Bill Gross: Investment Outlook (January 2010)

Thursday, January 7th, 2010

Bill Gross, co-Chief, PIMCO, has just released his latest instalment of his newsletter, titled, “Let’s Get Fisical.”

In it, Gross discusses the theme, that 2010 will be a year of “exit strategies,” of breaking free of government assistance. As usual, Gross’ outlook is captivating, and like others requires some interpretation as well as look-through.

Here is an excerpt:

“If 2008 was the year of financial crisis and 2009 the year of healing via monetary and fiscal stimulus packages, then 2010 appears likely to be the year of “exit strategies,” during which investors should consider economic fundamentals and asset markets that will soon be priced in a world less dominated by the government sector. If, in 2009, PIMCO recommended shaking hands with the government, we now ponder “which” government, and caution that the days of carefree check writing leading to debt issuance without limit or interest rate consequences may be numbered for all countries.”

and,

Additionally, if exit strategies proceed as planned, all U.S. and U.K. asset markets may suffer from the absence of the near $2 trillion of government checks written in 2009. It seems no coincidence that stocks, high yield bonds, and other risk assets have thrived since early March, just as this “juice” was being squeezed into financial markets. If so, then most “carry” trades in credit, duration, and currency space may be at risk in the first half of 2010 as the markets readjust to the absence of their “sugar daddy.” There’s no tellin’ where the money went? Not exactly, but it’s left a suspicious trail. Market returns may not be “so fine” in 2010.

I find it unusual that the discussion of carry trades is seldom discussed in depth, especially when it is such an integral, and functional, moving part of both the credit and equity markets. There has been a noticeable amount of press on the dollar carry trade ending, and the threat that poses, but very little on the subsequent presence and resumption in the yen carry trade, our Japanese “sugar-daddy.” As Hosein Askari recently asked, “Whose paying for the beer?”

Gross doesn’t mention it. There has been a reversal of the inverse relationship between the U.S. dollar and equity markets, emerging markets, commodities,  and the Canadian dollar, et al., since the U.S. dollar recovered off its late November lows. Where is the mysterious support coming from? Perhaps its too early to tell, OR, those who do know about it, are exploiting the opportunity, and keeping their lips tightly sealed.

Read the whole newsletter here.

Tags: Asset Markets, Bill Gross, Canada, Check Writing, China, Commodities, Debt Issuance, Economic Fundamentals, Emerging Markets, Exit Strategies, Financial Crisis, Financial Markets, Fiscal Stimulus, Government Assistance, Government Checks, Government Sector, Gross Co, Gross Investment, High Yield Bonds, Instalment, Investment Outlook, PIMCO, Shaking Hands, Sugar Daddy
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Marc Faber on the economy and financial markets

Thursday, October 8th, 2009

Below is a wide-ranging interview with Marc Faber on four videos on CNBC TV18 in India in which he explains his views on inflation, currencies, commodities, stocks and more, all courtesy of Edward Harrison at Credit Writedowns.

Asset-based economy. In general, he thinks we are in an inflationary environment, whereas I think deleveraging is secular and means any inflation is only cyclical. But he shares my belief that zero interest rates induce money balances to move into consumption or into higher-yielding assets. He believes this is a boon over the medium term (if not the short or long term) for financial assets, whether they be stocks, bonds, commodities, real estate or art. And it is something that will continue, he says. Faber believes Bernanke will be loath to raise rates aggressively given his prior statements and writings.

Currencies. Faber takes the view, with which I agree, that the Fed’s easy money policies after 1998 flooded the global economy, especially emerging economies, with liquidity. This has led to asset bubbles. Hong Kong residential real estate is one example he cites. As a result, Faber thinks the US dollar is no longer overvalued at present levels. A snapback rally for the dollar resulting from oversold levels would be bearish for asset markets. But, longer term, Faber thinks the dollar is weak.

Equities. There has been a huge rally everywhere. He says he is not a buyer at these levels. However, as central banks are going to continue to print money, stocks could continue higher - but he would not bet on a blow-off rally from these levels.

