Normalizing Central Banks Balance Sheets New York Fed/Columbia SIPA - - PowerPoint PPT Presentation

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Normalizing Central Banks Balance Sheets New York Fed/Columbia SIPA - - PowerPoint PPT Presentation

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Normalizing Central Banks Balance Sheets New York Fed/Columbia SIPA Workshop July 11 2017 Remarks by Prakash Kannan, Head of Total Portfolio Management; GIC Singapore The views contained in this presentation are that of the author and not

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SLIDE 1

Normalizing Central Banks’ Balance Sheets

New York Fed/Columbia SIPA Workshop July 11 2017

Remarks by Prakash Kannan, Head of Total Portfolio Management; GIC Singapore

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The views contained in this presentation are that of the author and not necessarily GIC Pte Ltd.

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SLIDE 2

EM assets in the long run

  • Over a long horizon, the biggest driver of returns is the compounding of earnings
  • Stability of institutions and predictability of policy frameworks more important in

the long run

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8.9% 5.7% 7.3% 2.8% 1.2% 3.2%

  • 6.0%
  • 4.0%
  • 2.0%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% 22.0% 24.0% Earnings Growth Dividends Valuation Total Return FX USD Return

  • Ann. Return

Snapshot Breakdown of EM LCY Index Returns: 31/12/95 to 31/12/16

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SLIDE 3

Crises are a prevalent feature of EM

  • Price controls, leverage buildups, currency and maturity mismatches, thin markets and reliance
  • n external financing introduce non-linearities in macro and market responses to shocks

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Source: Claessens and Kose

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SLIDE 4

Policy frameworks have been changing

  • Price flexibility provides some buffers
  • Investors are more discerning across EMs

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Source: Levy-Yeyati and Sturzenegger (2016) Exchange Rate Classification

0% 50% 100% 150% 200% 250% 60 65 70 75 80 85 90 95 00 05 10 15 Broad money %y/y 3yma

EM: Broad Money Growth

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SLIDE 5

Taper Tantrum 2013

  • Impact was large, but did

not lead to traditional “crises”

  • Two main drivers:
  • 1. EM Fundamentals
  • 2. Policy signalling channel

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Source: Federal reserve Bank of San Francisco (2014)

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SLIDE 6

FX moves were in line with fundamentals

  • Vulnerability Index:
  • Current Account to GDP ratio
  • Gross Govt Debt to GDP
  • Average inflation over past 3 years
  • Ratio of external debt to exports
  • Ratio of FX reserves to GDP

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Source: Monetary Policy Report, February 2014

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SLIDE 7

Policy signalling also mattered

  • Fed policy = f(r*, output gap, inflation vs target, “X”)
  • Uncertainty over “X” factor:
  • Asset prices?
  • Financial stability?
  • Credit growth?
  • Change in preferences or reaction function?

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SLIDE 8

Managing expectations

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SLIDE 9

The situation today (1)

  • Vulnerabilities have fallen for “Fragile 5”, but risen elsewhere

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50 100 150 200 250 AR ID MX IN CO BR RU ZA TR PL CZ HU TH EM MY CL KR CN

Private Non-financial debt (% of GDP)

Q4 07 Taper tantrum Latest

  • 6
  • 5
  • 4
  • 3
  • 2
  • 1

Brazil India Indonesia South Africa Turkey

(% for GDP)

Current Account Balances for "Fragile Five“ (% of GDP)

End-2016 May-2013

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SLIDE 10

The situation today (2)

  • EMs remain vulnerable to the global risk environment, DM interest

rates, and the US dollar

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Source: Jon Anderson, EM Advisors

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SLIDE 11

China remains a key risk factor for EMs

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Source: Jon Anderson, EM Advisors

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SLIDE 12

Conclusion

  • EMs have undergone structural changes over the past 20 years that

have resulted in more robust policy frameworks

  • But, EMs remain vulnerable to the global risk environment. Issue is

not so much about interest rate increases per se but a spike in global risk aversion and a sharp moves in the USD

  • China remains a source of risk. Will it amplify or dampen Fed shocks?

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