Discussão sobre temas relevantes em Davos 2009
A Davos debate with Nouriel Roubini and Ian Bremmer
Nouriel Roubini | Jan 29 de 2009
As governments grapple with the global crisis, politics has taken on central importance in determining the course of the world economy — and political risk is more significant than ever.
Two leading experts on the financial crisis and its political dimensions — Nouriel Roubini and Ian Bremmer — gave exclusive answers this week to Reuters questions on the key risks for 2009 and beyond, and the countries to watch.Roubini is professor at the Stern School, New York University and chairman of economic forecasting consultancy RGE Monitor. He is widely credited as one of the few leading economists to forecast the onset of the crisis and its implications. Bremmer is president of political risk consultancy Eurasia group, and co-author of the forthcoming book “”The Fat Tail: The Power of Political Knowledge for Strategic Investing”
In which countries do political and economic risks intersect most ominously in 2009?
Bremmer - I would start with the United States. How U.S. policymakers respond to the meltdown of the U.S. economy hugely affects both the global financial crisis itself and much of the associated political risk. The politics are especially worrisome because the new Congress will likely wrestle with the White House for control in several key policy areas.
In Congress, members of both political parties have complained that the legislative branch ceded too much policy authority to the executive branch over the past eight years. The new Congress wants that power back. The Democratic leadership now enjoys large majorities in both the House (257-178) and the Senate (probably 59-41). Feeling empowered, even Democratic senior lawmakers won’t always wait on the inexperienced young president to set the agenda. That dynamic creates even greater risks than usual that policy will become a product of political horse-trading rather than coherent economic analysis.
Elsewhere, the economic and the political fronts are colliding to generate turmoil and risk. In Russia, the financial crisis has slowed the economy and put downward pressure on the ruble, reducing the purchasing power of ordinary Russians. The government has had to spend down significant amounts of its considerable financial reserves. There is anxiety about the health of Russian banks. Prime Minister Putin and President Medvedev remain popular and fully in charge — for now.
But job losses in key industries and factory closures in single-industry towns could push unemployed workers into the streets provoking a showdown with local authorities. That could force the Russian government into domestic repression to maintain social order. Russian foreign policy has also become more aggressive in recent months. The recent stand-off with Ukraine over natural gas exports-and Russia’s seeming indifference to the damage that conflict has done to its reputation as a reliable commercial partner for Europe-demonstrate that Moscow continues to pursue geopolitical interests at the expense, if necessary, of its economic well-being.
In Ukraine, political and economic risks exacerbate one another. Political rivalries among President Viktor Yushchenko, Prime Minister Yulia Tymoshenko, and opposition leader Viktor Yanukovych have produced policy paralysis on all but the most urgent of economic problems. The damage inflicted by the global financial crisis on Ukraine’s real economy further sharpens this political conflict. There are fewer customers for Ukraine’s steel exports, a key source of government revenue. The slowdown in production and a spike in unemployment have only intensified the blame-game now burdening Ukrainian politics. In Turkey, too, political squabbles make coherent and effective economic policy more difficult. The deepening political conflict between the ruling AKP (a moderate religious party) and determined secularist elites within the business community, the media, and the military has prevented the government from pursuing the economic reforms that might ease the country’s long-term dependence on the International Monetary Fund.
Roubini - The U.S. is experiencing its worst financial crisis since the Great Depression and its most severe recession in decades: a severe housing bust is entering its fourth year of decline and there is no bottom in sight. The recession will last at least 24 months (December 2009) and the recovery may be so weak, and growth sub-par until 2011, that it will feel like a recession even once the economy will be technically out of it by 2010. The banking system is effectively insolvent, as credit losses will swell above $3 trillion and fiscal deficits above $1 trillion loom for the next 2-3 years.
A weakened U.S. economy and financial system may not be able to remain the leader of the world and may move towards trade and financial protectionism. We’re all aware that foreign actors have financed most of this debt over the past several years. During the 1980s, the U.S. also faced the burden of twin deficits, but relied on financing from key strategic partners like Japan and Germany. This time, the situation is more worrisome because today’s financing comes not from U.S. allies, but from strategic rivals like Russia, China and a number of relatively unstable petro-states. This leaves the U.S. perilously dependent on the kindness of strangers.
