MODERATOR:  Good afternoon and welcome.  This weeks Wall Street Series features two distinguished economists from J.P. Morgan, and today I am delighted to introduce Mr. Luis Oganes.  Hes a managing director and the head of Currencies, Commodities, and Emerging Markets Research at J.P. Morgan, where he manages teams of economists and strategists that analyze economic and political dynamics and identify investment opportunities in sovereign debt, currencies, and local bond markets. 

Mr. Oganes covers emerging markets in Asia, emerging markets in Europe, the Middle East, and Africa, as well as Latin America.  He also drives the emerging markets flagship publications.  On several occasions, he has left his country coverage duties temporarily to participate in advisory projects with some governments and quasi-sovereign entities in Latin America and the Middle East and Asia.  And today, Mr. Oganes is going to provide a macro and market outlook for emerging markets.   

This briefing is on the record.  The views expressed by briefers not necessarily affiliated with the State Department or the U.S. Government are their own and do not necessarily reflect those of the State Department or U.S. Government.  We will post the transcript of this briefing when its ready on our website at  If you publish a story as a result of this briefing, please share it with us. 

After his remarks, I will open the floor for questions.  If you have a question, please go ahead in the participant field and virtually raise your hand and wait for me to call on you.  And if youre experiencing audio issues, you may also submit it in the chat box in writing, and I will read it out aloud.   

And with that, let me pass the floor over to Mr. Oganes.  And again, thank you so much, sir, for joining us today. 

MR OGANES:  Thank you, Daphne, and good morning or good afternoon, everyone.  Very happy to do this again.  I hope that in the future we can once again resume these type of interactions in person.   

So some of you may have participated in the previous call that Daphne mentioned with my colleague, Mike Hanson, who is in – part of the Global Economics team.  So I – for those that participated in the call, I will apologize first if I may repeat some of the views that he may have shared with you already about the U.S. economy.  But before we speak about emerging marketswe always do need to look at the entire global context.  And what is happening in the U.S., it carries a lot of weight. 

So in terms of bigger messages for the global environment in which shaping – sorry, emerging markets are going to be operating in 2021, well, its already obviously not new news that the pandemic was a very, very traumatic effect for the global economy, both developed and emerging market economies.  We had the deepest and fastest drop during the first half of last year.  And if you look at the statistics, you know the previous time that the global economy fell that much was actually not during the global financial crisis 10 years ago; it was during World War II.  So just to give you a sense of magnitude of a decline. 

But equally, the rebound in the third and fourth quarters last year was extremely strong.  So if you look at a chart of growth dropping – global growth dropping and then rebounding, you could say hey, this is a V-shaped recovery.  So I think that the V is probably a good way to describe that drop and then the rebound, but the reality is that that – when we do this, obviously we do it for global growth – it is taking an average of what happened across developed and emerging market economies.   

But once you start to look at individual regions or countries, you can start to see quite a bit of disparity.  So the recovery is quite uneven, and there are countries that are certainly doing much better, or countries that – where the recovery is going to take much longer.  I will show you some numbers in a few minutes, but I just want to share with you the concepts before I illustrate a lot of my remarks here. 

The policy response from central banks and governments in both developed and emerging markets were actually quite unprecedented, in line or in tandem with the unprecedented nature of this shock.  A pandemic like this had not happened in, I think, a hundred years.  I think in the early 1900s there was a previous episode of a pandemic that had global repercussions and also a huge hit to global growth.  But this is already a hundred years ago, so – or 90 years ago, whatever it was, so the documentation in terms of economic growth on all that from that episode is not as strong as what we have right now.  So it was representative in many ways.  Certainly, for all of our lifetimes, it was the first time that we saw and experienced something like this.   

What happened in terms of the policy response, what the United States central bank, the Federal Reserve did, the Fed – given that the U.S. is still – the dollar is still the reserve currency of the planet, the main one, and what happens with the Fed in a way marks the template for many of what other central banks around the world do, the Fed actions last year were absolutely key to unlock a lot of monetary policy support around the world.   

And what the Fed did, as you know, they drove the rates down to basically zero; they expanded or reignited these – considered the leasing program that it had used 10 years prior during the global financial crisis, and that they were in the process of tapering/reducing the Fed balance sheet.  Well, that started to be reserved.  They once again very aggressively starting to buy assets. 

And this time around, compared to what happened 10 years prior, where all the asset purchases were basically U.S. Treasury bonds and mortgage-backed securities, only two asset classes, the asset purchase program last year was broadened in order to include also municipal bonds, some – you had high-grade bonds, basically the higherquality bonds; but they also had some funds that included high-yield bonds.  So the support – the credit markets, fixed-income markets cut from this asset purchase program last year because of the Fed actions was actually quite powerful.  Many asset classes started to feel immediately the impact of the asset purchase program, and you started to see a massive rally; that obviously, the moment that you start to see that on the rates market, equity markets follow, and you have also seen equity markets rallying. 

Why?  Because the moment that the Fed – well, first, brings the rates down to zero and starts its asset purchase programs, what is happening in reality when you think about it in the grand scheme of things, there is a massive injection of liquidity into the system, into markets; and that liquidity, of course, it starts to relax what would – otherwise would have been extremely problematic tightening of financial positions.  By that, I mean rates going up because there is uncertainty.  By that, I mean credit markets freezing because there is so much uncertainty, banks dont want to lend, people that are panicking because they cannot sell.  If you are a company and all of a sudden you are forced to lock down – I mean shut your doors because of lockdowns and curfews and the like, and you are not selling anything, well, you decide to have second thoughts about whether you should be keeping whatever cash you have instead of paying back to the bank.  So there was an issue of debt repayment from corporates.  At the individual level, if you were uncertain about losing your job or not having – or being furloughed, well, you start to have second thoughts about whether you should be continuing to service your mortgage or to pay your credit card or you – to pay your consumer loan.   

