 11 1613 151 Based on GDP at 2007 market exchange rates.2 Based on 2007 PPP weights.
8/3/2019 SLEA Innauguration_Key Note_Dr Koshy Mathai
16/19
Policy issues
Advanced economies:
Keep monetary policy easy;Dont overtighten fiscal now need a MT plan, to give space for supporttoday;
Recapitalize banks
Emerging and developing economies:
Continue tightening monetary policybut some countries can wait and see
Continue tightening fiscal policybut there is space for stimulus if needed
Introduce structural reforms and currency appreciation in key surpluseconomies
16
8/3/2019 SLEA Innauguration_Key Note_Dr Koshy Mathai
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Two thoughts on Sri Lanka
17
8/3/2019 SLEA Innauguration_Key Note_Dr Koshy Mathai
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Should restore the export share via regional integration.
0.10
0.12
0.14
25
30
35
US
Others24%
Countrywise breakdown of Sri Lankanexports, in percent of total, 2010
18
0.00
0.02
0.04
0.06
0.08
0
5
10
15
20
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
Export/GDP
Export/World
exports (RHS)
20%
EU36%
Otheradvanced
ec10%
China1%
India5%
Otherdev. Asia
4%
8/3/2019 SLEA Innauguration_Key Note_Dr Koshy Mathai
19/19
Reserves can grow further, and the XR should be more flexible.
Sri Lanka: Exchange Rates and Reserves
6
7
8
115
125REERRs/USDReserves in months of imports of goods (RHS)Reserves in ratio of ST debt (RHS)
19
0
1
2
3
4
5
75
85
95
105
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11