A financial crisis and recession that may turn out to be as severe in the EU will put strains on the economic and monetary union in Europe. Talk of a break-up — in a matter of years — of the monetary union, as its weakest links (Spain, Portugal, Italy and Greece) are unable to implement structural reforms to restore growth, will weaken any further drive towards a political union in Europe.
The most severe and synchronized global recession in decades — both in advanced economies and emerging markets — will lead to political stress, turmoil and even violence in some emerging market economies. Some — but not all — of the emerging markets under financial stress may experience outright financial crises (a combination of currency crises, banking crises, sovereign debt crises). These include Latvia, Estonia, Lithuania, Hungary, Romania, Bulgaria, Turkey, Belarus, Ukraine and Russia in emerging Europe; Iran, Pakistan, Indonesia and even South Korea in Asia; Venezuela, Argentina, Ecuador and possibly Mexico in Latin America. Of these countries, those where the geopolitical and domestic political risks are more serious in 2009 are Turkey, Ukraine, Russia, Venezuela, Mexico Iran, Pakistan.
An open question is whether — with oil prices remaining very low in the $30-40 range — the unstable petro-states Venezuela, Iran, Russia) will become more unstable or more malleable. While low oil prices may lead to economic and financial hardship the authorities may react to such economic weakness with more aggressive foreign policies.
Conversely, which countries or regions will see a relatively benign political and economic risk environment?
Roubini - This is the first globally synchronized recession and there are very few places to hide as the forces of recoupling shatter the myth of decoupling: first markets and then real economies have become almost perfectly correlated. Among the BRICs, Brazil and India are less affected than Russia and China, but even Brazil will suffer from falling commodity prices, shrinking export markets and an increase in investors’ risk aversion; thus growth may be barely positive.
India depends less than China on global trade flows, but it depends more on capital flows to finance a large current account deficit, and its’ banking system financed a credit boom with foreign liquidity that is now drying up.
A hard landing in Russia is unavoidable with growth being sharply negative (-3 percent or worse) if oil prices average $40 a barrel this year. For a country like China that needs a growth rate close to 10 percent to move 10 million poor rural farmers every year to the modern urban industrial sector, a drop to 5 percent growth or below (a most likely outcome) is effectively a hard landing. Since the legitimacy of the Communist Party depends on achieving high growth, I believe the hard landing that China will experience this year will have political consequences. Even when growth was 10 percent plus China had over 70,000 mass protests every year according to official records; with growth in the hard landing territory (actually likely negative in Q4 of 2008 and through the middle of 2009) protests will increase, especially as millions of migrant workers return to cities after the Chinese New Year to find that there are no jobs, and as millions of university graduate discover a challenging job market. So while the risk of a political revolution is limited, the more severe the hard landing, the more likely is the chance that the anger of the masses is converted towards the domestic authorities, rather than being channeled in a nationalistic and anti-foreign direction.
Bremmer - I would argue that China will remain politically stable throughout 2009, despite having seen tens of thousands of large-scale protests in recent years. But social unrest usually targets local officials and companies blamed for corruption, land expropriations, environmental problems and other local grievances. Very few of these protests target the Chinese Communist Party elite. Rather, many Chinese credit the Party for engineering decades of explosive economic growth and an ever-rising standard of living. The triumphal pageantry of last summer’s Beijing Olympic Games was expertly produced by the Party leadership, creating a focal point for a strong surge in Chinese national pride. The party has built a large stockpile of domestic goodwill over the past three decades. Toughening economic times will erode some of that credit, but the reserves are probably too deep for the Chinese government to face a dangerous large-scale domestic challenge to civil order in 2009.
Despite security worries, serious tensions in its relations with Pakistan and the uncertainties of an election season, India remains quite stable politically. The same is true for Brazil, where President Luis Inacio Lula da Silva has helped build a consensus across the political left in favor of relatively responsible macroeconomic policy. The Persian Gulf States remain both politically stable and, with the partial exception of Dubai, quite healthy economically.
How big a role do geopolitical factors play in driving global markets? And can their market impact ever be forecast with any degree of accuracy?
Bremmer - Sometimes the impact of geopolitical factors is substantial and at other times, it is more modest. But in the broadest context, we’re entering a period in which political risk will matter more for the markets than in the recent past.