Commodities. Faber thinks zero-rate levels make it extremely difficult to value anything. He poses the question: which would you rather own - the “US dollar at zero interest rates or a ton of gold or a ton of copper or a ton of crude oil?” Of course, commodities are supply constrained, whereas dollars are not, so there is a justification for buying them. But, he anticipates the commodity hoarding by China is about to end and that is bearish for industrial commodities as well as precious metals. As with other commodities, he thinks the huge run-up in oil could induce a setback. Long run, he is an oil bull because of limited supply.

Financial Crisis. He is disturbed by the fact that a crisis caused by excessive debt growth, especially as a result of Federal Reserve policy, has been allowed to pass with the same players in control. He says enjoy the ride for now. Longer term, this necessarily means the same bad policies will follow, which will lead to a system-wide financial collapse.

India. Faber is bullish longer term. Short term, there could be a correction. India is one of the best-protected countries because of less vulnerability to the export sector. He also believes the Reserve Bank of India has one of the best monetary policies in the world - supervising the financial system closely, relatively tight, and mindful not just of core inflation but also of other price levels like asset prices.

Part 1:

Part 2: Part 3: Part 4:

Source: Credit Writedowns, October 4, 2009.

Tags: Asset Markets, Boon, Central Banks, China, Cnbc, Cnbc Tv18, Commodities, Crude Oil, Easy Money, Edward Harrison, Emerging Economies, Emerging Markets, Financial Assets, Global Economy, Gold, India, Inflationary Environment, Marc Faber, Medium Term, Money Balances, Money Stocks, oil, Residential Real Estate, Snapback, Stocks Bonds, Zero Interest
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RGE: China’s Impact on Financial Markets

Wednesday, August 26th, 2009

Nouriel Roubini’s RGE Monitor has just published a report examining China’s direct and indirect influences on global asset markets, and particularly equity, commodity and forex markets. Although the full report is only available to RGE’s subscribers, the abridged version nevertheless provides useful insight as reported in the paragraphs below.

Chinese equities
The Shanghai composite index has fallen almost 20% from its August 4 peak, putting it within the traditional definition of a bear market. Thus far this year, however, the index has risen over 50%, and it has surged even more since its low in late 2008. Yet Chinese equities remain vulnerable given the liquidity outlook and the challenges of using relatively blunt tools to guide asset markets.

Correlations between Chinese and global equities (especially emerging market equities) have increased since 2007. Economies most reliant on Chinese investment, or on the commodities consumed by China, tend to show the most significant correlations. Yet even the markets of Central and Eastern Europe have shown greater co-movements. While Mainland markets are dominated by domestic investors and foreign investment is heavily restricted, they have vaguely led global markets, being among the first to begin to fall from overheated heights in early 2008 and the first to climb in late 2008 following China’s stimulus announcement.

China’s linkages with global markets, to the extent that they exist, seem more macro than financial. The same government policies designed to avoid bubbles and limit further misallocation of capital – including the slowing of credit extension currently underway – could not only restrain frothy Chinese equities, some investors worry, but also suggest that the Chinese and global recovery will be weaker.

Thus steps taken to “fine-tune” Chinese monetary policy and cool overheating in some sectors of the economy, could contribute to more global market volatility. A burst Chinese bubble could reduce Chinese demand and prefigure poor performance in other markets as liquidity is withdrawn. While markets in the US and Europe seem more likely to take their cues from local trends–particularly the corporate earnings and economic growth outlooks than Chinese markets, a slowdown in Chinese demand, could give pause. An increase in exports to China is among factors supporting European exports in Q2.

