LatinFinance - Special Edition - August 2013 - 78

economies will remain weak for foreseeable
future. central banks, including the US federal Reserve, will therefore be hard pressed
to tighten policy.
“there simply isn’t enough strength in
the underlying economy allowing central
banks to exit, but they will start adjusting
because of the costs and risks and the net
impact will be bumpiness,” he says.
markets are similarly overestimating
the capacity of developed economies,
principally the US, to return to meaningful
growth in the short to medium term, he
says. “i don’t see growth in the advanced
world taking off nor do i see it collapsing,”
he says. “People are overestimating the extent to which the undeniable healing in the
US economy will lead to higher growth. it’s
hard. We torture our models and it’s hard to
get to the 3%-3.5% GDP growth.”
“my best guess is you don’t get enough
growth to allow the central banks to disengage. Remember, they are supporting markets through three different mechanisms:
the balance sheet operations, the forward
guidance, and the negative real policy rate.”
el erian, who popularized the term “new
normal” in 2009 to describe an era of slow
economic growth, high unemployment,

mohamed el erian

“There simply isn’T
enough sTrengTh
in The underlying
economy allowing
cenTral banks To
exiT, buT They will
sTarT adjusTing and
The neT impacT will
be bumpiness”
and government debt problems in the West,
says the world economy is now entering
a period of “stable disequilibrium” – that
could end in financial turmoil, greater
social tensions and protectionist policies.
“there’s superficial stability but when
you dig there are elements of disequilibrium that makes the predictions quite hard,”
he says.
Developed and emerging economies
are approaching a crossroads “where the
current road eventually ends, giving way to
one of two contrasting outcomes” – a fast,

sustainable expansion or a slowing world
economy with countries “competing for
a smaller pie”. this includes china, the
world’s second largest economy, which
either completes its “middle-income transition and grows robustly at 4%- 5% a year,
or it fails – and then they’re going to grow
slower,” el erian says.
the next five years, while world growth
slows and the global monetary policy cycle
normalizes, will remain turbulent across
developed and emerging markets, he says.
But over the longer term, the investment
case for the emerging markets nevertheless
remains intact.
He insists that in five years’ time the term
‘emerging market’ will no longer be useful.
the traditional thesis – whereby emerging
markets were characterized by credit risk
and default risk, while developed markets
were defined by interest rate risk – has
already broken down, he says. “already in
terms of investment, we have default risk in
the advanced economies and interest rate
risk in emerging markets.
“the term was useful shorthand for a
particular historical period. But that period
has come to an end by virtue of what is happening on both sides.” LF

Mohamed El Erian: In his own words
Finding value
i’m not a buyer of the complete decoupling argument for emerging
markets. the short-term picture is bumpy – very bumpy.
But over the longer-term, there is significant growth potential in
these markets. if you’re a long-term investor, now is an opportunity.
i see four main factors supporting the investment case for emerging
markets.
first, there is still technology catch up. this becomes much more
powerful given the source of innovation that is occurring. this allows economies to leapfrog in terms of productivity.
Second, entrepreneurship, both of individuals and small and
medium-sized companies, is just beginning to take off. this is
because the enabling environment in emerging economies has
become much more accommodating.
third, emerging markets have not yet exploited their linkages
with one another. if you look at their patterns of trade, they are
still heavily historically influenced, that is, south-north. But we’re
starting to see much more south-south trade, which is a win-win for
the countries involved. i’m not talking about labor costs, i’m talking
about something much more fundamental.
fourth, for investors, these are markets that have yet to be completed. for example, there is an irony that exists in many countries

78 l atinfina nce.com - 25 Years - August 2013

where there is a stock of housing and a growing middle class – a
demand for housing and supply of housing – but the two are not
connected properly. this happens because the market lacks collateral rules, for example. So there are lots of places where investors
can complete markets, because the enabling environment is much
more accommodating.
take latin america. it’s been an amazing transformation over
the last 25 years.
for an investor today, the region is not just about external sovereign dollar-denominated debt. it’s about sovereigns and corporates; it’s about local debt and external debt; it’s about foreign
currency, it’s about completing markets; it’s about private equity;
the list goes on. investors now have a much broader set of risks and
opportunities and many more markets in which to invest.
this has come with a significant development of local financial
markets, a decline in external vulnerability and with much better
governance in many countries countries have taken control of
their destiny. it doesn’t mean that they’re not buffeted by what’s
happening outside – there are always risks that you can’t control –
but they are in much better control of the risks you can control.
— Interviewed by Taimur Ahmad

http://LATINFINANCE.COM

LatinFinance - Special Edition - August 2013

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