Download pdf - SLEA Innauguration_Key Note_Dr Koshy Mathai

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


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


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


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


5/19

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


6/19

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


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


8/19

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


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.


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


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


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


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


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


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.


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


17/19

Two thoughts on Sri Lanka

17


18/19

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%


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