Chinese equities were looking very bubbly in July and early August, and in our most recent economic outlook, we highlighted developing asset bubbles in China’s property and equity markets as one of several potential risks of China’s stimulus. Chinese liquidity has begun to be less loose, even if it is not yet tight and inflows to Chinese equity markets have slowed from July onwards. Several trends which supported equity markets in H1 2009—record bank lending with few restrictions, the improvement in consumer confidence, the deferral of IPOs—are no longer supportive. Inflows to the Chinese equity market slowed in July 2009 as bank lending slowed and government regulators suggested a closer look would be taken at the allocation of funds. Meanwhile price/earnings ratios are no longer as cheap, having almost doubled from their late 2008 lows. Corporate earnings may stay weak given the difficulty in passing on higher production costs. All of these factors suggest that Chinese equities might have farther to fall.

On the plus side, further correction might have only a limited effect on the Chinese economy, given lower wealth effects than in developed markets. Market capitalization is a much smaller share of GDP and equity investment is a much smaller share of savings. Sentiment is affected. New accounts opened by Chinese retail investors have fallen since their late July peak. The reluctance of retail investors to incur losses could contribute to a boom and bust cycle, negatively affecting Chinese and global asset markets.

Chinese commodity demand
Record commodity imports, particularly of metals, contributed to the commodity price climb in H1 2009 (pumped up by the ample liquidity from zero interest rate policies and quantitative easing). A sustained reduction in Chinese imports of commodities is perhaps the biggest risk to global commodity markets, particularly metals. In fact there is some preliminary evidence that the extensive stockpiling that contributed to the record volumes of commodity imports early in 2009 may be slowing as prices rise. The volume of imports of key metals like copper, tin and aluminum has slowed in either June or July 2009. While this reduction may reflect seasonal trends, with stockpiles filled and costs high, a further slowdown should not be ruled out.

Chinese imports of commodities, especially base metals, grew sharply in the first half of 2009 as China sought to restock depleted reserves and build up new stockpiles. Even the infrastructure-heavy stimulus likely absorbed only some of the imports, suggesting that China might be on the verge of a commodity glut Further purchases, particularly later in Q2, may have extended beyond the official stockpiling to include investors who took physical delivery as a hedge.

Yet, not all of the increased demand is due to stockpiling. Metal processing has been a key part of China’s fiscal stimulus – with any excess production purchased by the government. There have been reports that some of the state metal and grain reserves became net sellers domestically, suggesting the pace of imports might slow. The Baltic Dry Index, a measure of shipping costs that reflects demand for bulk commodities, has fallen from its 2009 highs. Import volumes of several key metals fell in June and July 2009. Should they fall further, and should global stock piles grow, commodity prices could correct from their current levels.

Chinese commodity purchasers are in part price-sensitive. In 2008, Chinese producers made due with cheaper alternatives to expensive ores. Purchases of scrap copper and aluminum rose in July 2009 even as the imports of higher-grade ore and materials fell. While the continued demand for scrap metal does suggest some underlying metal demand from Chinese consumers, they have their price.

Despite China’s role as the largest consumer of many commodities, it has had limited success as a price setter despite its influence as one of the largest demanders of most commodities. Unwilling to accept the 33% negotiated by Japanese companies and their ore suppliers for bulk shipments, China held out for 40-50% reductions – a concession suppliers were reluctant to give. Only one – Fortescue, a relatively small producer, agreed to a 35% price cut.

Unlike metal ore imports, whose volumes have doubled and in some cases tripled from 2008 levels, oil imports have only recently topped 2008 levels. Chinese oil imports did report a sharp increase to 19 million tons in July, well above recent levels, perhaps due to demand from new refineries. Yet end user demand in China and globally has not climbed much even as supply has inched up again – OPEC members have been increasing production. Worse than expected macro news, meanwhile, would likely contribute to a correction, to the $50 range more in line with supply/demand fundamentals.

Yet, liquid financial conditions and the improving “less bad” macro climate may keep commodity prices in their current US$ 70 range, despite weak demand and an increase in storage Should oil prices keep climbing, they could put a damper on the economic recovery and on the revival of energy demand. Yet over the next few years, supply constraints supply, limited investment and high production costs for the new supplies that are entering the market could keep prices elevated and a damper on global growth, especially among the oil importers like China, India and the US
Source: RGE Monitor, August 26, 2009.

