WEBVTT - Emerging Markets Have Never Experienced A Crisis Like This Before 0:00:10.440 --> 0:00:14.800 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.840 --> 0:00:19.280 I'm Joe Wisenthal and I'm Tracy Hallway. Tracy, I hate 0:00:19.320 --> 0:00:21.680 to do this, but I have to try. I knew it. 0:00:21.840 --> 0:00:24.319 I knew you were going to do this. I knew it. 0:00:25.160 --> 0:00:28.840 I'll spare you, I'll spare you the effort. But yes, 0:00:29.320 --> 0:00:34.319 there is a crisis that we haven't covered yet. I'm 0:00:34.360 --> 0:00:36.960 never gonna let you forget the time when you said 0:00:37.000 --> 0:00:38.879 that we had touched all the basis of this, when 0:00:38.880 --> 0:00:43.639 they were clearly several several more major areas that we 0:00:44.240 --> 0:00:47.120 had yet to discuss. Well, we're starting to get there 0:00:47.120 --> 0:00:52.559 in terms of hitting all the really big themes I think. Okay, Okay, 0:00:52.600 --> 0:00:56.360 I'm not going to result, but yes, go ahead. Of 0:00:56.440 --> 0:01:00.080 the many crises will we be covering today, Okay, the 0:01:00.160 --> 0:01:03.240 one that we definitely have not talked about yet is 0:01:03.400 --> 0:01:06.520 emerging markets. And you know, there are all kinds of 0:01:06.600 --> 0:01:12.280 aspects to a extraordinary economic disruption of this sort, the 0:01:12.319 --> 0:01:14.960 likes of which we've never seen in terms of essentially 0:01:15.080 --> 0:01:20.399 a mandated halt to so many businesses worldwide, But one 0:01:21.000 --> 0:01:27.840 acute vulnerability point is obviously emerging markets. Countries whose economies 0:01:27.920 --> 0:01:32.920 may rely on tourism or other exports to richer countries, 0:01:33.319 --> 0:01:36.440 countries that have a lot of dollar denominated debts but 0:01:36.480 --> 0:01:40.520 are suddenly finding it very difficult to acquire those dollars 0:01:40.560 --> 0:01:43.559 in their normal means of business. This is a huge 0:01:43.600 --> 0:01:46.759 shock domestically from many countries, but also a huge shock 0:01:46.880 --> 0:01:50.400 to world trade. And of course emerging markets are sort 0:01:50.400 --> 0:01:55.840 of necessarily the most the most at risk here, right, 0:01:55.880 --> 0:01:58.720 So you have this perfect storm really of pressures on 0:01:58.760 --> 0:02:02.400 emerging markets. You have up the big spike in the dollar, which, 0:02:02.440 --> 0:02:06.520 as you mentioned, causes pain for emerging markets in different ways, 0:02:06.560 --> 0:02:08.959 a bunch of different ways. You also have the contraction 0:02:09.000 --> 0:02:12.320 in global trade. You have the fall in the oil price, 0:02:12.440 --> 0:02:16.320 which is bad if you're an oil exporting developing nation. 0:02:16.840 --> 0:02:20.960 And then of course you have the coronavirus pandemic itself, 0:02:21.040 --> 0:02:25.640 which could disproportionately impact developing countries given that they have 0:02:25.760 --> 0:02:31.160 fewer health resources, fewer financial resources, and different not really 0:02:31.240 --> 0:02:36.240 ideal living conditions to actually battle the virus. So yeah, 0:02:36.360 --> 0:02:40.320 it's it's a pretty bad mix for em at the moment. Right. 0:02:40.400 --> 0:02:42.280 The way as you put it, there really is sort 0:02:42.320 --> 0:02:45.640 of like just being buffeted on every side. Right now. 0:02:46.000 --> 0:02:49.799 So our guests today, and I feel like our guest 0:02:49.840 --> 0:02:52.280 today is yet another one of our recent guests that 0:02:52.600 --> 0:02:57.160 deserves when we eventually get oddlock toade bags or something 0:02:57.160 --> 0:02:59.519 like this, because this might be his fourth or fifth time. 0:03:00.160 --> 0:03:03.080 We've talked to Dan Wing several times, We've talked to 0:03:03.200 --> 0:03:06.280 Chris White several times, and of course our guests today, 0:03:06.600 --> 0:03:09.040 Brad Setser, it's got to be at least this fifth 0:03:09.040 --> 0:03:12.640 time talking to us since we launched the podcast. But 0:03:12.760 --> 0:03:16.919 he has been tracking the e M angle very closely 0:03:17.000 --> 0:03:20.440 and really has been uh for years, but UH now 0:03:20.840 --> 0:03:23.839 sort of with this particular crisis, and so we'll sort 0:03:23.840 --> 0:03:27.880 of get a broad overview of um the crisis facing 0:03:27.919 --> 0:03:30.480 different e m s and what needs to be done 0:03:30.720 --> 0:03:34.560 going forward. So, without further ado, Brad Setser, thank you 0:03:34.639 --> 0:03:38.080 very much for joining us. That's a great pleasure. Brad. 0:03:38.200 --> 0:03:41.840 Just sort of big picture if you, how does this 0:03:42.080 --> 0:03:45.720 shock to the real economy for e MS as a whole? 