Globally, today’s leading multinational institutions — the UN Security Council, the IMF, the World Bank, etc — no longer reflect the true balance of political and economic power in the world. Leaders of the G7 group of leading industrialized nations know this. That’s why the first attempt at a coordinated response to the global financial crisis came from the G20, a more diverse group that better reflects today’s international order, offering hope that its response that will win broader international acceptance. The problem with the G20, however, is that consensus is nearly impossible. Getting seven people to agree on something important is one thing. Getting 20 to agree is much more difficult — especially when they have different value systems.
We are moving away from a system in which the United States plays a dominant political and economic role toward a non-polar world order. But the leading emerging powers are reluctant to accept the burdens that come with a greater global role. So, there will be even less international cooperation on global issues, like climate change and proliferation, and fewer international fora able to arbitrate disputes.
During 2009, political risk is especially dangerous because of the intense focus on the global financial crisis. Distracted markets are less likely to price in the risks linked to the international conflict over Iran’s nuclear program, dangerous instability in Pakistan, Russia’s assertive, even aggressive, foreign policy, and possible large-scale unrest in Iraq as various militia groups and others rush to fill the vacuum left by departing U.S. troops and to control that country’s oil.
The market impact of a particular risk is always difficult to forecast with complete confidence because there are so many relevant variables. But just as oil prices rise or fall in response to political events, a particular election outcome, social unrest, or a surprise policy reversal can add substantial upward or downward pressure on equities and currencies around the world.
Historically, political risk has been more relevant in emerging markets, which I would define as any country in which politics matters at least as much as economics for the performance of markets. But it’s notable this year that, by this definition, the United States is behaving like an emerging market. Consider all of the various political considerations that go into deciding how (and whether) to bail out U.S. automakers or how best to design an economic stimulus package.
Roubini - Geopolitical shocks can — at times- - have a significant market impact, especially oil price shocks. Indeed the global recessions of 1974-75, 1980-82 and 1990-91 followed three oil price shocks (the Yom Kippur war, the Iranian revolution and the Iraqi invasion of Kuwait); and even the 2001 recession — driven by the tech bust — was in part aggravated by the doubling in oil prices following the second Palestinian intifada. This year, demand fundamentals should keep prices lower, but two risks remain: a military conflict between Israel and Iran over nuclear proliferation, and a successful attempt by OPEC to restrict oil production. The former scenario would be much more disruptive as a stagflationary oil price shock is the last thing needed by a world in the most severe recession in decades; but even the latter scenario could spike oil well into the $70s range and become an additional drag to negative global growth.
Geopolitical risks would also become more severe if a U-shaped global recession were to mutate — because of mistaken policy responses — into an L-shaped stag-deflation (a deadly combination of economic stagnation, recession and deflation). After all, the stock market crash of 1929 turned into a Great Depression because of poor monetary, banking and fiscal responses. When the Depression became global, trade wars — starting with the Smoot-Hawley tariff — further contracted global exports and imports, capital controls became pervasive and defaults in emerging markets became the norm. Some similar risks are emerging today as countries become more protectionist and impose capital controls. Ecuador already defaulted on its foreign debt and others are teetering on the verge of a sovereign debt crisis. In the 1930s, the botched policy response and severe depression led to the rise of nationalistic, militaristic and aggressive regimes in Italy, Germany, Spain, Japan to name a few. The final result was World War II.
Today, the lessons of the Great Depression have hopefully been learned and a destabilizing L-shaped global stag-deflationary slump should be avoided. But monetary easing is weak in some regions and is less effective in the presence of insolvency/credit problems. Fiscal stimulus is constrained in many countries by previous high deficits and debts and cleaning up and bailing out the financial system is constrained by the “too-big-to-save” banks (i.e. losses in large, internationally active banks are much larger than the resources of small open economies to rescue them). And widespread and disorderly defaults by households, firms and financial institutions may follow a severe debt deflation.
Can political risk ever be quantified and ‘priced in’ in asset prices and markets? Or has the global crisis shown that markets are not capable of correctly pricing complex risk?
Bremmer - The impact of the war in Iraq was priced in. Markets rose once the invasion began. But we can’t say the same for Iran this year. The context is different, because the threats posed in the Iran case are less obvious and more difficult to predict. A vast majority of the analysts on Wall Street have backgrounds in economics. They price in political risk less effectively than economic risk.