Tags: Asset Markets, Bear Market, Central And Eastern Europe, Chinese Investment, Commodities, Correlations, Domestic Investors, Emerging Market, Emerging Markets, Fine Tune, Foreign Investment, Forex Markets, Global Equities, Global Markets, Global Recovery, Government Policies, India, Indirect Influences, Market Volatility, Misallocation, oil, RGE Monitor, Sectors Of The Economy, Shanghai Composite Index
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Roubini Global Economics: Re-emergence of global protectionism

Sunday, March 8th, 2009

By RGE Monitor

As governments around the world fight rising unemployment, falling exports and bank credit crunch, and several central banks are facing liquidity traps, many are turning to restrictions that privilege national producers. These populist measures attempt to minimize growth impact, social unrest and pain from the credit crunch that poses a risk to several ruling governments, especially those facing elections soon. Furthermore, some officials hope that such restrictions will reduce the leakage of the scarce funds used in bank bailouts and fiscal stimulus to other countries.

But as history shows, the impacts of trade protectionism on exports and job creation if any are small in the short-term and instead may lead to global retaliation, and in the long-term result in inefficient allocation of labor and capital and trade distortions, affecting potential output and employment. But given the increased capital flows and labor migration in recent years and dependence on external capital in developed and developing countries to drive domestic demand, asset markets and growth, rising financial and labor protectionism pose an even greater risk of exacerbating the current global recession as trade protectionism did in the recession of 1930s. Increased global integration since the 1930s also indicates the consequences of protectionism will also be larger.

The US and EU’s stance will provide clues to other countries policy towards globalization. So it might be somewhat alarming that US anti-recession policies propose protectionist elements, and Western Europe has rejected a bailout package for Eastern Europe while implementing policies that pose risk to EMU’s ongoing trade, capital and labor integration.

However, there are at least some signs of global policy co-operation to suggest that a return to the Smoot-Hawley era might be less probable. Countries around the world have been coordinating since the crisis began to cut interest rates, inject liquidity into the banking system and contain rising spreads in the money markets. Other instances include countries implementing fiscal stimulus packages, the Fed extending swap lines to South Korea, Singapore, Mexico and Brazil; surplus Asian countries increasing their contribution to the pool of regional swaps; Japan filling IMF’s coffin to help increase assistance to crisis-hit countries in spite of its dire economic situation; and Western European countries willing to offer a case-by-case bailout to some of the Eastern European countries.

Trade protectionism
Plunging global manufacturing activity and consumer demand along with the trade finance crunch, commodity correction and exchange rate fluctuations are already bound to cause a contraction in global trade in 2009. Increasing instances of imposition of trade barriers by countries to restrict imports and promote exports will only exacerbate and prolong the decline in global trade and make export-dependent economies worse-off. Furthermore they may do little to help the imposing countries. However, sharp devaluations in some countries, especially emerging markets may increase import substitution.

Trade barriers such as tariffs are the most common element of protectionism that countries use in difficult times as witnessed during the food shortages in 2008. Countries like Indonesia, India, Vietnam, Ukraine, Russia, Argentina, Ecuador and Turkey have raised import tariffs, duties or laid restrictions on import licenses or quotas.

In their fiscal stimulus packages, several countries are also offering distortionary subsidies, and credit and other incentives for exporting firms to sustain trade flows, especially countries with high export dependence and low domestic demand. But trying to promote exports amid global demand and industrial activity slump might only add to the global excess capacity and deflation pressures.

One of China’s first steps was to reinstate and then increase export rebates which create disincentives to sell goods at home, a move that might only increase the domestic imbalances, as might the government’s efforts to buy grain and metals to support prices.

As WTO bound rates, especially for developing countries, have fallen significantly in recent years, governments have ample room to raise tariffs closer to the bound rate levels without violating WTO rules. And with policymakers preoccupied with domestic economic challenges, Doha trade talks might not be revived in the near-term despite the exhortations of the G7, G20 and other groupings.

