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Emerging Markets

Currency Strength Boosts EM Imports

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May 19, 2017

Emerging market demand for imports surges but may not last. FX managers should take heed in any case.

Currency controlsStrengthening currencies in the emerging markets has increased their companies’ demands for imports, but multinationals with a presence in those markets probably shouldn’t bet just yet on generating more cash there.

Global import growth picked up in November and accelerated in early 2017, and in fact global imports rose $4.1% in the first two months compared to the same period a year ago, notes Standard & Poor’s, referencing World Trade Monitor data. One factor treasurers and FX managers should be keeping an eye on is one factor helping these imports: strengthening emerging market currencies.

“This is a meaningful acceleration from the rate of 1.3% in 2016, and above the average annual growth between 2012 and 2016,” says S&P in a May 17, 2017 report titled, “A Pickup In Emerging Market Imports Is Driving World Trade Growth.”

The pickup in global trade is especially benefiting the European Union’s more export-oriented economies. In German, for example, goods exports rebounded significantly in the fourth quarter, by 5.5% year over year, after subdued growth in 2016, S&P says, adding that Spain’s export goods were even stronger, surging 13% in January and February over the same period last year.

Data from the CPB Netherlands Bureau for Economic Policy Analysis, which publishes, World Trade Monitor, reveals that strong import demand from emerging markets has been the primary driver of global trade growth acceleration. The volume of goods imports in the countries the CPB classifies as emerging surged 10% in January and February over the same period last year, while being virtually stagnant in 2017 over the year before.

Developed economies growth slowed down to 0.4% in the first two months of the year, from 1.9% in 2016, except in the U.S. where import demand picked up, according to S&P.

S&P attributes the stronger import demand to two main factors. One is an increase in economic activity as “external conditions” improve, especially in commodity-producing countries as the prices of commodities such as oil have risen. The rating agency notes that in emerging markets imports tend to grow faster than domestic demand; for example, it estimates that a 1% rise in domestic demand in Russia boosts imports by 1.68%.

“The recovery in domestic demand is therefore associated with a strong rebound in imports,” the report says. “ At the same time, rising exports often correlate with higher imports, especially in economies where the import content of exports is high, as in Asia.”

The second key factor supporting the surge in imports is the recent appreciation of emerging market currencies, making it easier to purchase imports. S&P says the real effective exchange rate, which is trade-weighted and adjusted for inflation differentials with main trading partners, appreciated by a “whopping 40%” in Russia over the last 16 months, and 30% in Brazil.

“Currency appreciation reflects higher commodity prices in the case of commodity exporters, and also improved investor sentiment resulting in better capital inflow dynamics for emerging market economies since the second quarter of 2016,” S&P says.

The rating agency warns, however, that capital flows into emerging markets remain highly volatile, as foreign investors are repeatedly reassessing the attractiveness of emerging market assets in light of ever-changing expectations about the path for interest rates in the US and other advanced economies. S&P states that in its view, currency appreciation was the major driver of the recent boom in imports in Brazil and Russia, since domestic demand remains weak. However, retail sales were still contracting during the first quarter in both Brazil and Russia, so domestic demand could not justify the 30% year over year rise in imports in Russia, or the 15% increase Brazil over the first two months.

“The analysis suggests that the recent surge in emerging market imports may in fact be temporary,” S&P says, adding that it anticipates domestic demand increasing very slowly unless commodity prices rise more strongly—not its baseline scenario.

In Asia, says S&P, much of the surge in imports can be attributed to businesses there anticipating greater demand for their exports. “If stronger external demand fails to materialize, then extra imports would generate larger inventories, which would act as a headwind,” S&P says.


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