Roubini - The global financial crisis — missed by most analysts — shows that most forecasters are poor at pricing in economic/financial risks, let alone geopolitical ones. In normal times, markets are poor at pricing low probability, fat tail risks (black swan events), but the recent global financial crisis was a white swan event, as it followed a gradual build-up of predictable financial vulnerabilities that were ignored by most. But when the proverbial financial or geopolitical shocks hit, the market over-reaction can become severe, as fear follows greed and markets tend to react in extremely risk-averse ways, replacing the denial and indulgence of good times with the extreme risk-aversion of bad times.
Is there likely to be a trend toward greater protectionism and nationalist economic policies around the world in 2009? What will be the implications for the global economy?
Roubini - Protectionist pressure will become more severe if the global economic slump is more protracted and deep. Certainly Doha is dead as multi-lateral trade liberalisation is impossible. Protectionist tariff actions have already started to emerge in places such as Russia and India and they may spread further. Trade-distorting subsidies are more likely than tariffs (see the rescue of Big Auto in the US). Currency tensions — for example between the U.S. and China — could escalate into trade wars. One also needs to worry about financial protectionism as a backlash against sovereign wealth funds and even FDI that may take place.
The new U.S. administration is dominated by pro-globalisation figures (such as Tim Geithner and Larry Summers), but Obama’s choice for Labor Secretary and U.S. Trade Representative, and the ongoing pressures by trade unions, counter-balance these free-trade leaning forces. And the fact that the new Treasury Secretary Geithner used the dirty M-word against China points to the risk that the fight about how much the RMB should further appreciate will turn into a trade war. Certainly, a China worried about the collapse of its exports and a hard landing may be tempted to have the RMB depreciate, or certainly not appreciate further.
Bremmer - There will be a heavy nationalist influence on economic policies globally this year because the overwhelming priority among political players will be to stimulate economies, growth and job creation. These are “national” projects. Governments will appeal to national pride to maintain domestic support. In Iceland, politicians are calling for a return to local traditions of strength and self reliance. In Russia, economic policy is intended to maintain Russia’s new strength. In America, President Obama is calling for shared sacrifice and an “era of responsibility”. We will see austerity programs all over the world this year. Austerity breeds populism, but populism can easily breed protectionism in any country with significant exposure to international markets. If one country finds political advantage in throwing up a wall to protect a vulnerable industry or economic sector, other governments will have a political incentive and justification to do the same. The West has preached the virtues of free trade and free markets for years. Now, many in the developing world can cite massive state spending by Americans and Europeans to justify kick-starting their own economies, including by protectionist measures.All that said, worries about global trade will be secondary in 2009 to other more pressing domestic questions. The risk of a protectionist wave is a longer-term problem.
Where is the oil price going in 2009, and what will be the political and social consequences?
Bremmer - In July, oil hit $147 per barrel. We got “drill baby drill” and a sense of urgency to investment in alternative fuels. Oil has now fallen to $44 per barrel. That undermines much of the political momentum behind both. It’s also bad news for oil producing states like Venezuela that haven’t handled their account balances very well. It adds pressure on a Russian government that finds itself drawing heavily on the revenue amassed as reserves over the past six years. So-called stabilization funds may yet be used for actual “stabilization”. High inflation, unemployment and subsidy spending leave Iran in less-than-ideal economic shape, but its government has done a much better job than Venezuela of maintaining oil output levels. But we can’t remain bullish on lower prices indefinitely. We see a lack of investment in infrastructure and exploitation in many countries. There are continuing geopolitical tensions in the Persian Gulf, the Caspian, West Africa, and other hotspots. Output is likely to fall over the longer term in Mexico, Venezuela, Russia, and elsewhere.
Roubini - In the short run, the demand destruction in the global demand for oil will keep prices low and hurt a bunch of unstable petro-states. These petro-states should become less aggressive facing fiscal and financial pressures; but some may be tempted to convert the domestic anger triggered by economic malaise into an aggressive foreign policy stance. Over the medium term, oil prices will sharply rise again once the global economy recovers. The return to potential growth will imply rapidly rising demand from urbanizing and industrializing China, India and other emerging markets. Meanwhile, the supply response will be much slower as low prices in the short-run lead to less investment in new capacity. In addition, as peak oil factors take hold, unstable petro-states won’t invest enough in new capacity and even Middle East states will decide it is better to keep more of the limited and finite reserves of oil in the ground for future generations. This suggests the importance — for oil importing countries — to invest in alternative and renewable technologies as a new oil shock looms.
