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| Sunday, 2 May 2004 |
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| News Business Features Editorial
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Fitch lifts global economic growth forecast Fitch Ratings, the international rating agency, has raised its global economic growth forecast to 3.6% from 2.8% but warns that there is a risk that US interest rates will rise faster and by more than expected. This may well create volatility in financial and credit markets and place pressure on emerging markets with weak fundamentals and substantial external financing needs. Fitch's Sovereign Review: Spring 2004, published recently says the global recovery is well underway, led by the United States, China and Japan. The agency expects global growth to settle back to its trend level of 3% in 2005 after peaking at 3.6% in 2004, a rate exceeded only twice in the last 15 years. However, with emerging markets' gross external financing needs set to rise to USD260 billion in 2004 and USD274bn in 2005 from an estimated USD230bn in 2003, Fitch warns that some countries and regions will be more vulnerable than others to any tightening in credit conditions, particularly as foreign direct investment, traditionally the largest source of external financing, continues to decline in relative importance. Latin America, which has benefited most from the current favourable international market environment, stands to be the worst affected. But other sovereigns like Turkey, Lebanon and the Philippines where debt service still figures prominently in public finances could also fare badly. A rise in US interest rates could also see some moderation in capital inflows to emerging Asia, putting pressure on local currencies and interest rates. Fitch warns that with the potential elimination of the output gap in the US this year and in the absence of fiscal tightening, inflationary pressures could emerge surprisingly quickly, causing interest rates to rise faster than expected, triggering another period of volatility in financial and credit markets. Ample global liquidity and historically low interest rates have encouraged international investors to take more risk in the search for yield, driving down credit spreads on emerging market debt dramatically over the last 18 months. Against this background, Fitch warns that a sharper than expected rise in US interest rates could prompt a substantial increase in the cost of external and budget financing for emerging markets and hinder access to international capital markets for those with weak credit fundamentals. Fitch believes that emerging market economies as a whole are much better placed now to absorb such a shock than they were prior to the Mexican Tequila crisis in 1994 when US interest rates were last raised sharply, or the Asia/Russia crises in 1997-98. Last year witnessed an unprecedented build-up of foreign reserves, bringing the Fitch-rated emerging market universe within sight of net external creditor status, while many countries have adopted more flexible exchange rate regimes. Such factors, coupled with discernible improvements in macroeconomic policy management, have delivered a strong upturn in sovereign creditworthiness over the past year with Fitch sovereign rating upgrades outpacing downgrades at the rate of 3:1. Emerging Europe and emerging Asia have featured prominently in this ascent, but Fitch says there are signs, too, that the credit cycle in Latin America has at last begun to turn, led by upgrades in Brazil and Uruguay. While the United States remains the locomotive of global growth, Fitch says twin budget and current account deficits render the US dollar and asset prices increasingly vulnerable to political and economic shocks. Europe has failed to emerge as a supplementary engine of global growth. Fitch has revised down euro-area growth in 2004 to 1.6% from 1.8% while the durability of Japan's economic recovery is at best unproven. China has been a key driver of global recovery, accounting for around one fifth of global growth in recent years, but continued rapid expansion is presenting new policy challenges and the risk of a hard landing cannot be wholly discounted. |
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