0:03:45.760 --> 0:03:47.720 And I know people always say you can't look at 0:03:48.000 --> 0:03:52.400 ems as a whole, and every country has its unique situation, 0:03:52.480 --> 0:03:56.520 but as a whole, how does it compare to prior 0:03:57.200 --> 0:04:00.720 major downturns in global trade of the global economy, and 0:04:00.960 --> 0:04:06.600 this this shock is clearly going to be significantly worse 0:04:07.080 --> 0:04:11.400 than the two thousand and eight shock, the global financial crisis, 0:04:11.880 --> 0:04:15.400 It's clearly going to be significantly worse than the Asian 0:04:15.400 --> 0:04:21.240 financial crisis. I think this is across a range of measures. 0:04:21.279 --> 0:04:24.239 You know, it is the biggest shock the emerging world 0:04:24.360 --> 0:04:27.480 is faced in the last thirty years. Yeah, I think 0:04:27.520 --> 0:04:31.839 I saw someone on Twitter describing the current economic situation 0:04:31.960 --> 0:04:34.640 or the crisis is sort of like the Spanish flue 0:04:34.680 --> 0:04:38.279 meets Great depression meets two thousand and eight financial crisis 0:04:38.400 --> 0:04:42.719 meets Asia financial crisis, which is a pretty terrible mix 0:04:43.600 --> 0:04:45.839 when it comes to e MS. What would you say 0:04:45.920 --> 0:04:50.320 is the biggest pressure point at the moment, what's causing 0:04:50.320 --> 0:04:56.080 the most pain? Well, I think there are two distinct 0:04:56.680 --> 0:05:03.480 pressure points. One pressure point does the global financial crisis 0:05:03.520 --> 0:05:07.760 analog pressure point? Those countries that have borrowed in dollars 0:05:08.680 --> 0:05:12.920 or those countries that have a large dependence on foreign 0:05:12.960 --> 0:05:18.920 investors holding their local currency debt have had difficulty borrowing 0:05:19.000 --> 0:05:23.200 dollars and have had to manage a world where a 0:05:23.200 --> 0:05:26.960 lot of foreign investors are pulling money out. And then 0:05:27.000 --> 0:05:32.599 that's been combined with a shock to global trade, but 0:05:32.680 --> 0:05:37.040 a particularly sharp shock to global trade and tourism and 0:05:37.880 --> 0:05:43.919 global commodity prices, so symmetric fall and trade. Um it 0:05:43.960 --> 0:05:48.680 obviously hurts activity, but it doesn't create gaps between exports 0:05:48.680 --> 0:05:52.120 and imports. But if you're reliant on tourism and tourism 0:05:52.120 --> 0:05:54.720 goes to zero, all of a sudden, you can't pay 0:05:54.760 --> 0:05:57.919 your import bill. If you rely on oil exports, and 0:05:57.960 --> 0:06:01.680 your break even used to be fifty or sixty, and 0:06:01.720 --> 0:06:05.120 you can't get twenty dollars a barrel today for lower volumes, 0:06:05.680 --> 0:06:08.480 all of a sudden, again you can't cover your imports. Though. 0:06:08.960 --> 0:06:12.279 So it's the combination of the financial shock and the 0:06:12.360 --> 0:06:16.760 real shock, the real shock to trade, the shock to 0:06:16.839 --> 0:06:20.480 health is almost certainly coming. But I think they're for 0:06:20.640 --> 0:06:25.320 most emerging economies. That's uh something that I'll play out 0:06:25.320 --> 0:06:29.320 over the next month before we go any further. A 0:06:29.320 --> 0:06:32.320 little bit of housekeeping. Two points is a of course, 0:06:32.640 --> 0:06:34.880 we've had bread on so many times. I didn't even 0:06:34.920 --> 0:06:37.920 really properly introduce him in the beginning, but he is 0:06:37.960 --> 0:06:41.360 a senior Fellow or the Council on Foreign Relations as 0:06:41.400 --> 0:06:44.480 well as a senior adviser of EXANTE Data I just 0:06:44.560 --> 0:06:47.640 feel like so hopefully most of our listeners have heard 0:06:47.640 --> 0:06:50.960 Bread or followed him for a long time, but forgot 0:06:51.040 --> 0:06:53.880 to do that. Also another crucial piece, we went the 0:06:54.360 --> 0:06:58.240 we want the no introduction necessary route, which is which 0:06:58.279 --> 0:07:00.719 is a form of praise really uh, and also another 0:07:00.760 --> 0:07:06.719 crucial form of consideration. We're recording this April nine, twenty, 0:07:06.880 --> 0:07:09.360 and we've been saying that a lot of we want 0:07:09.360 --> 0:07:12.080 people to know exactly which day it's been recording because 0:07:12.920 --> 0:07:16.080 things are moving so fast. But there's another special reason 0:07:16.520 --> 0:07:19.080 it's important to bear in mind the day that we're 0:07:19.080 --> 0:07:22.960 recording this, which is that next week, which is when 0:07:23.040 --> 0:07:26.560 people will likely be listening to this is the I 0:07:26.760 --> 0:07:30.840 m F Spring meetings, and those of course take on 0:07:31.200 --> 0:07:36.040 new urgency in light of the sort of twin shocks 0:07:36.080 --> 0:07:39.400 that Brad had this uh just described. So of course 0:07:39.400 --> 0:07:41.960 we're recording this before those happened, and we don't know 0:07:42.000 --> 0:07:44.040 what will have been announced by the time you're listening, 0:07:44.080 --> 0:07:46.880 but sort of bread, uh, that gives us a chance 0:07:46.920 --> 0:07:51.360 to pivot again sort of big picture, what is the 0:07:51.480 --> 0:07:56.120 role of the I m F in alleviating some of 0:07:56.200 --> 0:07:59.640 the acute crisis and what does it happen it's toolbox 0:08:00.040 --> 0:08:04.200 when so many countries are all suffering at the exact 0:08:04.200 --> 0:08:08.640 same time. The the i m S role broadly speaking, 0:08:09.400 --> 0:08:13.760 is to lend reserves for an exchange reserves two countries 0:08:13.800 --> 0:08:17.200 that don't have enough foreign exchange reserves, and that may 0:08:17.240 --> 0:08:21.280 be countries that don't have enough foreign exchange reserves relative 0:08:21.440 --> 0:08:27.040 to their short term debt that is coming due. Maybe 0:08:27.080 --> 0:08:30.920 that countries that don't have enough foreign exchange reserves relative 0:08:31.000 --> 0:08:33.880 to the number of foreign investors in their local markets 0:08:34.120 --> 0:08:36.480 who want to get out. Or it may be that 0:08:36.600 --> 0:08:41.080 countries that don't have enough foreign exchange reserves to cover 0:08:41.760 --> 0:08:46.040 the fall off in their exports without reducing their imports 0:08:46.200 --> 0:08:49.920 very dramatically. Now there's some details, you know, the i 0:08:50.040 --> 0:08:53.640 m F can, in the process of providing balance of 0:08:53.679 --> 0:08:59.000 payment support also provide budget financing, and that certainly will 0:09:00.280 --> 0:09:04.000 have a role. But in general, the i m F 0:09:04.320 --> 0:09:08.880 is a an institution that is designed to provide countries 0:09:08.920 --> 0:09:13.360 that need reserves with reserves and to give lend people 0:09:13.440 --> 0:09:17.000 reserves for longer periods of time and for a broader 0:09:17.040 --> 0:09:20.880 set of uses. Then, say the kind of foreign exchange 0:09:21.400 --> 0:09:24.520 which is provided through say the FED swap lines, which 0:09:24.600 --> 0:09:30.079 is really short term lending to support short term funding 0:09:30.120 --> 0:09:32.600 needs of banks. The I m F has a lot 0:09:32.600 --> 0:09:37.240 more flexibility. It lends for several years, varies a little bit, 0:09:37.280 --> 0:09:42.920 but it usually lends UH in conjunction with a program 0:09:42.960 --> 0:09:47.480 of some reform and policy change. Now, look, we're in 0:09:47.520 --> 0:09:52.400 a different world than the usual world the reforms or 0:09:52.480 --> 0:09:55.599 policy changes that may go with I MF lending, and 0:09:56.000 --> 0:10:00.760 in this context, maybe we the I m F asked 0:10:00.840 --> 0:10:03.600 you to spend more on your public health system, or 0:10:03.640 --> 0:10:07.600 the I m F ask you to increase the amount 0:10:07.640 --> 0:10:12.000 of public spending to poor families. I don't think the 0:10:12.080 --> 0:10:16.479 conditionality needs to be thought of as the