Has the global financial crisis disproved the belief that free markets generally create optimal results and that state intervention in the economy should be kept to a minimum?
Bremmer - Yes, but it hasn’t proven that large-scale state intervention is an absolute good either. Intelligent moderation is good for both open markets and government investment, but we’re likely to see the pendulum swing way too far this year in the “state intervention” direction. Let’s also remember that many of the bad bets on markets were actually made via sovereign wealth funds—excess pools of capital owned and managed by governments that were created to maximize state return on investment—and, in some cases, political influence.
Roubini – This is not a final crisis of capitalism and market economies. To paraphrase Churchill, market oriented capitalism is the worst economic system apart from the alternative. But the specific brand of Anglo-Saxon, laissez faire, wild-west, free market fundamentalism without prudential supervision and regulation of financial systems has been debunked. Central banks that are usually the lenders of last resort have become the lenders of first and only resort. And the new Keynesian Finance ministries have become the spenders of first and only resort, as private demand – consumption, residential investment, capex spending – is plunging. In financial markets, the laissez faire approach of self-regulation implied no regulation; the reliance on market discipline failed in the frenzy of euphoria and irrational exuberance in good times. Internal risk models failed as the risk takers had the upper hand over the risk managers, and ratings agencies had massive conflicts of interest through being paid by those whom they were supposed to rate. Light-touch regulation failed miserably, as did the reliance on teeth-less principles rather than rules. While the risk that the pendulum may swing too much from self-regulation to excessive regulation is possible, a greater reliance on simple rules and tighter regulation and supervision is necessary to prevent another very costly boom and bust cycle. The financial, fiscal and economic costs of this crisis are so severe that failing to prevent the next virulent one will lead to a severe backlash against globalization, free trade and free capital flows.
The crisis has seen a fundamental reappraisal of risk and a general flight from risky assets. What does this mean for asset prices and markets in countries seen as having high levels of political risk — will they be disproportionally hit?
Bremmer - Some will, yes, though it won’t be clear until the markets start to rebound. Right now everybody’s getting hit because no one is lending. When the markets recover, everyone will recognize the fundamentally unstable places. They’ll be the ones that don’t bounce.
Roubini – Usually the combination of economic and financial vulnerabilities with political risk leads to extreme risk aversion of domestic and foreign investors and over-reaction of asset markets. The financial crises in emerging markets in the 1994-2003 period were all associated with rising political risk (populist governments, political uncertainty, domestic conflict) that led to lower policy credibility and greater trigger-happy behavior from investors.
We’ve seen your assessment of the top risks in 2009. What’s your best guess of the top risks in 2010?
Roubini – The top risk for 2010 is that the painful U-shaped global recession turns into a more severe multi-year L-shaped global stag-deflation. The key factor in determining whether the current U (a mild V-shaped recession is now out of the window) turns into an L is the policy response in the US and abroad. While US authorities seem to get it and are now pursuing aggressive policy responses, the rest of the world is reacting and responding much slower. In the Eurozone, the ECB is behind the curve. The fiscal stimulus is likely to be weak and dealing with the cross-border banking crisis requires international burden sharing of the fiscal costs of bailouts. In emerging markets, monetary response is constrained by high inflation, foreign currency liabilities and the risk of currency crises. The fiscal stimulus is constrained – in some cases – by high fiscal deficits and debt. Financial sector rescues also risk being botched, leading – like Japan in the 1990s – to zombie banks and zombie corporations and households whose debts are not properly restructured, thus exacerbating the credit crunch, the debt deflation and the risk of widespread defaults. Given the global glut of capacity from the overinvestment by China and Asian economies, global deflationary pressures could take hold leading to more persistent and virulent deflationary pressures in the global economy.
Bremmer - From the perspective of global politics, Iraq will likely become more dangerous as noticeably fewer US troops on the ground increase the incentives for the country’s various sects, tribes, and factions to compete for Iraq’s wealth and for control of government—both in Baghdad and in the provinces. China could turn toward deeper protectionism as the political leadership begins to respond to growing public demand in China for rules that favor Chinese firms at the expense of their foreign competitors. Security in Pakistan, Afghanistan, and India will likely remain a front-burner issue.