ROUNDTABLE: Capital outflow in leading emerging economies: Is the worst over and what will be different in the next era of economic growth?

Moderator: Zara Amer, Head of Content, Clear Path Analysis

Panellists:

1. Mark Gull, Head of Fixed Income, Pensions Insurance Corporation

2. Gerhard Winzer, Chief Economist, Erste Asset Management

Zara Amer: Are capital outflows to ease in 2016, as concerns over slowing global and Chinese economic growth begin to calm?

Gerhard Winzer: This would be the base case. The main reason for the net capital outflows over the past few years, particularly in 2015, has been the narrowing growth differential between emerging and developed economies. For many years, this economic growth differential used to hover around 4%, but last year estimates put it at only 2%, so the growth of emerging economies was still higher than that of developed economies.

Over the past couple of years, we have seen growth disappointments in the emerging and the developed economies, but the extent of this disappointment was much higher in the former than in the latter. The main reason for this situation was China.

China is now in the process of transformation, but unfortunately this is a bumpy road, and emerging economies are affected by such a set up. Every time the transformation gets too bumpy, China switches its economic policies from neutral or restrictive to expansionary. Over the last couple of months the Chinese economic policy has turned expansionary, leading to higher credit growth.

This does not prevent growth rates from slowing, but it ensures a soft or at least less hard landing of the Chinese economy. China employs a stop-and-go policy, and currently we are in go mode, which prevents their economy from experiencing a hard landing.

This helps to stabilise commodity prices and currencies. In view of the stop-and-go policy, we expect the currently narrowing economic growth trend to stabilise. We believe that within the next couple of years the growth differential will increase slightly from currently 2-3%.

This is why we assume that we are already past the worst with regard to the earlier mentioned capital outflows.

Mark Gull: We have some concerns about the ability of the Chinese to control their economy and get everything right.

We saw earlier in the year that they sent confusing messages to the market about what was going on with their currency and rates and this created volatility in the markets.

What should happen is that China's outflows should pick up a little bit and this will help with stabilisation which is tied in with the weakening of their currency. This is the “right thing” to do, particularity if rates are pushed up a little bit, as higher rates will move more income from companies to households by rewarding savers and it is savers who are looking for the most appropriate home for their money.

The difficulty is whether they can manage this balancing act.

Another element to be concerned about is that part of the way the Chinese have driven up growth has been through increasing debt. It is hard to know what the credit quality of some debt issues is and how much there are in the way of non-performing loans; so the ability of the authorities to manage the debt position is crucial.

If they can manage it, things can stabilise; so the base case is that they muddle through and make it work, but I would highlight some of these risks, as they do require a bit of a juggling act.

To download the full round table debate, go to the Investing in Emerging Market Currencies & Debt 2016 Report.