traditional conditionality 0:10:16.800 --> 0:10:20.360 in all cases, and that will be interesting to see 0:10:20.760 --> 0:10:23.040 whether or not we get an element of that in 0:10:23.280 --> 0:10:26.840 UH next week's I m F meetings. UM, just when 0:10:26.880 --> 0:10:31.400 it comes to the state of effects reserves in emerging markets, 0:10:31.640 --> 0:10:33.960 can you give us a sort of high level overview 0:10:33.960 --> 0:10:36.959 of what those look like right now? Who is best 0:10:37.080 --> 0:10:41.520 positioned in this environment and who is maybe UH warsaw 0:10:42.200 --> 0:10:45.160 so sure. I mean, there are a set of emerging 0:10:45.200 --> 0:10:50.920 economies that basically interact with the global economy as creditors. 0:10:51.840 --> 0:10:56.840 They have more foreign assets than they have foreign liabilities, 0:10:58.040 --> 0:11:02.360 and in many cases they have more liquid foreign exchange 0:11:02.360 --> 0:11:05.880 reserves in their central bank, then they have external debt. 0:11:06.559 --> 0:11:12.360 That is broadly a description of Korea, it's broadly a 0:11:12.400 --> 0:11:16.560 description of China. It is certainly a description of Taiwan. 0:11:17.160 --> 0:11:21.240 It is a description of Thailand. On the other end 0:11:21.280 --> 0:11:24.960 of the spectrum are emerging markets that have almost no 0:11:25.120 --> 0:11:28.319 reserves or almost no reserves that they haven't borrowed from 0:11:28.320 --> 0:11:33.559 their own banks and have substantial external debts. The most 0:11:33.600 --> 0:11:38.680 extreme cases leban On Earth, but Turkey falls in that category. 0:11:38.800 --> 0:11:42.679 And then you have I think Argentina broadly speaking, as 0:11:42.720 --> 0:11:45.840 we all know, falls in that category. And then you 0:11:45.920 --> 0:11:49.720 have a set of countries in the middle countries that 0:11:49.800 --> 0:11:55.240 do have reserves, that do have already pre negotiated credit 0:11:55.280 --> 0:11:59.880 lines from the I m F, but have substantial external 0:12:00.040 --> 0:12:05.080 act and it is possible that the withdrawal of foreign credit, 0:12:05.200 --> 0:12:09.240 together with a loss of export receipts could leave them 0:12:09.400 --> 0:12:13.880 short reserves. So those are countries like Colombia or Indonesia, 0:12:15.000 --> 0:12:19.320 South Africa, uh and in bad states of the world, 0:12:20.520 --> 0:12:23.760 even a country like Mexico, which is a special case 0:12:23.840 --> 0:12:26.880 because of his relationship with the United States. And then 0:12:26.880 --> 0:12:32.360 that same split is present amongst the oil exporting economies. 0:12:32.760 --> 0:12:36.000 Saudi Arabian Russia, the two biggest, both have about a 0:12:36.000 --> 0:12:40.839 half trillion in reserves. That's enough that they can broadly 0:12:40.920 --> 0:12:46.360 speaking cover their imports this year even if oil doesn't rebound, 0:12:46.720 --> 0:12:49.400 and still have enough reserves so there's no real threat 0:12:49.440 --> 0:12:53.040 to financial studaility. But then there are much weaker oil 0:12:53.080 --> 0:12:59.959 exporting economies Algeria, Oman and Goal and Nigeria, almost Ecuador obvious. 0:13:00.480 --> 0:13:03.760 The list goes on and on, and those countries broadly 0:13:03.800 --> 0:13:08.160 speaking lack enough for an exchange info to pay their 0:13:08.200 --> 0:13:11.480 foreign debts. Right now, I have a question that might 0:13:11.480 --> 0:13:14.920 be a little stupid and it's not facetious, but I 0:13:14.960 --> 0:13:18.400 think some people might interpret it as such. Does a 0:13:18.480 --> 0:13:24.720 country like Argentina, which has spent years of being sort 0:13:24.760 --> 0:13:28.360 of closet disconnected already from the global financial system due 0:13:28.400 --> 0:13:31.120 to all of its defaults, is this less of a 0:13:31.200 --> 0:13:33.600 shock in a weird way to them because this is 0:13:33.640 --> 0:13:38.840 sort of business as usual. Yes, I think that's right. Actually, um, 0:13:38.880 --> 0:13:41.880 it's less of a shock because even before the coronavirus, 0:13:42.480 --> 0:13:46.760 Argentina was seeking at debt restructuring for all of its 0:13:46.760 --> 0:13:50.680 external debt and that