Emerging Markets at the Crossroads: Challenges and Opportunities

Emerging markets (EMs) are at the crossroads of three major transitions in the global economy: an increase in U.S. interest rates, China’s shift to consumption-led growth, and lower commodity prices. Panelists discussed the challenges, opportunities, and policy tools needed to navigate these transitions.

Key Points:

Comparisons with the global financial crisis. Lipton, Prat-Gay noted that compared with the global financial crisis, EMs are now facing more direct challenges that impact the real economy as opposed to just the financial sector. However, Yudaeva emphasized every country experience is different. For instance, some EM oil importers have actually benefitted from lower commodity prices. In terms of policy coordination, Lipton noted that the emphasis is now more on coordination within economies, ensuring that monetary policy is supported by fiscal policy and structural reforms. 

Policy recommendations. Despite current challenges, panelists though that EMs have the policy space to boost growth in the near term. Lipton emphasized that EMs must address imbalances by dealing with excess capacity and undertaking fiscal adjustment. Lower potential output means that structural reforms are essential, including diversifying the economy and improving the business environment and institutions. EM growth will also depend on the global environment and the Fund can play a role in ensuring that capital flows are supportive of growth. Yudaeva noted that improving market confidence can in itself create policy space.

Capital flows. Prat-Gay noted that EM policymakers have already made considerable efforts to ensure that flows from advanced economies’ monetary policies do not result in credit booms. Frieda observed that the influx of capital flows may have reduced pressures on policymakers to undertake structural reforms. Even though investors may not have differentiated across EMs during the boom period, now they appear to be punishing some countries that have not undertaken structural reforms (e.g. Brazil). 

Oil prices. Despite speculation that OPEC may agree to a production freeze, Lipton, Prat-Gay, Yudaeva noted that there remained uncertainty about the direction of oil prices. Policymakers should continue to take a cautious approach in terms of fiscal planning and taking steps to diversify their economies.

Corporate sector risks. Lipton noted that some EM corporate sectors are under distress as a direct result of the three transitions. Links to the sovereign and banking sectors create additional concerns. Yudaeva noted that in Russia, the concern is more about indebtedness in the non-tradeable sector as the export sector can adjust via the exchange rate. Macroprudential policies are being deployed to address this issue

Russia. Yudaeva remarked that the recent downward revision of the IMF’s growth forecast was more pessimistic than the authorities’ views. She noted that the economy is doing better than expected in the second wave of adjustment to lower oil prices.  Frieda, Lipton commended Russia’s policy response to recent shocks, including through monetary policy, exchange rate flexibility, and addressing budgetary issues.

Quotes:

“There is huge potential for emerging markets to grow rapidly and be the growth engine for the global economy. They need technology. They need investment. They need to educate their population.” David Lipton, First Deputy Managing Director, IMF

“There is a strong sense in the market that China still has to go through a meaningful adjustment process, and the way in which they are [currently] re-stabilizing the economy is not particularly healthy.” Gene Frieda, Partner and Senior Global Strategist, Moore Capital Management

“The Fed over the last few quarters has been a lot more cognizant of the rest of the world…whether this is a good or a bad thing, I leave that question to you.” Alfonso Prat-Gay, Minister of Treasury and Public Finance, Argentina

“Structural reforms are an important global issue. Experience over the last seven years has taught us is that you cannot increase productivity simply by printing money.” Ksenia Yudaeva, First Deputy Governor, Central Bank of Russia