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The
outlook for the global economy in 2017 will be similar to that
for 2016, but with an upside risk, with the world expanding
below 3 percent and the U.S. economy outperforming that with a
growth of 2.5-3 percent, El-Erian, chief economic adviser to
Europe's largest insurer, said at the Asian Financial Forum in
Hong Kong.
The U.S. outperformance is expected to bolster the dollar, but
the currency could be lifted even further as the U.S. Federal
Reserve would raise interest rates at least three times under a
baseline scenario for 2017, not two as the market is pricing
now, he added.
"If the baseline materializes, we get at least three hikes. That
attracts more capital," El-Erian said. "That is the major risk
for the baseline, that the dollar gets too strong, too quickly
and what you get is the repeat of what we've seen in the past,
which is a very strong dollar breaks something in the system."
U.S. dollar gains could, in turn, increase the risk of default
in emerging markets for businesses that have borrowed heavily in
foreign currencies to benefit from record-low borrowing costs.
"Most emerging economies have been tempted at one time or
another to borrow in dollars because the cost is perceived to be
lower," he said. "Sovereigns have learned the really hard way
and have stopped doing this. Corporates have not."
"The biggest risk right now of the dollar movement is on the
mismatch of corporates. That's where the breakage happens and
then the question becomes - does the corporate problem become a
sovereign problem?"
(Reporting by Elzio Barreto and Julie Zhu; Editing by Sunil Nair
and Muralikumar Anantharaman)
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