International Monetary Fund Update

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The chief economist of the International Monetary Fund warned that emerging markets could not “endure” the recurrence of the 2013 “shrink panic” market chaos, when the Fed hinted that it would withdraw from stimulus measures earlier than expected, triggering a surge in global borrowing costs.

In an interview with the Financial Times, Gita Gopinath expressed a cautious attitude as the Fed prepares to withdraw support for the pandemic, highlighting the economic pressure faced by low- and middle-income countries. Suffer disproportionately From the coronavirus crisis.

She also warned that if inflation becomes a more harmful problem in the United States and forces a sudden tightening of monetary policy, there may be consequences.

“[Emerging markets] They are facing greater headwinds,” she said. “They are being hit in many different ways, and that’s why they can’t afford to lose their tempers in the financial markets from the major central banks. “

Gopinath’s comments were made after Fed Chairman Jay Powell, In the speech At the Virtual Jackson Hole Symposium for Central Bank Governors held on Friday, he said that the US economy will be strong enough that the Fed will begin to reduce its $120 billion asset purchase program this year.

In the past five months, with the launch of the Covid-19 vaccination campaign, commercial activities have increased dramatically.US Consumer price Driven by strong demand and supply chain bottlenecks leading to severe shortages of certain commodities, prices have also soared.

Soaring inflationary pressures Higher and faster Exceeding most economists’ expectations, even though the Fed has long stated that they will fade over time. But policymakers have become more comfortable with the risks that they may last longer, especially as the more contagious Delta variant fuels an alarming increase in Covid cases worldwide.

“Many of the problems we face, even in terms of inflation and supply bottlenecks, are related to the pandemic that we are raging in different parts of the world,” Gopinath said. If higher inflation persists, “this may affect inflation expectations and then have self-fulfilling characteristics.”

“We are worried about a situation where the inflation rate is much higher than expected, which will require the United States to normalize monetary policy more quickly,” she added.

The International Monetary Fund calculated in July that by 2025, the global gross domestic product may fall by 4.5 trillion US dollars. This is what Gopinath said is the “double whammy” of the new wave of infections in emerging markets. Efforts have been made to obtain vaccines and the normalization of “large-scale” US monetary policy, although this is not the basic situation of the fund.

Maurice Obstfeld, the former chief economist of the International Monetary Fund and a professor at the University of California, Berkeley, said that for low- and middle-income countries, this kind of damage will be particularly serious because High debt Levels since the outbreak of the epidemic.

According to data from the Institute of International Finance, the average government debt of large emerging economies will rise from 52.2% of GDP to 60.5% in 2020. This is the largest surge on record and has helped countries survive the pandemic.

Many people are in better shape today than they were when they lost their temper in 2013. Larger foreign exchange reserves and better budgets and external balances help strengthen their defenses, but huge shocks may penetrate this buffer.

He said: “If they are hit by the sudden increase in dollar funding conditions and the reversal of capital flows, then in the ongoing pandemic, this could be devastating.”

According to IIF data, in the last nine months of 2020, more than $360 billion will flow into emerging market stocks and bonds. Despite the slowdown in inflows, many countries are still extremely vulnerable to rapid changes in investor sentiment.

Rising inflation has forced several countries, including Brazil, Hungary, Mexico, and Russia, to raise interest rates, but further tightening may be needed to combat capital flight and currency devaluation, causing more economic pain.

Gopinath said that central bankers need to provide “super clear communication” on their policy path from time to time-this is what she said Powell is very effective.

“One of the problems [then-chair Ben] Bernanke’s statement in 2013 was not to say that quantitative easing will begin to relax, but to be confused with the expectation that interest rates will begin to rise faster than expected,” she said. “This time, they have made it very clear. Will start to reduce production first. .. Then they will start raising interest rates. “