Global central bankers, finance ministers and
representatives from the private sector and civic groups gathered in Bali recently for the annual meetings of
the IMF (International Monetary Fund)/World Bank Group. Below are 10 key takeaways from the discussions.
1) Investor global risk sentiment is cautious with no large directional views.
This reflects higher uncertainty on U.S. and China trade policy, the outlook for the Federal Reserve’s tightening cycle,
the Italian budget and EU negotiations, and generalized weakness in emerging markets (EM). This caution
notwithstanding, there was no imminent cliff event in focus with baseline expectations being for negotiated (but
drawn-out) outcomes that will keep near-term uncertainty high.
2) The macro outlook for the global economy is constructive with the projection for growth in 2019
slowing to around 3.5% but remaining at relatively robust rates (in line with PIMCO’s recently published Cyclical
Outlook, “Growing, But Slowing”), and global inflation being contained in developed
markets and most of EM. Key questions on investors' minds included whether above-trend U.S. growth would
continue as the fiscal tailwind diminished and the extent and impact of China’s countercyclical measures to
shore up growth. A potential U.S. recession was viewed as a question for 2020 and beyond rather than for 2019, but
overall it is now widely accepted that global growth has passed its peak. In EM, the recovery was expected to
continue at a more gradual pace with policymakers’ focus turning to much lower potential growth than
3) There is a growing resignation by the IFIs (International Financial Institutions) that the global
multilateral approach is giving way to a more unilateral approach led by the U.S. So far there has
been very limited policy resistance to U.S. trade protectionism against China, which is viewed as a bilateral
negotiation, similar to the U.S.–European negotiations. This is in spite of the view by most that declines in
global trade and the potential for trade wars are disruptive for the global economy as a whole with very few
4) U.S.–China trade tensions are here to stay with this being the first of many cycles of
disputes/negotiations (as distinct from the USMCA, i.e., NAFTA 2.0). Most policymakers and
investors expect only a gradual depreciation of the Chinese yuan versus the U.S. dollar rather than an outright
“currency war”, but there are other proxy “wars of influence” occurring between the U.S.
and China. Examples include Pakistan, which has received significant Chinese lending and is now turning to the IMF
for support, as well as the growing backlash in EM against Chinese financing of large-scale projects with what is
viewed as disadvantageous and opaque terms.
5) Sentiment towards EM is cautious but improved from the peak bearishness of the
summer. The combination of a hawkish Fed, stronger U.S. dollar, trade tensions, and idiosyncratic EM
drivers are keeping many investors cautious on taking large directional bets on the asset class. Nevertheless,
there is a sense that pockets of value have emerged leading investors to focus on alpha and tactical trades.
Distinct from the recent past, although there are positioning overhangs from earlier in the year, there are no large
consensus trades, with relatively mixed views across the big components of the asset class.
6) Policymakers and investors are mindful that there have been no big surprises in the recent EM sell-off.
The general view is that while there have been a number of seemingly unrelated idiosyncratic policy issues in
select EMs, quantitative tightening and the strong dollar are the common drivers of EM weakness seen so far. As
such, countries with higher current account deficits, higher external borrowing, and policy vulnerabilities were
the hardest hit, e.g., Turkey and Argentina, while those who have been putting in place corrective policies, e.g., Mexico and Indonesia, fared much better.
updated IMF program is being viewed favourably. The stringent monetary base targeting rule,
focus on FX flexibility and front loading of disbursements that covers fiscal financing requirements for 2019 give Argentina a credible nominal anchor which the government is committed to adhering to. In contrast, the jury is
still out for Turkey. While the government’s fiscal and monetary program is relatively tight and likely to
bring about a large macro adjustment in 2019, markets are likely to be disappointed if they expect a stronger
reaction from the Turkish central bank in terms of proactive interest rate hikes.
8) With upcoming elections in India and Indonesia in 2019, investors are cautious, even as the
baseline outcome is for political continuity. In India there is a sense that the incumbent government has not gone
far enough on driving reforms. Meanwhile in Indonesia, high investor positioning in the local curve and low levels
of foreign currency reserves are likely limiting the central bank’s willingness to aggressively intervene to
defend the Indonesian rupiah.
9) The removal of election uncertainty in several large EMs has been a net positive. In Mexico,
markets are waiting for the start of Andrés Manuel López Obrador’s presidency in December
and expect less fiscal profligacy than his electoral campaign would suggest. In Brazil, investors appear optimistic
about the prospect of pension/social security reform in 2019 under a Jair Bolsonaro presidency but caution is
warranted given the difficulties in passing deep reforms amidst Brazil’s fragmented coalition politics. South
Africa, unfortunately, is an outlier: Even with the election of the reform-minded Cyril Ramaphosa to helm the
African National Congress (ANC), there has been limited progress on much-needed reforms in state-owned enterprises
and labor markets.
10) Finally, while sentiment towards EM has improved on the margin, there remain big questions on
investors’ minds as to whether the sell-off in EM is the canary in the coal mine for other credit sectors, in
particular U.S. high yield where valuations look relatively tight. The moderate correction in equity markets last
week has increased investor scepticism that EM is the only vulnerable asset class in a backdrop where the main
uncertainty is stemming from the U.S., be it uncertainty over the Fed or the outlook for global trade tensions.
Learn about PIMCO’s outlook
for the global economy and markets in 2019.
Lupin Rahman is a portfolio manager on the
emerging markets team, specializing in sovereign credit and monetary and currency policy analysis.