Understanding uncertainty key to resilience

Tuesday, Dec 04, 2018 08:35

Vo Tri Thanh

The world economy is forecast to witness sluggish growth in 2019, due to both the business cycle and a rise in uncertainty that poses big challenges for both the Government and businesses.

Recent changes in the global economic outlook and global oil prices have reflected such risks.

The International Monetary Fund cut its global growth forecast for the first time in more than two years in the October 2018 edition of the World Economic Outlook (WEO), blaming escalating trade tensions around the world and stresses in emerging markets.

The IMF said global economic growth was projected at 3.7 per cent for 2018-19, 0.2 percentage points lower for both years than forecast in April. It was the first downgrade since July 2016. The Fund also slashed its expectations for global trade with total goods and services flow expected to grow by 4.2 per cent this year and 4 per cent next year – down 0.6 and 0.5 percentage points, respectively, from the previous estimate.

The two economies which are in the centre of the trade spat – the United States and China – were also forecast to experience much weaker growth. The IMF maintained that the US will grow by 2.9 per cent this year but would slow to 2.5 per cent in 2019. The expectation for China’s growth this year is 6.6 per cent and 6.2 per cent in 2019.

Especially, rapid and unpredicted changes in global oil prices over the past month have caused difficulties in preparing a scenario to handle risks and uncertainty.

In the October WEO, the IMF expected oil prices would rise by more than 30 per cent to average US$69.38 a barrel in 2018 (higher than the April 2018 WEO projection of $62.3). It forecast prices of ‘black gold’ would decrease slightly to $68.78 per barrel in 2019 due to a gradual increase in supply.

However in reality, global oil prices plunged sharply in November.

Brent crude is trading below $60 per barrel while the US West Texas Intermediate (WTI) is hovering around $50. WTI has lost 34 per cent of its value from its peak on October 3 while Brent has fallen 32 per cent.

Many experts were surprised with the steep declines in oil prices despite the Organisation of Petroleum Exporting Countries (OPEC) discussing a possible cut in supply.

In August, some analysts predicted the US sanctions on Iran would soon push oil prices above $80 and even $90 per barrel due to potential supply disruptions to Iranian crude exports.

In fact, the latest oil slump comes amid escalating concerns about an increase in global supply and a slowdown in global economic growth.

The Trump administration allowing some of Iran’s biggest customers to continue buying Iran’s oil drove anticipation of a drop in demand. Meanwhile, both the US and OPEC members increased their production that has driven up supply.

The world is experiencing a collision of many problems, including the geopolitical instability in the Middle East and East Sea, as well as the intertwined but competing interests of different countries and economies.

US-Sino trade tension is expected to be front and centre. Some good news appeared across the US-China dinner table at the G20 Summit in Buenos Aires on December 1. Both sides agreed to not add additional tariffs after 1 January and reached a trade war truce. The duration, scale and intensity of the trade dispute though are still unpredictable but the dispute itself is a bad omen for growth.

The suspicion of benefits of globalisation, process of trade liberalisation and rising trade barriers have become more prominent which may generate “further disruption in trade policies” of countries all over the world.

Many countries have adjusted their trade and monetary policies after a long time combating the global financial crisis and promoting economic recovery. The Federal Reserve and other major central banks could tighten monetary conditions after a decade of easy policy.

The US central bank (Fed) pushed rates up toward more normal levels after a decade near zero. However, the need for “further gradual rate increases” among a tightening of financial conditions is taken into consideration amid concerns about global growth and an anticipated slowdown in the United States.

Uncertainty is rising. An intensification of trade tensions and the associated rise in policy uncertainty could have negative impacts on trade and investment, as well as trigger financial market volatility.

In this context, building capacity for the Government and businesses to manage uncertainty is a key factor to handle risks and to some extent take advantage of better opportunities.

For the Vietnamese Government, in addition to pursuing its integration policy, making use of free trade agreements and diversifying export markets, developing internal strength is indispensable.

The Government needs to reinforce its resilience with macro- and micro-prudential policies. Countries with stronger fiscal positions will have effective tools to cope with possible disruptions in the world economy, as well as gather enough resources to ensure social security.

Such a strong financial system will include the building of sound financial buffers, more flexible monetary policy and limiting excessive risk taking.

Viet Nam should also grasp the opportunity to speed up structural reforms and policies to catch global trends – such as technological innovation, green and sustainable development and global value chains – to raise productivity and ensure broad-based gains. This is one of the biggest challenges for an emerging market like Viet Nam.

For enterprises, they need to learn how to handle risks and manage uncertainty through the grasp of information on ongoing trends, understanding and utilising risk-prevention tools such as derivatives and insurance products.

The understanding of uncertainty to anticipate policy changes is also crucial to adjust part of or the whole business strategy and avoid policy shocks.

* Vo Tri Thanh is a senior economist at the Central Institute for Economic Management (CIEM) and a member of the National Financial and Monetary Policy Advisory Council. The holder of a doctorate in economics from the Australian National University, Thanh mainly undertakes research and provides consultation on issues related to macroeconomic policies, trade liberalisation and international economic integration. Other areas of interest include institutional reforms and financial systems.

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