So the fact that the Fed acted so fast, so pre-emptively, and so aggressively permitted the markets to continue to function, credit markets to continue to function, banks continue to lend.  They didnt freeze their lending.  And companies, they got either some release – some relief because of all these programs that were launched, the Payroll Protection Programs.  They were able to put employees in furlough and have basically the government pay for their salaries for a period of time.  And so the payment system was not interrupted and that felt – reserve – so that recovery happened very fast, because actually balance sheets, both of corporates and of individuals, were protected.  They had a lot of policy support.  

The example of the Fed was followed not only by other central banks in developed world, be it the ECB, the BOJ, that they were already keeping rates actually even more aggressive into negatives.  They never actually rise out to positive.  But they themselves enacted their own version of quantitative easing asset purchase programs.  But the innovation this time around was that last year we saw emerging market central banks in many cases following the Fed and doing their own asset purchase programs.  This was actually completely unprecedented in the – compared to history. 

Think about it.  In the past, anytime that there was a global shock like this – well, not like this one, because this is unprecedented – but any global shock, the typical thing would be that would generate risk aversion.  Risk aversion meant that investors started to pull their money out of emerging markets.  That meant that currencies around emerging markets will go under pressure because there were outflows out of the local markets and out of their economies, right?  And because of the currency pressures that were passed through from devaluation to inflation, central banks – they were forced to do exactly the opposite than what they did last year.   

In the past, they used to hike interest rates in the middle of very – in response to external shocks.  So they were – they didnt have the luxury of doing what the Fed had done, which is cut rates as well.  Guess what?  Last year, the response was totally different.  The fact that the Fed and so many other developed markets, central banks cut rates so aggressively and it started to heal markets or support markets with these asset purchases, it meant that it gave the green light to EM central banks to start to do their own versions of not only cutting rates but also doing quantitative easing if their circumstances allow.  So we saw, for the first time again in history, many EM central banks pursuing that strategy.   

That actually help as well, local corporates and individuals in all these economies not to have to stop the payment process of – the payment mechanism of the economy, right?  So they continue to service their corporate loans or their mortgages or your credit cards, et cetera.  Now, this is why it explains this V-shaped recovery, that at least there was a limit on the impact on balance sheets, which was a good thing. 

Fast-forward to where we are right now.  So, as I told you, the worst we can see clearly is behind.  Now, unfortunately, the worst may not necessarily be behind with the pandemic, but thats why we at some point started to see a divergence between what markets were doing – so markets were rallying, were recovering; but all of a sudden, the disconnect between what markets were doing and what we all felt in our own lives and in reality – the deaths keep piling in; hospital beds completely overwhelmed; the contagion volume from the first wave to the second wave, in some countries a third wave; lockdowns being forced upon us in many countries, north and south or east and west; and a lot of disruption to economic activity, a lot of disruption to mobility; and markets continue to rally.  So this disconnect is explained by the fact that the policy response was very strong; again, liquidity injected by central banks around the world.  That money has to go somewhere, and that eventually ends up in financial markets and generating these rallies.   

This is not a bubble, strictly speaking.  This is not irrational.  This is happening by design.  Interest rate reductions and asset purchase programs are meant to avoid tightening of financial conditions.  They are meant to keep markets running.  They are meant to generate this asset price inflation or reflation or whatever you want to call it, just to keep at least the financial side of the equation working, while the real side of the economy, of course, has to deal with the shock of having all of us working from home, people unable to travel, people unable to go to their factories or workplaces, et cetera, right?     

So this is where we are right now.  So now we have a recovery in place, and some countries are taking a lead, and some countries are going to be – or regions are going to be falling behind in this process.   

So I described, too, what happened on the monetary policy side.  On the fiscal side, meaning government, what – the part that the government controls – there was also quite a bit of action.  The U.S. Government, as you well know, during the previous administration of President Trump, there was also quite a bit of support that was approved.  Some of the measures were obviously executive control; some of the measures were enacted by Congress on a bipartisan way.  All kinds of expenditure programs, these PPP schemes that I mentioned that were, in the end, government finance, et cetera, that obviously help a lot.  As we know, as we speak now under the Biden administration, theres another package that is being debated that may end up being – going through the budget reconciliation process and being approved. 

All that is going to constitute fiscal support for the economy that, combined with the monetary policy support that is not being removed, is going to be extremely powerful in generating a big increase, a big acceleration of growth in the United States.  And the U.S. economy is still the largest in the planet, and together with China, that Ill speak about in a minute, the fact that the two largest economies are having such policy support and growing at such a high pace, this obviously is going to trickle down and benefit the rest of the world, the rest of the global economy.  So it is important what happens in Washington.  And you guys, many of you, are obviously sitting in the U.S. and following what is happening on the U.S. policy side.  You know very well that what is happening there is going to have very important implications, ramifications for the rest of the planet. 

And this is exactly where we are right now.  Our economies – and those who attended my colleagues presentation a couple days ago may have heard that our U.S. economies upgraded their own focus for the U.S.  Ill show you some numbers in a minute.  For the second and third quarters, theyre basically penciling in the likelihood of passage of a very strong fiscal package again in the U.S that is going to be piling into the impact of the packages that were approved already during the previous administrations – administration and generating quite a bit of fiscal policy support in addition to monetary policy easing.   

So that is a – well, so this is what is happening in the U.S.  What is happening in China – and let me skip Europe – Ill (inaudible) afterwards.   

In China – China was first in, first out in the pandemic, right?  So this was the economy that was affected first, and the – in the second quarter, already China was emerging from the (inaudible) to the first quarter, and China was one of the few countries, if not the only one, that actually displayed actual positive growth in 2020.  So their recovery fast – happened fast enough to reverse the hitch to the first quarter, and the cumulative growth in the – for the full year ended up being positive, in the 2 – 2.3 percent of GDP for 2020 altogether.   

Most countries obviously ended up in the red last year, had negative growth.  And so from that perspective, China and the countries that are linked to China because they have very strong economic links, trade links, the technology link, et cetera, thats for the most part Northern Asia, like Korea or Taiwan, they also – the numbers for growth in the case of Taiwan was 3 percent, in the case of Korea was only minus 1 percent, so very modest despite such a difficult year.  The countries that were linked to China, very – neighboring countries benefited from this very, very strong rebound. 

