Tariff war and policy uncertainty leading to synchronized global slowdown

In its latest World Economic Outlook (October 2019), the IMF argues that the global economy is in a synchronized slowdown, thanks to rising trade barriers and increasing geopolitical tensions. It has downgraded global growth for 2019 to 3%, the slowest pace since the global financial crisis a decade ago. Specifically,

• US-China trade tension will reduce the level of global GDP by 0.8% by 2020
• Growth is affected by idiosyncratic country-specific factors in emerging market economies. Growth in Argentina, Iran, Turkey, Venezuela, Saudi Arabia, India, Russia, Brazil, Mexico, China, etc are expected to slowdown
• Growth weakened in China because of regulatory efforts needed to rein in debt and macroeconomic consequences of increased trade tensions
• Growth slowed down in India because of corporate and environmental regulatory uncertainty in addition to the concerns regarding the soundness of nonbank financial sector. 
• Growth is also affected by structural factors such as low productivity growth and aging demographics in advanced economies

So, what is causing the weak growth? 

• Sharp deterioration of manufacturing activity 
• Global trade affected by higher tariffs
• Prolonged trade policy uncertainty affecting investment and demand for capital goods

What is supporting growth?

• Services sector is keeping labor markets afloat and wage growth and consumption spending healthy in advanced economies. This may not last long due to weaknesses in the US and Euro area.
• Monetary policy is supporting growth by easing policies amidst the absence of inflationary pressures and weakening economic activity. 

What are the risks to growth?

• Heightened trade and geopolitical tensions including Brexit-related risks
• These could lead to shift in risk sentiment, financial disruptions, and a reversal of capital flows to emerging market economies 
• Low inflation is constraining monetary policy and its effectiveness

What is needed to rejuvenate growth, especially to boost confidence and reinvigorate investment, manufacturing, and trade?

• Undo the trade barriers, rein in geopolitical tensions, and reduce domestic policy uncertainty. Tariffs should not be used to target bilateral trade balances. Cooperation to resolve roots of dissatisfaction is needed (resolve deadlock over WTO dispute settlement mechanism; modernize WTO rules to encompass e-commerce, subsidies and technology transfer, etc)
• Monetary policy needs to be coupled with fiscal support where fiscal space is available. If borrowing costs are low, then countries should borrow more to invest in social and infrastructure capital 
• If monetary policy is supporting growth, then macroprudential regulation should be the norm to prevent mispricing of risk and excessive buildup of financial vulnerabilities
• Sustainable growth requires structural reforms to boost productivity, improve resilience, and lower inequality. These reforms are more effective when good governance is already in place (applies to emerging market and developing economies)

Although global growth will inch up to 3.4% in 2020 it is still a downward revision from the April 2019 projection. This is supported by growth rebound in emerging market and developing economies. The ‘recovery’ is not broad-based and remains vulnerable because of the expected slowdown in major economies like the US, Japan, and China.

South Asian outlook

• Nepal is clocking in the highest GDP growth in FY2019. In FY2020 Bhutanese economy is expected to grow at 7.2%, followed by Indian economy 7.0% and Nepali economy 6.3%.
• Nepal is projected to have the highest inflation rate, 6.1%, in FY2020.
• Maldives is expected to have the highest current account deficit, 15.7% of GDP, in FY2020, followed by Nepal (10% of GDP)

GDP growth
Economy	FY2019	FY2020
Bhutan	5.5	7.2
India	6.1	7.0
Nepal	7.1	6.3
Maldives	6.5	6.0
Bangladesh	5.9	6.0
Sri Lanka	2.7	3.5
Inflation
Economy	FY2019	FY2020
Nepal	4.5	6.1
Bangladesh	5.5	5.5
Sri Lanka	4.1	4.5
Bhutan	3.6	4.2
India	3.4	4.1
Maldives	1.5	2.3
Current account balance (% of GDP)
Economy	FY2019	FY2020
Maldives	-20.4	-15.7
Nepal	-8.3	-10.0
Bhutan	-12.5	-9.6
Sri Lanka	-2.6	-2.8
India	-2.0	-2.3
Bangladesh	-2.0	-2.1

New cross-border transmission line, 762 MW Tamor reservoir project, projected GDP growth of 6.4%

Nepal, India agree to build New Butwal-Gorakhpur transmission line with equal equity investment

From The Kathmandu Post: Nepal and India have agreed to fund a second high-capacity cross-border transmission line connecting Butwal to Gorakhpur in India through a commercial entity with both countries pledging equal equity in funding of the project. The agreement on Tuesday followed a two-day, Seventh Joint Steering Committee and Joint Working Group meeting on Nepal-India Cooperation in the Power Sector in the southern Indian city of Bengaluru. The meeting concluded with agreements on implementation and financing modality of the 135 kilometre-long, 400 kV transmission line and formalisation of an energy banking mechanism between the two South Asian neighbours.

“The sides have agreed to build the transmission line with 20 percent of equity investment and 80 percent debt,” said Energy Minister Barsha Man Pun. It was decided that a company would be formed under the modality within three months and to have a project implementation agreement, within six months.The decision came a month after the Nepali and Indian energy ministers expressed optimism over both sides coming to terms on the development modality of the proposed 400 kV New Butwal-Gorakhpur transmission line project.

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HIDCL, Power China to build 762MW Tamor hydel

From The Himalayan Times: The government has awarded the 762-megawatt Tamor reservoir hydropower project to a Nepali and Chinese joint venture firm. Hydroelectricity Investment and Development Company Ltd (HIDCL) of Nepal and state-owned Power China Corporation will construct the project on government-to-government (G2G) basis. Construction of the Tamor project is expected to start from next fiscal and be completed by 2025.

During Chinese President Xi Jinping’s two-day state visit to Nepal, the Investment Board Nepal (IBN) and Ministry of Energy, Water Resources and Irrigation (MoEWRI) awarded the contract to HIDCL-Power China to build the project under the public-private-partnership (PPP) model. Minister for Energy, Water Resources and Irrigation, Barsha Man Pun, informed that the government has also signed an agreement with Power China to build the 156-megawatt Madi multipurpose hydropower project which is located in Rolpa district. As per an initial study, the project cost is around $39 million.

Earlier, HIDCL and Power China had jointly submitted a project development proposal at the IBN to build both the projects with a share structure of 46:54 per cent for the Tamor project, with the Nepali firm investing 46 per cent and Power China investing 54 per cent of the project cost. Similarly, in Madi multipurpose hydropower project, HIDCL will manage 26 per cent and Power China will manage 74 per cent of the total investment.

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World Bank projects Nepal’s GDP growth rate to average at 6.5%

From myRepublica: The World Bank has projected the growth of Nepal’s gross domestic product (GDP) to average at 6.5% over the current fiscal year – FY2019/20 and the next fiscal year – FY2020/21.The medium-term outlook is supported by government consumption and investment, according to the bank. Reasoning strong services and construction activity due to rising tourist arrivals and higher public spending, the international financial institution made the growth projection for Nepal. 

According to the report, growth on the supply side will be driven by services, underpinned by steady remittance inflows and high tourist arrivals whereas investment and government consumption are expected to be the main drivers of growth on the demand side. The tourist arrivals will be supported by the Visit Nepal 2020 campaign, the completion of the second international airport and the construction of big hotels in the country.