Rio de Dinheiro

Foreign Policy: What are the largest risks to the global economy during the next year?

Mohammed El-Erian: The twin deficits in the United States. They require higher and higher funding at increasingly unattractive levels and therefore raise the question of sustainability. We think the risk of a U.S. hard landing is greater than the risk of a Chinese hard landing.

FP: How likely is an economic crash in China?

ME: The probability of an economic crash in China is very small. What they have been doing is tapping slowly on the brakes, and that is the right approach…. [So the] most likely scenario is that China will soft land, which translates to growth rates of 6-8 percent and an inflation rate of 4 percent. As a result, China and the economies in its production chain will become a second engine of growth for the global economy.

FP: Do any developing countries have better economic prospects than China in the medium to long term?

ME: One economy that has tremendous potential is Brazil. It’s being driven by very sound macroeconomic policies, an increasing emphasis on institutions, a large and growing financial cushion, and the ability to [work] with China.

FP: How high do you think oil prices will go?

ME: The equilibrium level for oil prices is $40-45 [per barrel]. That reflects the fact that consumption has gone up. Two other influences will make oil prices volatile. One is inventory accumulation by countries that are worried about long–term supply, particularly India and China. The second is that the volatility encourages a tremendous amount of financial speculation.

FP: How long will the dollar remain the world’s reserve currency?

ME: There will soon be three reserve currencies: the dollar, the euro, and the Chinese [yuan]. The question is how quickly we get there, and that depends on how successfully the United States manages its twin deficits… The [issue] is the speed of the journey, not the destination.

FP: Which countries will be the surprise economic success stories of the next few years?

ME: Brazil and Russia. Both economies are becoming stronger at home and more forceful abroad.

FP: Which three economies are likely to experience severe economic problems in the next year?

ME: The United States faces a high risk because of its [deficits]… [and] a couple of developing economies could suffer: Turkey because of its large current account deficit and the Philippines because of its fiscal deficit.