China this year, were expecting it to grow at a very high clip – 9.4 percent – after having grown, as I told you before, 2.3.  So this year is also China going to be providing quite a bit of policy support, although when you see it in the terms of a quarter breakdown for growth, you can see that the best is already probably happening in this first quarter.  And China – were already seeing signals that the Chinese authorities are concerned about potentially overheating of the economy, and they are starting to remove in a very gradual fashion policy support, both on the monetary and on the fiscal side.  On the credit side they use different tools compared to the U.S., so youre going to see the growth of total social financing starting to go down.  What they want to make sure is that they dont create problems down the road by putting – injecting too much credit into the economy, generating the possibility of asset bubbles and the like.  So you will see China growing – slowing down in the coming quarters.  However, we still think that for the year as a whole, again, a very strong number: 9.4 percent. 

So thats a very important support for emerging markets overall.  The rest of Asia, for obvious reasons, theyre all connected to the supply chain of China, right?  So its not only North Asia but also Southeast Asia.  But – and then theres a connection to places in Latin America or in Africa or the Middle East because of the commodities link, right?  China is still a big – one of the biggest sources of demand for commodities, and to the extent that it is growing close to 10 percent this year, has been good news for commodities.   

And commodities, as you know – commodity prices have been going up.  There is more commodities demand, and this is helping the terms of trade of many countries around the world that are exporting commodities, which is, for those that are exporting commodities, good news.  Obviously, for those that are importing commodities – importing oil, importing energy – that is bad news because the prices will probably go up.  Ill mention something about inflation and commodity prices more in a couple minutes. 

So to complete the external environment, then Europe is kind of somewhere in between.  The growth of Europe was also affected last year.  Its also recovering this year.  But in Europe, we have as we speak – in the first couple months of the year – once again a very strong second wave that forced many countries to shut down again.  I mean, Im basically in lockdown – right this minute Im actually connecting from South America, from Peru, from my own country for personal reasons, but in London – I mean, its in a tough lockdown.  Maybe not as tough as the first one last year, but everythings closed other than coffeeshops and supermarkets, and so youre going to have first quarter growth numbers across the board in Europe probably being very weak, negative in many places.  The expectation, however, is that as lockdowns start to get lifted and there is obviously some progress made in the distribution of vaccines, you will have second and third quarters in Europe as well being strong.   

So the issue of vaccines is an important one to monitor, and were trying to incorporate – have some kind of projection as to when vaccines could generate what we call herd immunity, right?  And by herd immunity – I mean, depending on who you ask, they may have a different number to provide.  Some people say herd immunity is only reached by when 80 percent of the population either is vaccinated or already have had COVID, right, in which case contagions really go down and the risk to being out there or the risk to economic activity or the risk of getting on a plane or the risk of going to a restaurant diminishes dramatically in terms of getting hit by the pandemic. 

Were certainly not there on the pace of administration of vaccines, distribution of vaccines, and the willingness of populations to take it varies.  Every country is a different story.  The U.S. and – is proceeding.  The UK is actually topping the charts, I think, in Europe in terms of distribution of vaccines.  I keep checking when its going to be my turn, given my age, and Im hoping that I will get it in maybe April or May.  But – and so theres – obviously a place like Israel is far ahead, but the reality is that this is – were still far from this herd immunity situation.  So the administration of vaccines, at least this year, even though it may improve our ability to have some return to normalcy, improve our ability to move around, and improve the – eliminate the need for more lockdowns, theres still going to be probably leftover disruptions to our lives, to our – to economic activity that will probably still constrain a full recovery of back – going back to pre-pandemic levels.  So thats why the recovery is going to have different speeds. 

Theres a chunk of emerging market economies where we are not expecting to reach even 60 percent of vaccination population – of the population being vaccinated this year.  Thats going to happen sometime in the first or second quarter of next year.  In some countries, it may happen in the third quarter in 2022.  So again, this is not going to be a normal world yet, and the reality is that until the whole world has some degree of high level of vaccinations, crossing borders is going to be – still going to be problematic, right?  Theres going to be some controls.  People are going to be mindful that until we all get us to a degree of vaccination to reach some degree of herd immunity, the reopening of borders is going to be a process that probably is going to be very gradual, which means that economic activity consequently across the world – particularly in emerging markets, where the vaccines are going to be probably a lot more delayed than in the developed world – thats going to be something to keep monitoring and watching. 

So let me show you some numbers to – illustrating numbers – a lot of the things that I have mentioned, and Ill open this call for questions.  Allow me to share a couple of my screens.  So Im hoping that you can see these numbers.  So the first three columns are real GDP growth, 2020, 2021, 2022.  And in this page is U.S., Canada, Latin America, and then Asia.  Ill show you the next slide is going to be EMEA – Europe, Middle East, Africa – and the averages.   

But the point to highlight here is look at the numbers for the U.S., and then you have the numbers for four, right?  So you have already – starting in the second quarter of last year, you see the dramatic drop in U.S. growth, 31.4 percent.  This is quarter on quarter annualized.  The third quarter, recovering; fourth quarter, continuing the recovery, although the much more modest pace, 4 percent.  And then you start to have some more normalization of growth, right?  Big decline, big jump, and then you start to go something a little bit more closer to the averages that we would handle in normal times.   

So – but you can see there that in this first quarter of the year of 2021, for the U.S. were expecting 5 percent growth, and look at the big jump in the second quarter: 9.5 percent.  Look at the big jump in the third quarter: 8.3 percent.  Again, these are quarter on quarter sequential growth annualized, which means that a lot of the fiscal package that is about to be approved in Washington, we are expecting it to have this kind of impact in U.S. growth in the subsequent quarters.  Full year growth in the U.S. is going to – is expected to be 6.2 percent.  And remember that potential growth in the U.S. in normal times, the speed – the cruising speed of U.S. growth is probably somewhere between 1.5 and 2 percent per annum.  So for the U.S. to be growing 6.2 percent, my God, this is a big number.  This is three times the pace of the cruising speed of the U.S. economy, so you can see that fiscal and monetary policy support combined are extremely powerful in delivering these type of growth numbers for the U.S.  