debt restructuring was going to involve 0:13:50.720 --> 0:13:55.560 almost no near term payments, so you know, essentially they 0:13:55.760 --> 0:14:02.280 they their creditors were already anticipating a deep loss and 0:14:02.360 --> 0:14:06.040 no near term cash flow. It's also a smaller shock 0:14:06.920 --> 0:14:10.040 just because of the structure of Argentina's exports. To be honest, 0:14:11.320 --> 0:14:17.120 Argentina exports soybeans, wheat, and beef. And if you think 0:14:17.160 --> 0:14:20.640 of the kind of trade that is likely to see 0:14:20.640 --> 0:14:27.040 the least disruption, that's trade in in basic foods. And 0:14:27.200 --> 0:14:32.520 while soy is an input into the production of chicken 0:14:32.560 --> 0:14:35.840 and pork, it's a pretty important input, and so therefore 0:14:36.400 --> 0:14:40.760 Argentina's trade is going to see somewhat less disruption. So 0:14:40.800 --> 0:14:45.119 I think both on the financial side, you know, Argentina 0:14:45.840 --> 0:14:50.920 was already essentially heading to default, already not going to 0:14:51.000 --> 0:14:54.680 be paying, already reliant on the I m F, and 0:14:54.760 --> 0:14:57.520 on the current account side, they happen to be in 0:14:57.560 --> 0:15:02.120 a position where there's a re reasonable basis for thinking 0:15:02.160 --> 0:15:05.080 that Belsia smaller loss and exports. Yeah, but you can 0:15:05.080 --> 0:15:08.720 look at other countries like Lebanon, which is very reliant 0:15:08.760 --> 0:15:13.160 on tourism and remittances and faces an even bigger problem 0:15:13.160 --> 0:15:18.320 even though they too essentially entered the coronavirus shock in 0:15:18.400 --> 0:15:21.720 default right, we actually have an All Lots episode with 0:15:21.760 --> 0:15:26.920 Paul McNamara talking specifically about the situation in Lebanon from 0:15:26.960 --> 0:15:29.280 a few months ago. And I don't think things have 0:15:29.960 --> 0:15:33.800 improved since then. Um I wanted to go back just 0:15:33.840 --> 0:15:37.120 to the idea of the external debt and emerging markets. 0:15:37.160 --> 0:15:40.680 It's not like this hasn't been on people's radars before. 0:15:41.240 --> 0:15:44.200 You know, we saw the Bank for International Settlements, for instance, 0:15:44.200 --> 0:15:47.160 writing over and over and over that dollar denominated borrowing 0:15:47.920 --> 0:15:52.360 was a potential vulnerability in emerging market and now it 0:15:52.400 --> 0:15:55.520 seems like it could really come back to haunt them. 0:15:56.200 --> 0:15:59.360 We did see some emerging market economies that did try 0:15:59.400 --> 0:16:04.440 to borrow more through domestic currency bonds. Has that helped 0:16:04.440 --> 0:16:09.040 them at all? Yes? Uh, you know, I think it 0:16:09.280 --> 0:16:15.240 obviously helps if your currency falls, if your debt is 0:16:15.240 --> 0:16:18.760 denominated in your own currency, If you're debt denominated and 0:16:19.160 --> 0:16:22.080 foreign currency, the real burden of that debt goes up. 0:16:23.120 --> 0:16:26.240 It hasn't been a panaceat the fact that a lot 0:16:26.280 --> 0:16:30.840 of foreign investors were holding local currency debt meant that 0:16:30.920 --> 0:16:34.400 they were more exposed to currency moves. And in their 0:16:34.440 --> 0:16:39.000 efforts to limit their exposure, two further falls in the 0:16:39.040 --> 0:16:43.000 currency they would sell, and that puts the pressure on 0:16:43.040 --> 0:16:46.160 the local bond market. It puts pressure obviously on the 0:16:46.200 --> 0:16:51.400 exchange rate. So in that sense, it became an amplifier 0:16:52.120 --> 0:16:55.240 of the a lot of the currency moves, but in 0:16:55.240 --> 0:16:58.200 a sort of strange way, it amplifies those moves, which 0:16:58.240 --> 0:17:02.840 is bad, but it makes a country itself less vulnerable 0:17:03.400 --> 0:17:08.359 to the impact of an undervalued currency. But it clearly 0:17:08.480 --> 0:17:14.160 has introduced a new new type of dynamic into the market. Uh, 0:17:14.200 --> 0:17:17.119 and that dynamic can in its own way be destabilized 0:17:28.280 --> 0:17:32.680 m so Bron. Obviously, one of the questions out there 0:17:33.080 --> 0:17:36.920 is we don't really