Business Standard: December 10, 2018
New Delhi: Jan Lambregts, managing director and global head of financial markets research at Rabobank International, and Hugo Erken, senior economist and country analyst for North America, Mexico and India, share their views with Puneet Wadhwa on the outlook for the global economy and markets. Edited excerpts:
What is your interpretation of the G20 meeting outcome? Is the worst as regards ‘trade war’ behind us now?
Erken: This is not what we expect. In many ways, the deal currently in place does not differ much from the ‘Mnuchin deal’ dating back from May, when China promised to buy more US agricultural and energy products and lower the trade deficit with the US. Although we can expect China to step up US imports, the current deal also implies that China on many fronts will have to accept structural reforms and open up its economy.
What are the key risks for the global financial markets from here on?
Lambregts: There is never a shortage of risks to worry about. If I had to limit myself to three, the risks would include the ongoing and further escalating trade war between the US-China, hard Brexit, and a too aggressive US Federal Reserve (US Fed), triggering a recession down the road in 2020-2021.
How many rate hikes do you expect from the US Federal Reserve in 2019?
Lambregts: After a 25 basis point (bps) hike in December, we expect the US Fed to hike one more time in the first quarter of the calendar year 2019 (CY19). Combined with a slower economy, we think this will see the US Fed pause for the remainder of 2019. However, this is not a consensus view. The market thinks the US Fed is getting a bit too aggressive with their dot plot of forecasted tightening, but still believes it will do a bit more than our forecasted path.
How are you viewing developments in India ahead of the state and general elections?
Erken: Although the Indian economy starts to fray at the edges, we still believe growth will be in line with potential growth in the next couple of quarters. The recent decline in oil prices, high government consumption and accommodative monetary policy will support growth in the run-up to the general election. Growth forecasts for the third and the fourth quarters are pegged at 7.3 per cent and 6.9 per cent, respectively. We expect the infrastructural stimulus to provide an additional impulse to the economy in the second half of CY19, which will reverse the downward growth trajectory of the Indian economy. What could throw the Indian economy off its potential growth track further down the road is an expected slowdown in the US economy, which will affect world trade.
How do you view the recent turn of events between the government and the RBI?
Erken: The RBI has not been over-cautious on inflation in our opinion, as the inflationary risks were absolutely present. The recent spat between the two has been resolved in a pragmatic manner, which has been promising from a market perspective. Further down the road, however, the NPL (non-performing loan) problem India is real and significant. So, in the end, the pain of loan restructuring has to be taken at some point, and this impact could be exacerbated if the economy slows down.
What is worrying in our opinion is the re-assessment of the capital framework by a panel of RBI and government members. If this panel decided that the government can tap to a larger extent into the RBI’s reserves, this might have foreign investors question the independence of the RBI and put a leash on FDI and portfolio investments, which are absolutely necessary to plug India’s current account deficit.
Are you concerned about the continuity in reforms as we head into an election year?
Erken: We expect a somewhat lower trajectory for potential output due to difficulties for the Bharatiya Janata Party (BJP) to retain its robust majority in India’s Lower House (Lok Sabha) after the general election in April/May 2019. As a result, the BJP will have to resort to coalition-based policymaking with other members of the NDA (National Democratic Alliance) or even non-NDA parties. That will hamper the business-friendly reform agenda of the BJP, resulting in levelling off of potential growth as well.
How does India look as an investment destination amid all this?
Erken: India remains an attractive investment destination. The improvement on the ease of doing business index, low external and household debt, reform-friendly government and the enormous market make India an attractive proposition. However, there are risks that make India vulnerable to external shocks and may weigh on portfolio inflows, such as the high dependency on oil and the high twin deficit. From a policy perspective, decreasing India’s vulnerability will be an important challenge for the next government.
Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.