Let me then start to – you can see there the numbers for China, further in the middle of that table.  Last year China, Ive already told you, 2.3 percent positive.  That was remarkable given that this was the pandemic year, but again, China was first in, first out, and we managed to see these numbers.  9.4 percent is the growth number for this year, is going to be moderated into 5.6 percent.  This is more of a – lets say a normalization of the growth pace.  If you look at the profile for – quarterly profile, Chinas growth, you had in the second quarter dramatic rebound, right, 54.7 going – normalizing to 7.1.  Fourth quarter, still some residual strong growth, 14.9.  Again, this is sequential quarterly growth.  But you have normalization in 2021 – 6 percent, 4.5, 5.5, declining.   

However, because we closed last year with such strong number in China – the fourth quarter was 14.9 – there is this statistical element that we call the carryover effect.  So even if China were to grow zero every quarter in 2021, the fullyear number 2021 would still be a positive one because of this strong carryover.  So even though you see quarterly numbers of 6, 4.5, 5.5, that full year number is 9.4 percent because of the statistical carryover from the previous year.  Basically, a lot of growth momentum going between last year and this year in the case of China.  This is what explains the strong behavior of commodities of late: oil, copper, et cetera.   

Let me share the rest of the world.  So you have there for Europe.  I already told you last year, a horrible year in Europe, right, 6.8 percent decline.  This is the euro area.  You look at emerging EuropeEMEA – so this is EMEA EM.  This means Eastern Europe, Middle East, North Africa – all of Africa.  Negative growth last year, 2.7 percent.  This year, a big rebound everywhere, right?  In the euro area 5.7 percent.  You have the UK at 5.6.  In the case of EMEA EM, so emerging Europe, Middle East, Africa, 4.2 percent positive.  And then some normalization towards – in the – in the subsequent years.  

If you look at the global numbers in the bottom, they are – perhaps are the more interesting ones.  So developed markets, horrible year last year, 5 percent decline.  This year, 5.6 percent increase.  Emerging markets at this stage, because China is so big and China did something, right, actually grew positively last year.  We like to look at – when we talk about emerging markets, we exclude China just because China distorts the picture, makes EM average look a lot better than what it really is.  And you can see it there, right?  When we exclude China, emerging market economies overall declined 4.4 percent.  They are going to be rebounding 6.1 percent this year, 4.2 percent next year, and the numbers – they show some momentum.  

Now, the one thing to mention is that our U.S. economists just upgraded the growth numbers that I just mentioned to you before to 9.5 percent in the second quarter, 8.3 in the third quarter.  These numbers are still not fully being reflected in our emerging market projections.  So the numbers that Im telling you right now for emerging market ex China of 6.1 percent, chances are that in the coming weeks our various EM economists are going to be upgrading their own growth projections.  So that number may end up being, sake of argument, half a point higher, so we may have EM ex China, something close to 6.6 percent.  And maybe for emerging markets overall, including China, something close to 8 percent, which obviously is a good number, is good news. So again, what is happening in the U.S. matters a lot for the rest of the world.  

So just to complement these figures, one other – so what does this all mean for emerging markets?  So I discussed all the economics parts, right?  The market side, as I told you before, because of so strong policies on – the strong policy support, emerging market assets rally, right?  Currencies drop initially, then they rally.  Bond yields go – went up initially, then they rallied, yields went down.  Emerging market, sovereign debt spreads, they went up initially, then they tightened back down.  So the total return in 2020, despite a horrible pandemic, was basically positive across the board, which is remarkable in itself after how much damage had been done to the global economy.  So talk again about the power of what central banks do in terms of propping up markets, right? 

So for this year, the picture is still a positive one because at the end of the day growth is going to be very supportive.  I already showed you all these numbers.  The problem is that, okay, a lot of the rally has already happened, so you could say that emerging market valuations in some places could be already what we call rich, on the rich side, starting to feel expensive.  We have seen massive inflows from investors in U.S., Europe, Japan going to emerging markets, so a lot of investors already positioning – well positioned in emerging market assets, and begs the question whether – what we call the technical position, maybe its a little bit heavy because people are already exposed and invested in these markets.  

And the one thing that we need to watch is what happens with interest rates, right?  So the Fed is telling us, every time they have an opportunity to speak to markets or be interviewed or speak at forums or conferences or in Congress, that they are nowhere near starting to remove policy support, right?  Theyre going to – they are nowhere near tapering, meaning stopping or starting to unwind their asset purchase program.  They are nowhere near hiking interest rates.  So its like, guys, cool down, we are – we want to heal – the economy to really heal.  We are actually willing to tolerate inflation whenever that happens.   

The inflation target of the Fed, as you know, is 2 percent.  It used to be our yearly target.  Now they came up with something that is called the average target, which means that they are able and willing to tolerate inflation going above 2 percent for some period of time, a year, two years, we dont know.  Because what they care about is average inflation, and inflation, as you know, in the U.S. has been well below 2 percent for some time now, particularly because of the pandemic.  Last year, CPI in the U.S. was 0.4 percent.  This year were expecting 1.2 – sorry, it closed last year at 1.2, but in the previous – in the middle of the year it was 0.4 percent.  So there is ample room to tolerate higher than 2 percent inflation in the U.S. without the Fed coming and pushing the brakes on monetary stimulus, right?   

So – but the market obviously moves much faster, and the market is right now looking at these growth numbers, 9.5 percent, 8.3 percent.  How is this going to be financed?  Obviously, part of it is going to be financed by Treasury bonds, right?  So there is going to be quite a bit of issuance of Treasury debt by the U.S. Government, by the Treasury, that the market needs to absorb.  And when you see growth, I told you already the cruising speed of the U.S. economy is 2 – 1.5 to 2 percent, and growth in the U.S. this year is going to be 6.2 percent, much higher than the speed limit, right?  So – which means that there could be inflation pressures down the road, right?  I mean, were all – we cannot wait the moment that lockdowns are lifted to go out and shop and buy whatever, right?  New clothes, travel, we spend – use transportation – get on planes, et cetera, et cetera, et cetera.  So there are so many areas in which prices have been kept low because were all stuck at home the moment that – there’s a lot of pent-up demand.  There is a lot of constrained consumption that is probably going to be very strong when all these lockdowns – were all – we all get vaccinated and we all start to plan our next vacation, et cetera. 