Plunging sales and tightened access to domestic and foreign credit have also led many auto companies to seek bailouts from their home governments. Amidst scarce resources and to promote domestic firms over competitors, governments are offering financial assistance to just the domestic auto firms over the foreign-owned ones despite the relative inefficiencies of several of these national champions compared to other global players.

After the US government’s bailout of domestic automakers, GM and Chrysler, several countries including UK, China, Brazil, and Canada and in EU such as Sweden, France, Germany, Italy and Spain have followed suit to help their own auto companies. Western European auto sector support, a move that may hurt Eastern European countries, is seen as a challenge to EU’s single-market ideology even if they have passed EU competition rules. In China’s case, government policy aims to finally consolidate the industry.

But restricting assistance to some firms via loans or loan guarantees, tax incentives to firms and households buying autos, subsidies to undertake R&D and invest in renewable energy is highly distortionary and undermines domestic as well as trade efficiency, particularly if the beneficiaries do not make the difficult cuts required as part of the funding.

There have been growing calls for a global fiscal stimulus policy partly to support global trade, as coordinated action will have a better chance of boosting aggregate demand especially for smaller, open economies. Given that the global supply chain is highly integrated today, import demand by one country will boost exports for other countries and therefore their incomes and import demand, which in turn will boost the source county’s exports. However, to prevent import leakages and promote production and jobs at local firms, fiscal stimulus in countries like US, Spain and France encourage spending on domestically produced goods at the expense of foreign-owned firms and nationals working at those firms.

The US fiscal stimulus package limits sourcing infrastructure spending related goods from WTO signatories like EU, NAFTA and Japan while excluding non-signatories like China, Brazil, India, Russia, Ukraine, Turkey and many other developing countries. Since close to 55% of the infrastructure spending will take place after 2009-10, the impact of this measure on jobs and growth will be limited in the short-term. But this has nevertheless led other countries implementing fiscal stimulus and infrastructure spending to retaliate with similar measures to protect their own jobs and firms. As a result, this will impact jobs at importing firms and also the demand for US exports and jobs, sometimes affecting output and jobs in the same industries and sectors that the policymakers were aiming to protect. As it is, Obama and the Democratic Congress’ stance to renegotiate trade deals to incorporate non-tariff barriers like labor and environmental standards, and promote influence of labor unions has already cautioned the world on the US trade policy going forward even if Obama emphasized the importance of trade on his recent visit to Canada.

Moreover as exports are slowing, several developing countries such as in Asia and Latin America are increasingly favoring an undervalued currency. The initial currency plunge may have been due to deleveraging but given the export collapse, few countries are likely to allow much appreciation. And this is leading other countries to follow suit with the risks being particularly high in Asia, as these export oriented economies might favor competitive devaluations. Some Japanese officials have argued for intervention to weaken the yen, which only recently slipped from the heights where they intervened in the early part of this decade.

The Chinese yuan, which rose about 6% against the US dollar early in 2008, and appreciated more in real terms, returned to its de facto peg at mid-year and even depreciated somewhat. Treasury Secretary Timothy Geithner’s confirmation testimony re-ignited US China currency tensions by noting that President Obama views China as a currency manipulator, a tag that would allow trade retaliation. China has similarly publicly expressed concerns about the value of its large stock of US debt (over $700 billion) acquired in the process of managing its currency. Given the collapse in China’s exports, it is unlikely to allow a stronger currency which might give it little choice but to keep buying US assets, albeit likely at a slower pace than in early 2008.

However, the probability of these measures becoming significant enough to lead to a trade war like the 1930s might be low given that counties understand that retaliation effects will counter-productive for domestic growth and jobs. Moreover, the WTO surveillance mechanism, absent during the 1930s, will help countries go to the WTO court if they face import barriers and thus prevent trade wars.

