Magnus: Poland is not an emerging market anymore

Central European Financial Observer talks to George Magnus, a former Chief Economist and Senior Economic Adviser of UBS, London.

CE Financial Observer: I remember when The Economist started to publish an index of CEE countries – calling the transforming countries „the emerging markets”. It was in the middle of the 90ties. Which countries in your opinion are now emerging markets and which are developed ones? Is Poland still an emerging market? And what about Hungary or Estonia?

George Magnus: There has been some considerable discussion in recent months, for example in the Financial Times, as to whether the term emerging markets is now an anachronism. But I think the term is still entirely appropriate. Some countries – most in fact – will not be able to climb into the group of 35 or so countries in the OECD with income per capita between USD25,000-50,000+. In other words, rapid economic development from a low base is different from the type of economic expansion that has to happen once you reach income per capita of USD15-20,000 in current terms. On this basis, it is an anachronism that people still refer to South Korea and Taiwan as emerging markets, and I think Poland has also shed the emerging market nomenclature.

Some other CEE countries are definitely candidates to follow suit, in as much as they sit in or close to the major market of the EU and have a track record and capacity for implementing reforms.  Indeed it is gradually becoming more difficult to lump the Baltic countries, the Czech Republic, Slovakia and Slovenia with other more obviously emerging countries in south-eastern Europe, Latin America, Asia or Africa. But for me, the term ’emerging’ has captured the idea of countries with both exciting development possibilities, and institutional limitations. CEE countries are certainly among the leading edge of countries that might potentially overcome the latter.

One of the anthems of the election campaign in Poland was letting Poles to participate in the economic growth (and maybe even an economic wonder) by raising salaries. Do you think this pressure on raising wages will make Poland less competitive and less interesting for investors?

More and more nowadays we have to recognize that the distribution of income between wages and profits, or between the top 1 per cent of the income distribution and the rest is a constraint on economic growth. Of course, rising labor costs are an issue for trade and FDI competitiveness, but it isn’t the only issue. Germany has high labor costs but is always cited as an exemplary competitor in the global system. In any event, the growth crisis in the EU is partly about salaries not having underpinned demand sufficiently. Circumstances will vary between countries, but the principle of boosting purchasing power is certainly worth considering provided it’s a part of a coherent economic strategy and not an ideological rant.

The insurance company Alliance has recently published its report on global wealth. It shows that in 2014 the assets of households grew fast. They were up 7.1 per cent compared with 2013. The average household assets were: EUR11,275 in Czech Republic, EUR11,026 in Estonia, EUR8,578 in Latvia, EUR7,774 in Croatia, EUR6,750 in Lithuania, EUR6,455 in Bulgaria, EUR6,194 in Poland, EUR5,232 in Slovakia, EUR1,037 in Ukraine and EUR862 in Serbia. Is the country with bigger assets of average household more attractive to investors?

A large HH sector with large assets certainly tells us something about market size, potential liquidity, but tells nothing about financial sophistication, depth and breadth of markets or investment attractiveness.  The numbers themselves don’t tell us how those assets are distributed, e.g. between property and financial assets, or distributed between households. Your question may seem rhetorical, i.e. the bigger the size of average HH assets, the more likely that there will be attractive investment opportunities, but this need not follow. High average HH assets in oil producing countries don’t make these nations great investment opportunities, low average asset size in a lot of emerging and developing countries doesn’t mean they are all dogs either.

Last time we talked in 2013. You were working for UBS then. I asked you which market is the best to make investments in – from the perspective of a market player. You answered: USA. Today, after almost 3 years, do you agree?

I think the U.S. market has been pretty good until August this year before the summer slide. But it came back again more recently, and for foreigners the big driver has been the U.S. dollar impact on returns.

Which market from all over the world is now most lucrative for investors?

This is a tough question because asset prices are elevated, and yet the ECB and the BoJ seem poised to carry on easing monetary policy. Global growth is being revised and lowered largely because of emerging markets and China. Earnings prospects are stressed in most places, and yet no one has a better investment alternative to equities. This is a backdrop that makes me uncomfortable. But here’s my best guess at the moment. I don’t think the world economy will go into recession this year or in 2016, but there will be plenty to keep investors on edge, watching the Fed, China, emerging markets, and unpredictable political turbulence on all continents.

Slightly facetiously, I’d say if you have enough diamonds (portable), real assets (land), and U.S. dollars (bull market intact), and you want to own more financial assets, you might consider buying more equities. Why do I say this? I’m a contrarian. We have all been hooked onto a gloomy economy, deflationary world view. On a 3-5 year perspective there’s a sporting chance this will prove to be wrong. European equities look OK to me at the moment, fingers crossed, but sooner or later look out for some EM bargains. Prices and exchange rates aren’t going to fall in perpetuity. I don’t like China because the market isn’t really a market but Asia on a 1 year perspective, once companies have shed excess inventories and some debt, looks potentially interesting.

My second question was connected to your article „Social Unrest and Economic Stress: Europe’s Angst”. You wrote that „the streets of Europe have been relatively quiet” and anticipated the unrest to be seen soon in Italy or Spain. It has happened. So I have to ask you about Greece. What is the scenario for Greece for the next 3-5 years?

To be honest I don’t think anyone knows. In January, when Syriza won who could have anticipated that the same Prime Minister would have signed up to a third bail out from the dreaded Troika several months later, let alone the events in between? Right now, the most pressing task is the recapitalization of banks before new European banking regulations take effect in 2016. But attention will switch soon enough to the conditions of the bailout, in other words the austerity and governance conditions which will be reviewed regularly by creditors. With a fair wind Greek compliance could elicit a response in the form of a debt relief without which Greek debt math doesn’t really add up.

But the politics in Greece are still very difficult, and the new government blows hot and cold when it comes to actions that encourage expectations of robust compliance. The external economic environment is not great. Against all this Tsipras was re-elected and remains for now the only viable PM. I’d say Greece’s prospects over the medium term are tied as much to effective compliance as to a steady Eurozone recovery, debt relief initiatives and the absence of new shocks. But we have to acknowledge that another Grexit crisis may still be waiting.

Interview: Katarzyna Kozłowska

Otwarta licencja