So I think that inflation is something to watch.  Our own projection for U.S. inflation for the last quarter of this year is 2.5 percent.  We actually think that in the third quarter of this year, inflation could reach 3.3 percent.  So these are numbers already above 2 percent, right?  So these are numbers that most likely is going to make markets uncomfortable because theres going to be the feeling that, hey, with the recovery so strong, inflation is starting already to rear its head.  Its already above the 2 percent average, right?  Whether it is possible that the Fed one of these days surprises us with an announcement that, hey, the situation already has healed, we need to start normalizing monetary policy, we need to start tapering. 

So the mere fear that that could happen in the second half of this year, the moment that you start to see these inflation numbers, its already pushing yields in Treasury bonds higher, right?  And its already forced our own Treasury analyst to increase their Treasury forecast.  I believe that right now, they have for year-end around – I think its 1.65, so still below 2 percent for the 10-year yield.  We started the year, I think, at 1.2, then the average 1.4, now theyre up 2.6, 2.65, right?  So you can see that expectations are already moving the direction of higher yields. 

So the question for emerging markets is:  Okay, on the one hand, there is going to be growth, which is good.  Growth is always the backbone for asset price inflation, meaning that at least you would know that you are buying an asset, the asset is going up in price, because the underlying growth dynamics is a positive one, which is good news.  The problem is that if youre financing that, if the person making that investment is a developed market investor, right – if you are sitting in the U.S., in Europe and Japan, and (inaudible) interest rates and your economies start to go up, then you can generate a return, a positive return, additional return in your own country without having to venture into the outside world, without having to go and invest in emerging markets and have to – the hassle of monitoring whatever happens in these countries politics and economics and shops and you-name-it. 

So you start to pull money out of emerging markets and bring it home.  Why?  Because you have more higher yielding opportunities at home; why bother going to emerging markets?  So usually, when interest rates go up in the developed world, you start to see a retrenchment of capital from EM because the investors dont need to venture into EM as much.  They can generate yields in their own home country.   

So whether this is going to be something that it starts to accelerate this year or in the coming years is anyones guess, but Im just giving it to you as something to watch.  So the market could be doing its own tapering even though the Fed doesnt change its tune and the Fed doesnt do anything, basically.  The market could do a tapering for the Fed if yields continue to go higher and people start to pull out their money from emerging markets.  So I think that for EM and (inaudible) as an economist and a strategy for emerging markets, that the one thing that were watching very closely is what is happening to U.S. Treasury yields as the key indicator for what may happen in our own markets, right? 

So far, the move, I think, is mild enough.  So, I mean, we get to 1.6, 1.7 by year end.  That, I think, is not the end of the world.  It matters the reason for the increasing yields.  If their increasing yields is mostly a reflection of inflation expectations going higher, that is not so, lets say, negative/impactful on you – on emerging market bonds, or equities for that matter, or for capital flows in general.   

What is problematic is if U.S. Treasury yields go up because of expectations of a policy change by the Fed, meaning that if you break down the increasing yields between a nominal and a real rate, the nominal being inflation expectations, right – and the real mean – component – the real rate means expectations of changing what the Fed will do, that is now problematic.  So if the Fed somehow signals that theyre about to start thinking about tightening policy, meaning removing policy stimulus, that is when you may start to see more pressure on emerging market assets, rates going higher, central banks and EM being maybe forced to hike interest rates themselves, currencies in emerging markets starting to weaken because capital outflow starts to put pressure on local currencies, et cetera.  So were not there yet, but this is a risk to watch that I wanted to highlight among the things that were watching. 

Let me stop here.  I talk a lot.  And Daphne, if you want to moderate, Ill try to take questions.  Thank you. 

MODERATOR:  Thank you so much for that fulsome outlook.  We really appreciate your remarks.  We do have some questions that have come in, several in the chat room.  The first question comes in from Manik Mehta.  He is a syndicated journalist in Southeast Asia.   

His question – bear with me, but theres a few in the chat room.  Ive lost it.  He is – here you go:   

“Given the high spending and, in effect, high borrowings, how do you see the growth prospects for 2021?  Also, China is bracing to intensify its exports to the U.S.  However, Chinas exports to the U.S. are impeded by tariffs, particularly on steel and aluminum.  Products made from such metals are subject to tariffs imposed by the Trump administration.  Are tariffs the right mechanism to check imports?  Your comment, sir?  Thank you.” 

MR OGANES:  Well, thanks for the question.  So I think that I already responded at least the first part.  Were expecting, because of this policy stimulus, very strong growth in the U.S.  So theres no denying.  Again, we just over the past week increased our forecast by over a point, point and a half on average for the full year, and were expecting second quarter, third quarter growth to be 9.5, 8.3 percent, quarter on quarter, for the U.S.  And what I – again, I keep going back to potential growth.  The speed limit for U.S. growth before generating inflation pressures is very high, right?  So thats why markets, I think, are going to be a little bit nervous about the impact on inflation expectations and the impact on interest rates.  So thats something to watch. 

But from the pure growth point of view, this is a positive, obviously, for the U.S. economy that is going to generate a declining unemployment much faster, and this is going to generate repercussions for the rest of the world to the extent that the U.S. economy is still the largest on the planet, and a lot of countries around the world export to the U.S. 

The second part of the question related to tariffs and related to the fact that there are restrictions in place for – on trade, it is true that – I mean, part of the things that we spent so much time over the past couple of years under the previous administration, the readiness to use tariffs as a tool for geopolitics/trying to address a lot of domestic pressures, be it on the agricultural sector or on the – trying to revive domestic metal industries, et cetera, we always saw it as an unfortunate policy choice, just because in the end there was a lot of misinformation around the impact of these policies, right?   

I mean, we always see – again, being an emerging market practitioner, we think that emerging market economies, the one thing that drives growth in EM is global trade.  I mean, the best hope of emerging market economies to grow faster and to converge to the developed world is to be able to sell something to the developed market economies, right?  So the moment that you start to see tariffs distorting global trade, reducing globalization trends – well, you can expect lower EM growth as well. 

