EM/FM Under-Investment Could Challenge Equity Returns, Monetary and Fiscal Policy

As ratings agency reports go, Fitch's latest Sub-Saharan write-up wasn't so much controversial as it was cautionary; specifically, its point relating to inadequate infrastructure is one common to most if not all emerging and frontier economies (outside of Asia, at least), a discouraging and productivity/growth-stunting phenomenon The Economist duly noted last week while concluding that “most [Latin American] countries neither save nor invest enough [and] do not use their resources efficiently” due at least in part to an over-dependence on monetary tightening whereby “low savings, high interest rates and protective tariffs on inputs make investing unusually costly.”  Ultimately, moreover, ever burgeoning consumption in said economies–and by extension the hitherto elusive global re-balance fundamental to PIMCO's ‘new normal' paradigm–may be heavily correlated with just how efficiently this investment deficiency corrects.  To this end, McKinsey theorized last winter that the glaring disconnect between savings and the pragmatic need for more emerging and frontier-sponsored capital investment is destined to usher in a new secular shift away from equities and towards bonds over the next decade (as incentives align) meaning that this month's drastic global equity dip may be more harbinger than herring.  That said, it may also invite an awkward limbo period for central banks as efforts to moderate inflation are tested by increased fiscal outlays which could augment borrowing costs even more if deficit to growth rates become overly stretched.  Nigeria's current inflation picture is a perfect case in point: while July's core inflation, which excludes farm produce items from the CPI, was unchanged from the previous month at 11.5% y/y, Barclays opined earlier this summer that “CBN Governor Sanusi has been very outspoken about government's excessive spending” even though some it at least looks geared towards addressing a woefully underdeveloped electricity sector and oil revenues should be long-term sticky.   Yet the lion's share of spending excess, per some pundits, stems not only from steep, public sector wage increases but also a patronage-driven political system.