Financial protectionism
Global credit crunch and de-leveraging has reduced capital flows to emerging markets. Risk averse foreign investors are redeeming and repatriating funds where credit risk is perceived to be less or using the resources to offset other losses. The Institute of International Finance (IIF) estimates that net private sector capital flows to Emerging Markets in 2009 will be $165bn in 2009, less than half the 2008 inflow of $466bn and $929bn in 2007. The decline in capital flows is equivalent to about 6% of the combined GDP of EMs, way larger than the 3.5% of GDP during Asian crisis and 1.5% of GDP during the Latin American crisis.

Foreign commercial bank lending, which accounted for the largest share (over 50%) of capital flows to EMs in recent years, similarly accounts for much of the decline - such flows are expected to fall to $61bn in 2009 from $167bn in 2008 and $410bn in 2007. Portfolio flows to EMs will continue to contract in 2009 after declining to $89bn in 2008. FDI, the second largest component of capital flows to EMs in recent years, may not be as resilient as many economists assume and will drop to $198bn in 2009 from $263bn in 2008 and $304bn in 2007 as MNCs face lower corporate profits, lower export-related investment amid plunging global demand, credit crunch and decline in M&A and Private Equity activity.

Similarly the reduction in commodity prices will reduce the outflows from oil exporters to developed and developing economies - portfolio and direct investment from the GCC were a key capital source for some emerging economies, especially in the Middle East.

Hence, capital flows to EMs will contract at a time when domestic capital markets and bank lending activities are subdued. When exports and current account balances are easing, weaker capital accounts will pose risk to several EMs in financing or rolling over their external debt and maintaining stable asset prices and currencies. In fact, many short-term hot inflows and foreign bank borrowings to finance domestic consumption, corporate investment and drive asset markets such as real estate and stock markets and fuel economic growth.

Thus, ongoing bank losses and credit crunch will lead foreign banks to reduce credit availability, and at worse to cut credit lines to subsidiaries thus weighing down on domestic demand, raising bank defaults by firms and households and worsen the recession. Emerging Europe, which has seen foreign bank borrowing and foreign bank assets/GDP ratio surge in recent years, is the main victim of this trend. Going forward, Japan may be only one of several countries to apply its government savings to increase foreign exchange liquidity of corporations, many of whom lost out as FX markets became more volatile.

Therefore amidst capital outflows, end of the global liquidity boom, growing risk of increased global regulation and doubts over the benefits of financial globalization on risk sharing and financial stability, a rise in financial protectionism will only exacerbate the global credit crunch and financial crisis in several countries, posing the risk of slowing the pace of financial globalization.

As increasing number of banks are being bailed out, governments such as the UK, Germany, France, Greece, Denmark are imposing stringent conditions to lend their scarce capital to domestic firms and households rather than foreign ones and also direct credit to priority or recession hit sectors.

The stance of EU and US to monitor lending by banks is forcing them to increase lending in domestic markets relative to foreign ones. This is influencing banks’ commercial decisions, distorting credit allocation and reducing credit growth in EMs especially in emerging Europe like Hungary and Romania, and countries such as Russia, Ukraine and UK that are highly dependent on foreign bank borrowing. However in countries like China, state banks are responding to the government’s commands to lend, even if most of it is short-term, but foreign banks are more reluctant.

Banks including RBS, Citigroup, UBS, BoA are reducing lending abroad and even selling their overseas subsidiaries, especially the non-core assets in EMs to offset losses and manage their shrinking balance sheets. Risk-averse and loss-making banks also want to repatriate capital to their home markets where risks are perceived to be relatively less with an upside of having access to government assistance in times of crisis.

Additionally, governments are also imposing several capital controls to restrict capital outflows including on cross-border banking and corporate M&A activities even as they are easing capital inflow rules to support their currencies and finance their external balances. Further such controls are possible. Iceland, Ukraine, Argentina, Indonesia and Russia have imposed restrictions on the availability of foreign exchange.

Some governments have higher capital requirements and capital charges for foreign banks especially emerging market banks relative to domestic banks, leading banks to move assets to their domestic markets. To cope with domestic currency shortages, several countries have laid restrictions on currency conversion by importers and domestic banks and firms to meet their foreign currency needs.