So if you put in a chart global growth – sorry, global trade volumes, right, how much is exported, imported across the world and emerging market growth, it is two lines that move in parallel, right?  So the correlation between EM growth and global trade is very strong.  And the fact that there were so many – I mean, trade frictions, and this is not only U.S.-China.  You had, as you know, the renegotiation of NAFTA going into USMCA between U.S., Mexico, and Canada.  You had the UK pulling out of the EU with Brexit and now trying to redefine their trade relationship, a lot of distortions there.  You had the renegotiation of U.S.-Korea, U.S.-Japan.   

So trade ended up being as a easy target for politicians and governments around the world.  Thata reality.  And that had a toll on global trade volumes and on EM growth as a result.  This is all before the pandemic, right.  So the pandemic, if anything, intensified a lot of these negative trends.   

So under the Biden administration, our expectation is that youre not going to see a reversal of these tariffs, at least at the outset.  Probably theres going to be – our expectation is that tariffs are not going to be used as the number-one tool in foreign policy, which in itself is good news, right?  So were not going to be concerned about new items being all of a sudden getting slapped with tariffs, on – which was our key issue to monitor in the previous couple of years.  So the – I think that the issues between U.S. and China are probably going to move from trade to discussions about other issues that the Biden administration has already raised, related to – obviously to intellectual property protection, human rights, and more of a level playing field for U.S. companies, access into China and vice versa, right? 

So I think that at least we are expecting a bit more of normalization in global trade from that perspective, not expecting tariffs to be used as a tool.  But we are at this stage at least not expecting a reversal or reduction in tariffs that were already imposed.  They would probably be used as a bargaining chip in any further negotiations.  Were all hoping for a more engaged planet.  Were all hoping for a return for U.S. leadership, and that may imply down the road hopefully a reduction in these tariffs, but that, of course, will be part of a – of more of an engagement and global dialogue, as opposed to unilateral reductions.  So I guess were all going to be in a waiting – waiting to see what happens on that front.   

MODERATOR:  Thank you so much.  The next question goes to Ms. Li.  Please introduce yourself and your outlet. 

QUESTION:  Cool.  Thank you, Luis, for your kind insights.  This is Ailin Li from China Business Network.  I actually have one question on China.  China has implemented the dual circulation strategy, which means we rely on the domestic cycle of production, distribution, and consumption, supported by innovation and upgrades in the economy to accommodate weak external demand and the world growth.  Whats your takeaway from this new approach?  Where can foreign investors find opportunity under this new mechanism?  Thank you. 

MR OGANES:  So I think that China has already been trying to migrate to a different balance between its sources of growth.  So the initial phase of Chinas economic transformation over the last two decades were based on becoming the manufacturing sector of the planet.  And so whatever you produce, we can produce it cheaper, and hopefully better in China, so why dont you let us do it, and well sell it to you, right?  That was a little bit of the economic model.  And it worked, right?  And labor was much cheaper a decade or two ago in China, and, of course, the size of the economy, the scale that they could produce at, they ended up producing a lot of the things that we all consume on a daily basis, from basic goods to more sophisticated products. 

But, of course, when China started to grow more and more and more, the labor force started to become more sophisticated.  There were less people willing to do the cheap jobs – thats the reality of it – and salaries started to go higher.  So from a global point of view, China was no longer the cheap manufacturing center of the planet that it used to be, and China understood it as such.  So there was a need to start migrating from a growth model that was based on exports – okay, lets produce cheaply and sell to the rest of the world – to a growth model where, like the U.S., like most developed market economies, a lot of the growth comes from domestic consumption, not so much from exporting to the rest of the world, right?  If you look at consumption as a share of GDP, in China I believe it is still less than 50 percent of GDP.  In the U.S., it is 80 percent of GDP, right?  When you look at exports as a share of GDP in – or investment as a share of GDP in China, it used to be close to 50 percent, and now its going down. 

So I think China is trying to rebalance its growth, and partly is – obviously, aging population is driving part of this decision.  Remember that until recently, there was this one-child policy that is – that has accelerated the aging of population.  So China, I think the authorities knew that they could not keep this economic model based on just producing cheaply for the rest of the planet.  It had to be based more on generating a domestic consumer base that you produce and you are able to sell locally.  Just because the wage levels, income levels of the Chinese – so Chinese are a lot wealthier, right?  I mean – and you have even statistics that extreme poverty has already been eradicated in China, and that the average income levels, per capita GDP, is much higher. 

So as a consequence for the rest of the planet, we should not expect – and this is what I always tell people in – I mean, Im from – Im Peruvian.  Im Latin America.  Latin America, in the 1990s or in the 2000s, we all got used to have a very strong China buying all of our commodities, and we – our economic model was we produce commodities and sell them to China, right?  They will always buy, and we were able to get good prices, and thats how we lived.   

And its like, guys, Chinas changing, so we cannot expect China to always be the ultimate source of the month for commodities.  Why?  Because their own economic model is shifting towards consumption, so they will not be necessarily buying the same amount of commodities to manufacture there and keep buying from us, so we need to, if anything, try to not only sell commodities but also sell finished consumer goods to the Chinese, because that is going to be the next growth model for other countries, right?  What can I produce cheaply to sell to the Chinese, right?   

And you’re seeing many examples of this, right?  So the Chinese are obviously now becoming a lot more of a sophisticated consumer.  And I hear when I go to Brazil and I speak to the brewers, they tell me that they cannot keep up with demand for the most topline beer, right?  I mean, same thing with wineries, and same thing as with a number of consumer products. 

So I think that this is something that for the – I think its helping for the Chinese economy to have this model, this rotation, because what was happening before, and you guys know that very well, is that relying so much on investment and exports to grow, the worry was that a lot of that was financed by credit.  So you have total debt in China, total social finance in the ratio of GDP extremely high, right?  That number needs to go down, because then the risk of defaults is high, the risk of credit event is high, so that’s why there was a need to change the growth model. 