know, and that everyone just started 0:17:36.920 --> 0:17:41.800 guessing what post crisis economic behavior will look like. Presumably 0:17:41.920 --> 0:17:44.840 some tourism will come back, but we don't know how 0:17:44.840 --> 0:17:49.359 many years it will take for tourism to return to, say, 0:17:49.440 --> 0:17:52.600 twenty nine levels, or people to be comfortable traveling at 0:17:52.600 --> 0:17:55.160 the same degree they did. We don't know the degree 0:17:55.240 --> 0:17:58.560 to which a rich country like the US may choose 0:17:58.600 --> 0:18:04.000 to prior ties importing fewer things, especially after what we've 0:18:04.040 --> 0:18:07.040 seen in terms of shortages of masks and ventilators and 0:18:07.080 --> 0:18:11.399 other sort of basic equipment. Will this, in your view, 0:18:12.040 --> 0:18:16.560 create a rethink about these sort of financial and growth 0:18:16.600 --> 0:18:20.159 models that EMS have currently undertaken in terms of the 0:18:20.200 --> 0:18:25.720 presumption that tourist revenue or export revenue UH just might 0:18:25.840 --> 0:18:28.600 not be there again. And how much could we plausibly 0:18:28.680 --> 0:18:31.840 expect to see that all change. You know, I think 0:18:31.880 --> 0:18:35.480 it's it's a good question, it's a hard question. I think. 0:18:36.320 --> 0:18:40.960 I think you're right to say that those emerging markets 0:18:40.960 --> 0:18:48.640 that were most reliant on tourism face a particularly difficult challenge. 0:18:49.240 --> 0:18:55.080 You know, those emerging economies most reliant on oil also 0:18:55.200 --> 0:18:59.920 potentially face a long run challenge. Depends on them. It's 0:19:00.040 --> 0:19:02.760 tint to which oil demand rebounds and where the long 0:19:02.840 --> 0:19:06.640 run price settles. But you could imagine this not being 0:19:06.720 --> 0:19:14.320 a temporary shock, UH. And then manufacturing heavy East Asia 0:19:14.800 --> 0:19:18.160 does face a shock to their growth models. In China, 0:19:18.200 --> 0:19:23.720 in particular, if the world moves away from a model 0:19:23.800 --> 0:19:27.200 of what you might call full globalization, which would be 0:19:27.920 --> 0:19:30.440 if all of our phones come from China and all 0:19:30.440 --> 0:19:34.200 of our personal protective equipment comes from China. That's fine, 0:19:35.119 --> 0:19:39.440 that's more efficient to a world where there's more desire 0:19:39.560 --> 0:19:45.080 for at least regionalization of supply chains, if not nationalization, 0:19:45.680 --> 0:19:50.040 and a much higher point priority on resilience. Resilience can 0:19:50.040 --> 0:19:56.040 mean bigger stockpiles, but resilience can also mean local manufacturers 0:19:56.080 --> 0:20:00.320 who have the capacity to ramp up production in bad 0:20:00.359 --> 0:20:05.280 states of the world. So I do think that there 0:20:05.320 --> 0:20:11.960 will be some very significant challenges in some cases that 0:20:12.040 --> 0:20:16.800 may create new opportunities. You know, a world where there 0:20:16.880 --> 0:20:21.720 is more regionalization of supply chains, particularly in North America, 0:20:22.359 --> 0:20:24.920 would arguably be good good for Mexico at the expense 0:20:24.920 --> 0:20:29.800 of China, and it would help Mexico manage the loss 0:20:30.800 --> 0:20:35.480 of oil export revenue and the tax revenue that Mexico 0:20:35.560 --> 0:20:40.040 has historically gotten from its oil production. But it does 0:20:40.160 --> 0:20:46.359 imply some important long run adjustments on the part of 0:20:46.400 --> 0:20:53.240 many economies. Speaking of long run adjustments, we're talking a 0:20:53.240 --> 0:20:57.920 lot about the vulnerability of emerging markets that have borrowed 0:20:58.320 --> 0:21:01.240 in dollars, the attempts to shift away from that little 0:21:01.280 --> 0:21:05.679 bit and issue more local currency debt. Would you expect 0:21:06.160 --> 0:21:10.679 the current crisis to lead to a significant shift in 0:21:10.720 --> 0:21:15.560 the relationship between emerging markets and the US dollar. Would 0:21:15.560 --> 0:21:24.080 more em countries potentially try to move away from dollar dependence. Well, 0:21:24.240 --> 0:21:27.920 it's it's it's hard to move away from dollar dependence 0:21:27.960 --> 0:21:30.680 if creditors still want to lend to you in dollars. 