Emerging Markets’ Response to Recent Exchange Rate Pressures

Location: Jack Morton Auditorium

Recently, many economies have come under sharp foreign exchange pressures, reflecting large commodity price declines, volatile external financing conditions, and country-specific factors. This seminar will invite central bank officials from emerging and frontier markets to discuss their recent experiences in dealing with these pressures, including the role of exchange rate flexibility and constraints imposed by the overall macroeconomic policy frameworks and balance sheets.

Join the conversation via #FXpressures

Moderator

Maurice Obstfeld, Economic Counselor, Research Department Director

Maurice Obstfeld is the Economic Counsellor and Director of Research at the IMF, on leave from the University of California, Berkeley. From July 2014 to August 2015, Dr. Obstfeld served as a member of President Barack Obama’s Council of Economic Advisers. He was previously (2002-2014) an honorary advisor to the Bank of Japan’s Institute of Monetary and Economic Studies. He held permanent appointments at Columbia (1979-1986) and the University of Pennsylvania (1986-1989), and a visiting appointment at Harvard (1989-90). He received his Ph.D. in economics from MIT in 1979 after attending the University of Pennsylvania (B.A., 1973) and King’s College, Cambridge University (M.A., 1975).

Panelists

Lesetja Kganyago, Governor, The South African Reserve Bank

Lesetja Kganyago has been the governor of the Reserve Bank of South Africa since November 2014. Previously, he served as the deputy governor (from 2011) at the same institution. Kganyago was the director-general (2005-2011) and chief director (1998-2004) of the National Treasury of South Africa. He holds a Master of Science degree from the London University and a Bachelor of Commerce degree from the University of South Africa.

Veerathai Santiprabhob, Governor, The Bank of Thailand

Veerathai Santiprabhob is the Governor of the Bank of Thailand. He began his career at the International Monetary Fund before heading the Policy Research Institute of the Thai Ministry of Finance during the 1997 Asian financial crisis. He had served as a senior executive of Siam Commercial Bank and The Stock Exchange of Thailand as well as on the boards of many leading corporations and national policy committees. He holds B.A. in Economics from Thammasat University, and A.M. and Ph.D. in Economics from Harvard University.

José Dario Uribe, Governor, The Central Bank of Colombia

José Darío Uribe E. has been governor of the Banco de la Republica of Colombia since January, 2005. Prior to that, he was deputy governor (1998-2005) and director of the research department (1993-1998). Previously, Uribe was working for the National Planning Department and taught at various universities in Colombia. He has BA in Business Administration from EAFIT and Economics from Los Andes University, and a PhD in Economics from the University of Illinois, Urbana – Champaign.

Ksenia Yudaeva, First Deputy Governor, Bank of Russia

Ms. Ksenia Yudaeva is the First Deputy Governor of Bank of Russia since September 2013. Previously, she was senior advisor to the Russian President then headed the Experts’ Directorate of the Presidential Administration. She led research at several institutions in Moscow and Stockholm, Sweden. A graduate of the M.V. Lomonosov Moscow State University, Yudaeva received her PhD in Economics from the Massachusetts Institute of Technology.

Prepared by the Secretary’s Department

Contributor: Inderjit Sian

Given that many economies have come under sharp foreign exchange pressures, reflecting large commodity price declines, volatile external financing conditions, and country-specific factors, the seminar focused on the experience of emerging and frontier markets in dealing with these pressures, including the role of exchange rate flexibility and constraints imposed by the overall macroeconomic policy frameworks and balance sheets.

Key Points:

- Uribe noted that Colombia had been faced with a number of shocks including terms of trade shocks, US monetary policy, and an increase in risk premium. The main aspect of the policy response was the flexible exchange rate and Colombia had not resorted to any intervention. He noted that while there was a significant devaluation of the currency, currency mismatches were minimal, given the increased availability of hedging so the impact of the adjustment on financial stability was muted. The monetary policy response was to raise the interest rate to maintain price stability. The third element of the policy response was tightening fiscal policy both on the expenditure and revenue side to address the fall in oil-related revenues.

- Yudaeva. noted that Russia faced similar shocks to Colombia. They were also hit with the oil price shock and volatile capital flows. Additionally, given Russia did not manage to put in place an inflation targeting regime, they did not benefit from low inflation and low inflation expectations, unlike Colombia. The policy response was to switch to a free-floating exchange rate regime, and since August 2015 there has been no intervention in FX markets. She noted that while the move to a free-floating regime was controversial, the economy managed to adjust quickly to a new equilibrium. To address the issue of debt repayments in foreign currency, the central bank also introduced a new instrument to lend foreign currency to the banking sector and took some loans in foreign currency as collateral. The central bank also raised interest rates quite sharply to address increasing inflation. She further noted that while there had been a sharp decline in output, the economy would have suffered more of a decline if the policy response had been different. She also highlighted that fiscal policy had been counter-cyclical with a shift from a surplus to a fiscal deficit, however, the fiscal authorities plan to introduce a stricter medium term rule to ensure that budget expenditure is smoothed over the cycle going forward.

- Kganyago noted that inflation differentials have been unfavorable for South Africa. He highlighted that while the nominal effective exchange rate had depreciated as much as 45%, the real effective exchange rate had only declined by around 32%. He noted that South Africa does not target the exchange rate, but does consider it to the extent that the exchange rate affects the inflation trajectory. Moreover, given that over 90% of South African debt is held within the domestic currency, depreciation does not pose issues. Furthermore, the introduction of an inflation targeting regime had helped reduce the exchange rate pass through to inflation. In light of this, he emphasized that South Africa considers a floating exchange rate as a key policy tool that allows for speedier adjustment, helps address imbalances, and incentivizes growth in the tradable sector. Having said that, he noted that South Africa did not see a significant expansion in exports and compression in imports consistent with the level of depreciation, which implied there was probably a level of internal devaluation that was required. He also pointed out that South Africa holds a large level of reserves only to ensure market liquidity and would only consider intervening if there were any disruptions in markets.

- Santiprabhob noted that Thailand had a different experience given it is an oil importing economy and so there was a large increase in the current account surplus due to the decline in oil prices and slowdown in investment. Furthermore, the increase in the current account surplus did not reflect an improvement in Thailand’s competitiveness as exports have also been declining. That said, given the strong external position, Thailand has seen an increase in capital inflows as it is regarded as a safe haven. Changes to exchange rate regimes in Asia (China, for instance) had also added to increased volatility of the Thai baht. The policy response to the increase in exchange rate volatility was to: allow the exchange rate to move freely as a first line of defense; better equip the economy to deal with exchange rate movements through hedging currency positions and by promoting use of regional currencies in trade payments. He pointed out that currency mismatches have declined considerably compared to the past. The third element of the policy response was greater capital account liberalization to allow Thai firms and individuals to invest abroad. The last element of the policy response was to intervene in FX markets when there was large volatility in the currency.

Quotes:

“We see the floating exchange rate as a policy advantage. We use it as a shock absorber…and it allows rebalancing of the real economy.” Lesetja Kganyago, Governor, The South African Reserve Bank

“When you [consider] allowing the exchange rate to move as a shock absorber, but then you look at the current environment and what Thailand has experienced, you wonder whether exchange rate movement is a shock absorber or shock amplifier.” Veerathai Santiprabhob, Governor, The Bank of Thailand

“Exchange rate volatility has bad connotations, […] but it is related to the development of hedging instruments […] and discourages currency mismatches.” José Darío Uribe E., Governor, The Central Bank of Colombia

“For all major currencies it is important that the markets understand the policy…it will decrease volatility.” Ksenia Yudaeva, First Deputy Governor, Bank of Russia