The second is that you started to build a lot of bridges to nowhere, right?  I mean, beautiful airports in the middle of nowhere that chances are would never be used or not used enough.  So there was a lot of probably overinvestment in China in many places.  Yes, it was a good way to keep people employed, it was a good way to grow, but it was an inefficient investment at the end. 

So I think that is a healthy transition.  Obviously, there are consequences, right?  First of all, China is – we should not expect China to go to – to grow again at 10, 12 percent.  And so the – I think that the medium to longterm growth rate of China, something that is more sustainable, is probably something between 4 and 6 percent, as opposed to 8 to 12 percent, right?  That is the consequence of a more balanced growth. 

But I think that – I mean, in my opinion, this is a healthy development.  Of course, going from here to there is a bit painful.  Its painful domestically for the Chinese and its painful for the countries that are used, like Latin America, to sell commodities to China, right?  Everyone is going to need to adjust. 

QUESTION:  Thank you.  I appreciate your perspective. 

MR OGANES:  Thank you.   

MODERATOR:  Thank you so much.  The next question goes to Ozzy.  Ozzy, if you want to enable your video and ask your question, please go ahead. 

QUESTION:  Hi.  Can you hear me? 

MODERATOR:  Yes, we can. 


QUESTION:  Hi, Im Ozzy Yin from the Central News Agency from Taiwan.  My question is Taiwan-centric.  For the past year, Taiwanese economy grew along with surging exports and its stocks, and the currency outperformed many other countries, probably because its relative successful efforts of containing the coronavirus.  Do you think that this market and economic trend will continue this year?  Thanks. 

MR OGANES:  So for the case of Taiwan, together with China you have 3 percent growth for Taiwan going to 5.9 for this year.  That position in the next year normalizes back down to 3.5 percent.  So Taiwan is clearly featured in the North Asia dynamic of being the countries not only that entered the pandemic and exited sooner, but also were the most effective in containing it.   

So if you look back at what happened in growth in Taiwan last year, last year we had the second quarter being 2.8 percent only the decline, already rebounding to almost 17 percent in the third quarter, going to 7.8 percent in the fourth quarter, already, of course, normalizing and moderating. 

But, so for – when people ask me every time – obviously, everyone is curious to say which country handled the pandemic better, right?  And now, every country is different.  The economic systems are different, the political systems are different, right?  So what is being used as a strategy to contain the pandemic in some countries would certainly not work because of a different institutional setup and political data setup in other countries.  But in the particular case of Taiwan, it is one of the countries that is singled out as being – having been one of the most successful in generating this rebound, right?  So Taiwan, together with Korea, they’re fully aligned with the North Asia dynamics of mainland China and Korea and Hong Kong in terms of having that reversal.   

For this reason, by the way, we’re expecting emerging Asia as a whole to be the leader of this recovery.  So when you see which region is going to be the first one in fully going back to pre-pandemic growth trends, emerging Asia is at the forefront, and a lot of that is because of North Asia.   

The region that unfortunately is going to be the laggard in terms of recovery back to pre-pandemic levels is Latin America, and there’s a big (inaudible) on this year already, but by the end of 2021, we’re still not going to be back to where we were pre-pandemic, meaning January of 2020.  We’re going to need to wait until 2022, so you can get the sense already of the divergence of recovery paces. 

MODERATOR:  Thank you so much.  So the next question goes to Dorothea Hahn.  Dorothea, please, go ahead. 

QUESTION:  Hello, and thank you for doing this.  I have a question about the eurozone.  I work for German daily Tageszeitung/TAZ.  You described the big differences in growth negative for last year and positive for this year in the different countries of the eurozone.  I would like to know what that means for the future of those countries – I’m speaking about Germany, Italy, France, Spain – and about the possibilities of the eurozone in the future.  Thank you. 

MR OGANES:  Well, thanks for your question.  So the – I think that there were some actually very important things that happened in the eurozone before the pandemic or during the pandemic, which is – I think that what was good for us to watch as external observers looking at what was happening in Europe in terms of more of a unified policy response, it was – the views were not as divergent or as uncoordinated as they used – as they were during the banking crisis whatever – however many years it was ago – five or six years later, right, where there was a lot of different postures. 

I think that the willingness to have a more common framework, something that was agreed upon within the EU, obviously with what was – what the ECB was doing, I think that it was important during the pandemic in terms of helping, making sure that countries would get the support that they needed.  They would get the fiscal latitude that was needed to fend off the impact of the pandemic without necessarily calling into question the institution – the institutions or the institutional sustainability of everything.   

So the – remember during the banking crisis, that was – so much time was spent about some countries not willing to help others within the bloc in a rather, I guess, myopic stance that we’re in it together and if countries start to fail or hit walls or get into a crisis, a debt crisis or a financial crisis, banking crisis, it starts to spread around quite fast.  I think that the – that image of the policy response last year to the pandemic was one more of articulation, so I think that it did not bring back the specter of the eurozone all of a sudden collapsing, or the euro as a currency all of a sudden not having a medium or long-term viability.  That conversation didn’t come up last year, which I think is a good thing. 

Now, in terms of the future, I mean, I think that there is a learning by doing process, right?  Right now, for example, there is quite a bit of bad luck because of the delay in the administration of vaccines because in the end, this was – there was a process agreed upon to do this jointly and to rely on Brussels to do the negotiations and the purchasing and the distribution, and we’re seeing a much faster pace of this happening in the UK or happening in the U.S., and that’s once again generating questions about the – how quick institutions in Europe can react to the challenges at hand. 

I think that that’s probably – this is a question or – these kind of things are going to continue to happen, but what I can tell you is, from at least the perspective of the discussions (inaudible) we have in our research team, is that the survival of the eurozone as a bloc, the survival of a currency as a single currency is not being called into question right now.  And given the magnitude of the shock, I think it is a good thing that Europe is basically showing that it can act as a bloc and contain the help within the bloc, the impact of a shock like the one that we have experienced over the past year. 

QUESTION:  Thank you.  

MODERATOR:  So we’ll go for – we’ll have one more question, and that last question will go to Sandra Muller.   


QUESTION:  Can you hear me?  I turned off the video. 

