Anna Yukhananov and Alonso Soto Washington
Global finance chiefs told the International Monetary Fund (IMF) at the weekend to stand ready to aid emerging market economies that could be destabilised by a sudden flight of capital when the US Federal Reserve and other central banks back away from ultra-loose monetary policies.
The IMF’s governing panel, after a semi-annual meeting, acknowledged the risks posed by a transition towards more normal policies in advanced economies, and it urged nations not to delay preparations.
“The key task is to focus on the transition, prepare ourselves well for this eventual normalisation,” the committee’s chairman, Singaporean Finance Minister Tharman Shanmugaratnam, said.
“It’s not imminent, but it will happen.”
A wave of selling spread quickly through the world’s financial markets earlier this year after the Fed, responding to signs of stronger US growth, said it could start winding down its economic stimulus programme by year-end.
The pain was felt most severely in developing countries as a gusher of cheap dollars that had poured into their economies dried up, sparking a sharp slide in stock prices and currencies and pushing up local interest rates.
Low interest rates in developed economies, engineered by their central banks in recent years, had spurred investors to hunt for higher-yielding assets, many of which were found in emerging markets.
When the US central bank does move to reduce stimulus, the repercussions “may be even more significant”, according to Zeti Akhtar Aziz, the chief of Malaysia’s central bank. Aziz said the IMF’s “policy toolkit” needed to expand to help cope with the fallout.
The US central bank has held interest rates near zero since 2008 and has tripled its balance sheet to about $3.7 trillion (R36.5 trillion). Over the last year, it has been pumping $85 billion into the US financial system each month through bond purchases.
The IMF panel, which represents the fund’s 188 member nations, said these ultra-accommodative policies had supported world growth and remained appropriate for now.
Worries about the strength of the US economy prompted the Fed to refrain from winding down its stimulus last month. But few doubt it will wait very long. The panel urged developed market central banks to try to limit the damage to emerging markets when the time comes to move towards tighter policy, saying the shift should be “well-timed, carefully calibrated and clearly communicated”.
The Fed faced criticism from officials in developing nations and from market participants for abruptly suggesting in June that it could soon move to scale back its stimulus.
“Global financial stability is a shared responsibility,” said Ewald Nowotny, a member of the European Central Bank’s governing council. “The Fed should therefore clearly communicate the path of its intended policy actions to minimise negative spillovers” on developing economies.
Russian Finance Minister Anton Siluanov said policymakers should prepare for another round of “considerable turbulence in financial markets” once a move towards tighter policy began.
To protect themselves, finance leaders urged developing nations to act now to reform their economies and reduce vulnerability to unpredictable capital flows.
While emerging markets’ pace of growth has slowed of late, the governing committee of the IMF said it still expected expansion in these countries to account for “the bulk of global growth”.
The finance chiefs also called for the completion of IMF reforms to give emerging markets a greater say at the global lender. – Reuters