Davos: IHS says EMs need to think about structural reforms

Q: Is this going to be the year of stable global recovery and is it going to be an upward move or are we simply bottoming out and that this year is going to be now big change at all?

A: I think we bottomed out last year and this year will be an improvement. Ironically that improvement will be led by the developed world like the US, UK, Germany, these countries will do much better this year compared to the last year. So yes it will be a better year.

Q: This difference in the developed nations leading global growth this year, does that make you pessimistic about emerging markets (EMs), does that raise concerns because last year EMs got pretty bad for a variety of reasons - deficit, currency. So what is the outlook on EMs this year?

A: I think EMs have a challenge ahead of them. I think they enjoyed a boom period but I think now the next step is much more difficult, they have to be thinking about structural reforms, removing subsidies, making their economies more competitive, more productive. So in that sense they have a challenge, they can meet that challenge there is no question about it but they have to do a lot of hard work now. So the easy growth is gone.

Q: Within EMs which countries are you more positive about, where do you see the changes that you spoke about taking place and therefore you feel that growth will pickup for instance in India we have had a fairly rotten couple of years, growth has bottomed and it looks like it might get better this year but I would like an objective external assessment?

A: I think some of the reasons it will get better even for India this year is because the global economy will be better, if nothing else, exports will be an engine of growth. But in terms of countries that are either talking about reforms seriously or doing reforms I would say China. China has at least got a reform plan, we will see if they implement it. Mexico is another one where they are beginning to seriously look at reforms. I think it is a little tougher in India and Brazil because of elections coming up. So I don't expect anything until after the elections. So it is all different.

Q: Couple of questions we have been asking business leaders in Davos is while it is going to be a year of recovery but is it going to be a year that makes you feel confident enough to put money back to work. And the responses to that are fairly mixed. Most of them are still very cautious about participating in the investment cycle.

A: I think the reason for that continued caution is that they have burned in the past. They have already kept predicting that the next year would be a strong recovery and of course it didn’t quite work out that way. We are certainly more confident that there will be a recovery this year and we will see those kinds of investments.

Q: Is that anecdotally what business leaders are telling you that they are going to put large amounts of money back to work - for instance the Financial Times leader story this morning in the papers is some USD 387 billion in cash among just five large American companies. The question is when do they start investing that?

A: I think a lot of them and the shareholders of a lot of these companies want to see some top line growth and the only way you are going to get top line growth going forward is by investing, taking some risk. And in terms of what we are hearing from our customers -  we are fairly confident that we will see that, may be not as much as we would like to see but there will be more.

Q: It is impossible to talk about 2014 without referring to the taper. It has begun in January and I am not sure what your assessment is of what the momentum of the taper will be given that we have a new Federal Reserve chief taking over. Where do you stand in this taper debate, are we going to see the end of Quantitative Easing (QE) by this year which is the all additional bond buying stops or do you think it could spillover in 2015?

A: We think the taper will go through this year. By the end of this year they won't be buying any more bonds. So in that sense QE will end, they will cut all USD 85 billion by the end of the year.

On the other hand I don't see that as having a big problem and a big impact on the EMs because we have already seen that. What is interesting is when they actually started to taper, markets didn’t really react unlike when they announced that they were going to taper, when markets were very unhappy. So I think going forward we will see the tapering continue through the end of the year but the effects I don't think will be that horrific.

Q: But if you stop pumping in USD 85 billion a month, what does that mean for all the liquidity that has been fueling stock markets across the world. Even in India with the dismal economic outlook that we have had, a few months ago we saw all-time highs in equity markets. We have seen that take place in the US, we have seen that take place in western Europe. So what is this hold back in liquidity going to mean?

A: I think markets will struggle including the stock market. I don't see a collapse in stock prices but we are certainly not going to see what we saw last year. We might see some small advances in most stock indexes but it will be quite small compared to the last year.

Q: Where are you calling the US 10 year yield if all bond buying is going to end by this year? Will it be closer to 4 percent or even higher than that?

A: It is interesting about the bond markets, they anticipate and so in a sense markets have already anticipated that rise. So while they will go up a little bit no question, I don't think they are going to shoot up because markets have already discounted it, they have already factored it in.