MODERATOR:  Yes, you can — 


MODERATOR:  — (inaudible) enable your video. 

QUESTION:  Okay.  Hello.  So I’m a French journalist from La lettre de l’audiovisuel.  I have two specific questions for you following the question of my – of Germany.  I just see that there is really good data of France I see according to your data – sorry for the video – that France (inaudible) 7.4 of GDP.  I saw that Germany is 4.5.  So 4 – 7.4 is better than USA.  I’m really shocked, right, it’s – because USA, like you said before, it’s 6.2.  Can you explain this data?  Can you explain why France has such a good result and (inaudible) price? 

And my second question, if you can real quickly – I’m so sorry for that – I just noticed too that India is 13.6 – 13.6, so I’m trying to get (inaudible) positive and reach out the good points.  So can you just tell me why France is better, like, in Europe than Germany or some other country, and why India has like the result really amazing 13 percent – 13.6, sorry?  Thanks.   

MR OGANES:  Okay.  No – well, no, thanks for your question.  No, unfortunately, my expertise – I’m in charge of the emerging markets, so I don’t focus – I don’t do the projections nor supervise the work that is done for the euro area, and so a lot of the discussions that we have on a weekly basis, I take whatever numbers they provide the economists directly.  So Im not in a position to tell you the nuances as to why France, the projection (inaudible) for this year is higher than for Germany or for Italy, or Spain for that matter, which are the larger economies for the euro area.   

The one thing that I would say, though, in terms of a general concept, is that a lot of these differences are – you have not had a uniform pace of introduction of lockdowns and – so the same standard was not applied across Europe.  So in some economies, there was economic activity still allowed to continue despite sending people – a lot of people home, but – so the exceptions to the lockdowns were quite varied, and that generated as well quite a bit of dispersion.  So you have – the more strict regimes matter.  The timing of lockdowns and/or lifting of lockdowns also matter, because again, the numbers that we saw there are the result of statistics, right? 

So, for example, lets pick on France.  I will put my screen sharing for Europe there.  So you can see the decline in the second quarter.  So unfortunately, you dont see the titles there, but these horrible numbers, which is the fourth column there, the horrible numbers that correspond to the second quarter of last year, right?  France had 24 – 44.4 percent decline, very similar to Italy, 42.3.  But it was actually worse than in Germany.  Germany only declined 33.5 – “only,” quote, un-quote.  And better than Spain; Spain was worse, 54.5.   

But the fact that you had that kind of divergence among countries within the euro zone, it meant that the numbers afterwards, they have a huge component of disparity because if you decline a lot, chances are that your rebound is going to be stronger in the subsequent quarters, because there is a statistical element.  So if you drop a lot, your rebound measured in a – measured over a lower base ends up being magnified.  

So you can see there that France had a 97 percent increase in the third quarter of last year, so partly a reflection of having dropped quite a bit on the previous one.  And you had Spain increasing 83 percent.  So again, this divergence has to do with the nature of the lockdowns, which – which every country has its own sector that are important.  So in the case of Germany, for example, the auto sector is very important, and I think that there was a – they were allowed to still operate with safety measures and not fully shut themselves down for a long period of time, et cetera.  So again, depending on the key sectors of an economy, depending on how aggressive lockdowns were, depending on when they started and when they finished, that affects this disparity.   

So Im not in a position to explain exactly the numbers for you going forward, but it almost feels – I would tell you that trying to get into the gist of this, explaining these numbers bit by bit, it almost ends up being a bit of a futile exercise, because there are so many moving parts that explains these numbers, that – and theres some precedent in nature that – thats why we end up taking just the average, right?  So we say, okay, euro area, 5.7 percent this year, this is a rebound compared to last years 6.8 percent decline.  So obviously there are winners and losers, or not even – I mean, everyone was a loser in the end, but had countries that did better than others.  But again, the divergence is very (inaudible).  You have to almost, like, get down to a sector level – this sector is important to this economy, it did not shut down, and this is what explains a better outcome than in the economy next door. 

QUESTION:  Okay, thanks. 

MR OGANES:  Sorry, and you ask about India.  India – well, it has a very dramatic rebound.  So the policy response in India was quite strong for its own standards.  So interest rates were dropped very close to zero in real terms.  And what India started to do is to – one part of the policy response is to generate quite a bit of what we call regulatory forbearance, meaning that banks didnt have to – the criteria to declare bank loans in default was relaxed so that credit tightening didnt happen, credit standards were not – banks were not forced to rein in credit.  And you still have – all the banking system, I believe, in India, is state owned or state controlled.  So they were able to still keep growth – credit growth going.  So the policy response was quite aggressive in India.   

There are other things that, to be honest, Im not in a position to explain, that – there seems to be – now the – this is a country where we were very concerned given the size of the population, the fact that in the initial phase of the pandemic, people were forced, because they lost their jobs or they couldnt stay where they were, going back to their own home cities or towns and spreading the virus from the cities to their own local jurisdictions.  So we were thinking about something really nasty in terms of the impact of the pandemic in such a populous country like India, but in the end, (inaudible) recently are a lot more promising, and that obviously is relaxing the impact on mobility and on growth.  

So the projection that we have for growth in India this year is very strong.  It is actually reversing the decline – more than reversing the decline that we have seen last year, but again, this is a – a lot of this is statistics, statistical rebound given the degree of decline that we saw in the very initial phase of the pandemic. 

QUESTION:  Thank you. 

MODERATOR:  Well, I think that weve taken a lot of your time, Mr. Oganes.  Youve been very generous with your afternoon.  I want to thank you so very much for participating in this years Wall Street Series.  We learned so much, and I know that participating journalists appreciate your time.   

And I want to encourage everyone to check their inboxes in the next few days.  We will be having briefings next week on March 3rd with Citi, and the following week on March 9th with BlackRock.  Todays briefing was on the record.  We will share the transcript as soon as its available.  And once again, I want to thank you, Mr. Oganes, for participating.  It was good to see you and have – everyone, have a good afternoon.   

MR OGANES:  Thank you very much.  Stay safe, everyone.  Bye. 

MODERATOR:  Thank you. 

U.S. Department of State

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