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Last Updated : Jan 31, 2018 04:12 PM IST | Source: CNBC-TV18

See 2018 as a good year for most emerging markets: Citi

In an interview with CNBC-TV18, Willem Buiter, Chief Economist of Citi Group shared his views on the global positioning.

CNBC TV18 @moneycontrolcom

In an interview with CNBC-TV18, Willem Buiter, Chief Economist of Citi Group shared his views on the global positioning.

Don’t think we are set for a period of significantly higher growth in next decade than we have had in the last five years or so. I don’t think this is going to improve much. It is more likely to slow down as the World Bank pointed out, he said.

According to him, low capital expenditure to the gross domestic product (GDP) could drive global growth lower.

There is no evidence of a significant froth in equity markets yet. There is froth in US financial markets, they are having an underestimation of risk in stock markets, he added.

The risk of a market correction in the US at some point has to be material and that would undoubtedly impact adversely on emerging markets but the timing of such a correction is impossible to predict, said Buiter.

For 2018, our forecast is robust growth, the cyclical recovery, globally including all emerging markets (EMs), specifically India, China. So EMs experience is positive. I see a good year, 2018, for most EMs ahead he further mentioned.

Below is the verbatim transcript of the interview.

Latha: US Treasuries and German bunds have all seen a sell-off, is this a worry at all?

A: No, it is just a part of a very gradual normalisation. It only gets attention because it follows a long period in which bunds were actually negative and the US 10-year hardly dare go above 2.5 percent. So it is still extremely modest and very gradual, it is only through the biased windows of the last 10 years that this seems startling.

Sonia: You spoke about global growth and a lot of people are talking about 2018 being the year of economic recovery, are we starting with a new normal now?

A: I do not think that we are set for a period of significantly higher growth in the next decade than we have had in the last five years or so. Global potential output growth, the market exchange rate is about 3 percent and I don’t think this is going to improve much, if anything, it is more likely to slow down as the World Bank pointed out because of demographic trends and because of, on the whole, low shares of capital expenditure GDP as well as long tradition globally of overregulation.

Anuj: Can you interpret the ongoing rally? Is it pricing realistic sort of estimates or is it froth?

A: It is different in different parts of the world. In the US, I think there is most clearly evidence of irrational exuberance that the growth especially the growth of corporate earnings that appears to be priced into the stock market valuations seems unrealistic over the top. Elsewhere in the world that is much obvious and then the number of emerging markets, I think there is no evidence of significant froth in equity markets yet.

Latha: Then US is the mother market, so you fear there can be financial instability, if markets are indeed overestimating growth?

A: Clearly, there is froth in US financial markets, we are having underestimation of risks in stock markets in non-financial corporate credit markets especially the high yield and rest is deeply pro-cyclical fiscal stimulus that is now coming out of the pipeline, the risk of the market correction in the US at some point has to be material and that would undoubtedly impact adversely on the emerging markets but the timing of such a correction is impossible to predict I am afraid.

Anuj: Could 2018 be a year of economic recovery for emerging markets?

A: For 2018, our forecast is robust growth, the cyclical recovery, globally including virtually all emerging markets, including specifically India, we again see China also at around 6.5 percent a year – it is only a very limited number of countries that are expected to do worse in 2018 and in 2017. So yes, on the whole, emerging market experience is positive. We hope that for emerging markets that commodity prices will remain buoyant but not too buoyant so that the commodity exporters can benefit. I see a good year for most emerging markets ahead.

Sonia: The dollar weakness has been the most surprising element of financial markets in 2018 so far, what have you made of the dollar dip? Is it justified the fall that we have seen?

A: No, I cannot make sense in terms of economic fundamentals of the weakness of the dollar not just bilaterally vis-à-vis the euro but in terms of effective exchange rates with the fiscal stimulus, the monetary tightening that is already happening where further monetary tightening we are anticipating and it seems very hard to come out with a fundamental explanation of this persistent weakness of the US dollar. So I personally expect, since I don’t understand why the dollar is so weak, that we will see a correction.

Latha: Finally, the Federal Open Market Committee (FOMC) will announce its decision later today. How many rate hikes do you see, what is the FOMC rating cycle looking like?

A: For the US, we see three rate hikes for 2018. With upside risk, especially if the fiscal stimulus of which the spending part still has to be legislated turns out to be stronger than expected and we also expect of course further rate hikes into 2019 again we think probably around three in 2019. So we see the US set for a steady albeit very gradual normalisation of the policy rate.
First Published on Jan 31, 2018 10:40 am

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