0:21:30.800 --> 0:21:35.520 And given the volatility and emerging currencies, I can see 0:21:35.880 --> 0:21:40.440 in some sense more pressure for those economies who want 0:21:40.480 --> 0:21:44.320 to still borrow to borrow in hard currency just because 0:21:44.480 --> 0:21:48.000 the creditor side may be less willing to take local 0:21:48.040 --> 0:21:52.680 currency risk. We don't know, um, you know what. I 0:21:53.000 --> 0:21:57.680 think the general move is likely to be towards more 0:21:57.800 --> 0:22:03.879 resilient balance sheets across the board, to higher reserves, less 0:22:04.000 --> 0:22:08.280 external debt, and in a world of less external debt 0:22:08.280 --> 0:22:13.840 if you can manage it, less hard currency debt. The 0:22:13.880 --> 0:22:17.199 countervailing pressure and all of that is that there are 0:22:17.200 --> 0:22:20.120 a set of countries that really don't want to adjust 0:22:20.320 --> 0:22:22.760 in the near term, and they may go out and 0:22:22.760 --> 0:22:24.600 borrow an awful lot of dollars. I'm thinking of a 0:22:24.600 --> 0:22:30.240 country like Saudi Arabia, which has a choice threefold joys. 0:22:30.240 --> 0:22:33.280 It can either reduce its imports to reflect lower levels 0:22:33.600 --> 0:22:40.000 of oil exports lower revenues from oil oil exports, or 0:22:40.040 --> 0:22:44.920 it can maintain as imports relatively high levels and make 0:22:45.000 --> 0:22:47.919 up for the deficit and foreign exchange by borrowing, probably 0:22:47.920 --> 0:22:51.959 in dollars, or it can run down its reserves. So 0:22:52.000 --> 0:22:54.040 I would think that, you know, for Saudi Arabia, the 0:22:54.119 --> 0:22:58.280 easiest choice might well be more borrowing and a less 0:22:58.320 --> 0:23:02.680 resilient balance sheet. So I think the response will vary. 0:23:03.240 --> 0:23:08.960 But the basic lesson here is that only emerging economies 0:23:09.000 --> 0:23:14.400 with fortress like external balance sheets, uh, we'll be able 0:23:14.480 --> 0:23:18.000 to come off relatively well. So I think the pressure 0:23:18.200 --> 0:23:21.560 general direction of pressure will be towards more fortress like 0:23:22.240 --> 0:23:24.400 balance sheets. And one of the reasons why I think 0:23:24.440 --> 0:23:27.800 it's important that the i m F be very aggressive 0:23:27.880 --> 0:23:33.400 in some ways very generous in its response, because if 0:23:33.440 --> 0:23:37.040 every country wants to have a fortress balance sheet, that 0:23:37.160 --> 0:23:42.240 introduces inefficiencies of its own um and so you would 0:23:42.280 --> 0:23:48.040 want in some sense insurance mechanisms to help absorb true 0:23:48.119 --> 0:23:51.600 exogenous shocks so that every country in the world doesn't 0:23:51.600 --> 0:23:54.919 try to self insure. And in principle that's to the 0:23:55.000 --> 0:23:57.720 role that the I m F and the other multilaterals 0:23:58.000 --> 0:24:03.840 could play. Speaking of countries that have fortress balance sheets 0:24:03.880 --> 0:24:06.840 that we haven't really talked about much, obviously China, which 0:24:06.880 --> 0:24:11.399 still has an extraordinary mono foreign reserves and has shown 0:24:11.440 --> 0:24:15.159 the ability to sort of withstand the acute phase of 0:24:15.200 --> 0:24:20.800 this crisis and use domestic firepower to maintain its economy. 0:24:20.880 --> 0:24:25.240 It appears to be coming back online. Nonetheless, it's going 0:24:25.280 --> 0:24:29.000 to face pressure, particularly if there is any sort of 0:24:29.480 --> 0:24:33.920 you know, modest deglobalization, because again exports and so forth, 0:24:34.359 --> 0:24:38.159 what do you see as potential course shifts that we 0:24:38.200 --> 0:24:42.119 could be looking for it from the sort of Chinese 0:24:42.280 --> 0:24:45.920 economic model going forward. So I think, you know, there's 0:24:47.440 --> 0:24:54.520 a couple of powerful offsetting forces that are impacting uh, 0:24:54.800 --> 0:25:00.520 China and China's external position right now. One is the 0:25:00.600 --> 0:25:05.000 broad contraction and all trade, which hurts