The threat to financial globalization could be exacerbated by asset protectionism. On the one hand, many governments have worried that foreigners with surplus cash (especially sovereign wealth funds) might be able to snap up key assets more cheaply and end up with controlling stakes. France even created their own fund to provide capital lest foreigners buy up French companies too cheaply and both developed and developing countries have imposed new restrictions on investment in the last year.

On the other hand, the increasing need for capital by corporations and financial institutions may reduce political concerns. Yet it should perhaps not escape notice that the recent conversion of Citigroup’s preferred shares to common stock by Singapore’s GIC will leave it with a 11.1% voting share, an amount which would have raised congressional shackles a year or so ago. Perhaps the fact that the US may soon control 36% of shares dilutes these concerns.

Sovereign funds themselves are not as high-profile, a development that may be due to past losses, the need for greater liquidity and uncertainty about the value of assets. And at the same time, with less new funds available from the reversal in capital flows and commodity prices, past savings are being depleted to support domestic banks and finance fiscal stimulus packages. China may be a partial exception. It emerged in recent months as a capital source for several cash strapped resource companies, providing loans in exchange for oil supply contracts and using the opportunity to diversify its foreign assets.

Labor protectionism
Rising lay-offs and worker protests in UK, Ireland, Greece, France, Latvia and several other European countries is increasing political pressure to protect jobs for nationals. As a result, governments face pressure to lay off foreign workers rather than domestic ones, promote outflow of immigrants, put restrictions on firms to hire nationals over immigrants such as for the US banks using TARP funds, and in the fiscal stimulus packages create jobs for nationals than foreign workers and offer safety nets.

With slumping global manufacturing and exports, the International Labor Organization estimates up to 50 million workers will become unemployed due to the global recession while immigration itself will slow as job market and wages weaken in the host countries. These factors along with recent trends - rising income inequality, stagnant wage growth, impact of immigration on depressing job opportunities and wages for nationals, and impact of globalization and offshoring on job and income security - will rekindle workers’ anxiety and undermine the recent boom in labor migration.

The movement of labor within the EU, intra-Americas, to the GCC region and between developed and developing countries in general has led to a corresponding boom in the flow of skills and remittances that has also helped finance external accounts of several developing countries. These remittance flows are now under pressure as RGE Monitor’s Mikka Pineda details in a recent outlook for Filipino remittances in 2009.

In the GCC, where imported labor facilitated fast paced economic growth during the oil boom, there are reports that many work visas are being cancelled and the UAE has instituted policies to protect the jobs of nationals. This will reduce remittance flows to other countries in the MENA region and to South Asia. In the UAE, which will probably face the sharpest declines, job losses will exacerbate the slowing in domestic demand and reduced demand for housing even as though new restrictions may actually do little to increase employment of nationals as they are difficult to fire.

As Russia contracts, Central Asians working in Russia are losing jobs and are facing greater pressure from nationalist groups. With remittances as high as 30-50% of GDP in many Central Asian countries, the reduction in remittances will exacerbate the contraction.

As the global downturn worsens, so will workers’ anxieties about job and income losses, strengthening the need to increase spending on unemployment insurance, worker retraining and other social safety nets in the government’s fiscal stimulus packages around the world to keep the labor market flexible during the downturn while also creating long-term policies to cushion workers from changes in the economic structure that the recovery and globalization in general would bring about.

Source: Arpitha Bykere and Rachel Ziemba, RGE Monitor, March 4, 2009.

Tags: Asset Markets, Bailout Package, Canada, Central Banks, Credit Crunch, Emerging Markets, Fiscal Stimulus, Global Integration, Global Recession, India, Inefficient Allocation, Labor Migration, Liquidity Traps, National Producers, Populist Measures, Roubini Global Economics, Scarce Funds, Smoot Hawley, Social Unrest, Term Result, Trade Distortions, Trade Protectionism, World Fight
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