Tag Archives: Brazil

Emerging Economies – Overheating Index

The Economist last week introduced a new index for measuring emerging economies according to their risk of overheating. These economies make up more than 50% of the world’s GDP and over the last five years have produced more than 4/5ths of global real GDP growth.

The chart below tracks 27 countries according to their risk of overheating. The Economist take 6 different indicators and the scores for these are then added to form an index – 100 means that the economy is red-hot on all 6 measures.

The 6 indicators

1. Inflation – This has an average rate of 6.7% in the developed world. In the emerging markets inflation to vary – 1.7% Taiwan, 20% or more in Argentina, Vietnam and Venezuela. In China core inflatin is at 2.4% whilst Brazil has 5.5% and India is over 8%. When growth is bumping up against capacity constraints and labour markets are tight, food inflation may impact into wages and prices.

2. GDP – a country’s average GDP growth rate since 2007 compared with its growth rate between 1996 and 2006. Growth in Argentina, Brazil, India, and Indonesia has exceeded its long-term trend which assumes little spare capacity. However there appears to be plenty of spare capacity for other countrys – Hungary, Czech Republic and Russia.

3. Unemployment – a lot of emerging markets have been experiencing tight labour markets which are indicative of low unemployment levels – most have levels below their 10 year average. Brazil’s unemployment rate is at record low levels and this has led to wage pressure.

4. Credit Expansion – the best measure is to measure the different between the growth rate in bank credit and nominal GDP. In an emerging economy as the financial sector develops it is normal for the levels of GDP to be less than that of bank lending. However in countries like Argentina, Brazil and Turkey lending to the private sector has increased 20% more than nominal GDP. Though in China bank lending has halved over the past year and is in line with GDP growth.

5. Real Rate of Interest
– (Interest rate – inflation rate) this is negative in over half the emerging economies. In rapidly growing economies, as many emerging are, negative real interest fuel faster credit growth and inflation. China’s rate is positive but this understates the level of its recent contractionary monetary policy.

6. Change in Current-Account Balance – economies that run increasing current-account deficits generally means that they are overheating as domestic demand outstrip domestic supply. Turkey, Brazil, and India seem to be experiencing huge demand relative to supply.

When the scores from the six variables we can see that there are 7 countries where the index is over 80. Argentina is the only country where all six are red and Brazil and China are close by.

QE or QT

I have blogged quite a lot on QE – Quantitative Easing – which has been extremely prevalent in the developed world. However, what about QT – Quantitative Tightening? Remember:

QE – putting more money in the circular flow to stimulate demand
QT – taking money out of the circular flow to slow down the economy

According to the Business Insider website the developing world are trying to slowdown their economies. Here are some approaches from central banks:

The Chinese strategy is the most well known, as the PBOC has been trying to slow down credit growth through a series of bank reserve requirement ratio (RRR) hikes. Therefore if the RRR rate goes up it means that the bank has to hold more cash in reserve and has less to lend out.

They have increased their IOF tax – the IOF tax applies upon conversion of foreign currency into Brazilian reals related to equity or debt investments by foreign investors on the Brazilian stock exchange. This dampens the Carry Trade and means less speculative money is put into the Brazilian Real. They have also increased the reserve requirement in banks to reduce liquidity in money markets to slow economic activity in the market.

Carry Trade – a situation where an investor borrows money in one country that has very low interest rates and then invests it in another country with higher interest rates. This can be precariuous as exchange rates vary.

Here interest rates and reserve ratio requirements have actually gone in different directions.
Reserve requirements have climbed 8% for deposits maturing up to three months. These changes affect institutions with a local presence in Turkey. In order to sharply reduce the incentives for foreign players sending portfolio flows into Turkey, the policy rate was cut by 0.75% in conjunction with reserve requirement hikes in order to weaken the currency. The signaling aspect of such a cut has clearly played a strong role in driving market perception because investors tend to see Turkey’s monetary policy as expansionary. However, the net result of QT and policy rate cuts has likely been to make Turkish monetary policy tighter, not looser.

World Income Inequality chart

Still on the inequality theme – here is a very worthwhile chart that looks at World Income Inequality. It is from the publication entitled “The Haves and the Have-Nots,” a new book by the World Bank economist Branko Milanovic about inequality around the world which was recently reviewed by New York Times columnist Catherine Rampbell. The graph below shows how inequality in Brazil, USA, China, and India ranks on a global scale. On the x axis the population of each country is divided into 20 equally-sized income groups, which is ranked by each country’s household income per person. These are referred to as ventiles and 1 ventile = 5% of the population. So that we are looking at purchasing power parity (PPP) the data is adjusted for the variance in the cost of living in different countries.

Now on the vertical axis, you can see where any given ventile from any country falls when compared to the entire population of the world.

– poorest 5% are amongst the poorest in the world
– richest 5% are amongst the richest in the world

– the bottom 5% are richer than 68% of the world’s population

– the bottom 5% = 4th poorest percentile worlwide.
– the richest 5% = 68th percentile worldwide which means that USA’s poorest = India’s richest.

Now you might be wondering: How can there be so many people in the world who make less than America’s poorest, many of whom make nothing each year? Remember that were looking at the entire bottom chunk of Americans, some of whom make as much as $6,700; that may be extremely poor by American standards, but that amounts to a relatively good standard of living in India, where about a quarter of the population lives on $1 a day.

Exports to China – not so important for world economy?

Here is another graphic from The Economist which shows the value of exports of individual economies to China.

% of exports to China – 2009
Australia – 21.8%
Japan – 18.9%
Brazil – 12.5%
South Africa – 10.3%

Thus exports to China are only 3.4% of GDP in Australia, 2.2% in Japan, 2% in South Africa and 1.2% in Brazil (see below). Export earnings can, of course, have a ripple effect throughout an economy but the multiplier effect is rarely higher than 1.5 or 2 – this means that they hardly ever double the contribution to GDP.

Recently, the Bank Credit Analyst, an independent research firm, asked what would happen if China suffered a “hard landing”. Its answer to this “apocalyptic” question was quite “benign”. As it pointed out, Japan at the start of the 1990s accounted for a bigger share of GDP than China does today. Its growth slowed from about 5% to 1% in the first half of the 1990s without any discernible effect on global trends.

Price by colour-coding – Brazil’s hyperinflation

Here is a great piece from the BBC and also on the Tutor2u blog. During the late 1980s and early 1990s, the price of everything in Brazil went up at least once a week and usually several times – in fact inflation was just under 3,000% in 1990. With this is mind shop owners colour-coded certain items that they felt wouldn’t sell straight away. With CD’s, for example, it was easier to update the colour-coded chart than to change price-tags on every item. Of course, all this changed abruptly in July 1994 with an inflation-busting economic plan that included the introduction of Brazil’s current currency, the real. Click here for the full article.