China because China 0:25:05.040 --> 0:25:07.960 trades a lot, probably hurts activity as much as it 0:25:08.040 --> 0:25:11.679 hurts the balance of payments. And then China, because it 0:25:11.760 --> 0:25:15.159 is the world's biggest commodity importer, stands to be the 0:25:15.200 --> 0:25:20.160 biggest winner from lower oil prices. And because China has 0:25:20.200 --> 0:25:25.639 been such a huge source of tourists. The lockdown and 0:25:25.720 --> 0:25:33.320 they fall in tourism has significantly reduced China's imports, and 0:25:33.359 --> 0:25:38.800 therefore it works to improve China's balance payments. So in 0:25:38.880 --> 0:25:42.320 the short run, I don't actually see any pressure on 0:25:42.480 --> 0:25:47.159 China's balance of payments. If anything, I think as China's exports, 0:25:47.640 --> 0:25:50.720 particularly of medical equipment, ramp up, and as the full 0:25:50.760 --> 0:25:54.880 impact of lower oil prices shows up in China's import data, 0:25:55.280 --> 0:25:58.639 China's surplus, in my view, is likely to rise, but 0:25:58.920 --> 0:26:02.440 that rise will um with less activity. It's going to 0:26:02.520 --> 0:26:06.160 be an increase in your surplus when you're exporting less 0:26:06.160 --> 0:26:11.280 and importing less. So there is still a shock two 0:26:11.680 --> 0:26:16.200 China's economy. And there's obviously been a shock to China's 0:26:16.200 --> 0:26:21.760 economy from the measures that China has taken to slow 0:26:21.920 --> 0:26:26.760 the spread of the virus internally. And I think now China, 0:26:26.960 --> 0:26:33.800 broadly speaking, confronts a choice between two different growth models. 0:26:33.960 --> 0:26:39.240 I don't think going back to the two thousand seven, 0:26:39.320 --> 0:26:43.120 two thousand and eight export driven growth model is a 0:26:43.240 --> 0:26:48.320 viable option in today's world. That would be a world 0:26:48.359 --> 0:26:51.440 where China's current account surplus goes to like ten percent 0:26:51.520 --> 0:26:54.800 of Chinese GDP or a jillion dollars and the world 0:26:54.840 --> 0:26:59.639 becomes more dependent on Chinese manufacturing. I think there's fairly 0:26:59.640 --> 0:27:02.840 obvious as reasons why that's not a politically or our 0:27:03.000 --> 0:27:07.360 economically acceptable outcome right now. So then China either has 0:27:07.400 --> 0:27:14.399 to maintain domestic dynamism through a very high level of investment, 0:27:14.480 --> 0:27:18.320 and that has been done through a mix of loose 0:27:18.359 --> 0:27:24.040 credit for state sponsored firms, a lot of government sponsored 0:27:24.080 --> 0:27:31.000 industrial policy projects UH, and then a lot of quasi 0:27:31.040 --> 0:27:35.520 public investment often done by local governments, all the things 0:27:35.600 --> 0:27:37.919 we used to spend all sorts of time talking about. 0:27:38.920 --> 0:27:41.440 There's no reason why I, given China's high savings rate, 0:27:41.480 --> 0:27:45.280 it couldn't try to do that yet again and generate 0:27:45.760 --> 0:27:49.719 a bit of a recovery using the tried and true 0:27:50.280 --> 0:27:57.480 Chinese investment from above growth model. The alternative and when 0:27:57.520 --> 0:28:02.600 I'm personally drawn to is a world where China radically 0:28:02.760 --> 0:28:08.359 reforms it's UH system of tax and the system of spending. 0:28:08.960 --> 0:28:13.440 China actually has an incredibly regressive tax system. China collects 0:28:13.480 --> 0:28:16.720 one point three percentage points of its GDP and income tax, 0:28:17.160 --> 0:28:20.919 which is a extremely low number in the US. And 0:28:20.960 --> 0:28:23.480 you know we aren't we aren't considered a high tax country. 0:28:23.680 --> 0:28:26.160 We get ten percent of GDP from personal income tax, 0:28:26.280 --> 0:28:28.760 so China is a k one eighth of our level. 0:28:29.560 --> 0:28:34.120 The system of social contributions has a very high minimum 0:28:34.160 --> 0:28:37.960 contribution for urban workers, which means that in a lot 0:28:37.960 --> 0:28:42.080 of cases the poorer, you are, the bigger your tax burden. 0:28:42.880 --> 0:28:46.360 And then world workers with those who lack the right 0:28:46.440 --> 0:28:52.280