IMF is­sues warn­ing over debt in largest economies

RE­COV­ERY NOT YET COM­PLETE AND CUR­RENT EN­VI­RON­MENT IS ‘BREED­ING COM­PLA­CENCY’

The Nation - - BUSINESS -

FOR THE first time in years the In­ter­na­tional Mone­tary Fund is op­ti­mistic about global eco­nomic growth. But it sees a new prob­lem: mount­ing debt in the world’s largest coun­tries.

“Debt lev­els are in­creas­ing in G20 economies,” To­bias Adrian, who heads the IMF’s mone­tary and cap­i­tal mar­kets division, said on Wed­nes­day.

Among pri­vate busi­nesses in those coun­tries, lever­age is higher than be­fore the fi­nan­cial cri­sis. And the weight of debt ser­vice has also jumped in sev­eral top economies, he noted.

With cen­tral banks in the United States and Europe ex­pected to tighten mone­tary con­di­tions “this poses greater risks over time from sharp in­creases in in­ter­est rates,” he said.

In­tro­duc­ing the IMF’s new­est as­sess­ment of risk in the world’s fi­nan­cial sys­tem, Adrian noted that the ex­tremely low in­ter­est rates of the past sev­eral years have al­lowed coun­tries to bor­row eas­ily to fi­nance their re­bound from re­ces­sions.

And re­cov­ery is not yet com­plete, he noted, say­ing low rates are still needed.

At the same time, he said “this en­vi­ron­ment is breed­ing com­pla­cency”, with risks build­ing on sev­eral fronts.

That is true es­pe­cially for the su­per­stars of the emerg­ing economies like China, Brazil, and Turkey.

China con­tin­ues to fund growth with the ex­pan­sion of credit, he noted, par­tic­u­larly “shadow” credit lend­ing out­side the reg­u­lated bank­ing sys­tem.

An­other side of the prob­lem is the de­pen­dence of emerg­ing mar­ket and lower-in­come economies on ex­ter­nal fund­ing, es­pe­cially port­fo­lio in­vest­ment in­flows.

Around $300 bil­lion (Bt10 bil­lion) in such funds will flow into these coun­tries in 2017, sup­port­ing their growth.

“This is broadly good news,” said Adrian.

“But this greater re­liance on for­eign bor­row­ing may at some point be­come a vul­ner­a­bil­ity, par­tic­u­larly for low­in­come coun­tries, if those re­sources are not put to good use.”

That leaves such mar­kets vul­ner­a­ble to shocks like geopo­lit­i­cal tur­moil and jumps in in­ter­est rates, which would in­crease the cost of debt, and could spark sharp out­flows in port­fo­lio in­vest­ment. Sonja Gibbs, of the In­sti­tute of In­ter­na­tional Fi­nance (IIF), said emerg­ing economies are on the whole bet­ter off than they were just a few years ago.

Growth is stronger and many show other fun­da­men­tal eco­nomic strengths, she said.

How­ever, she ac­knowl­edged, “there is a po­ten­tial for prob­lems”.

“It’s go­ing to be a chal­lenge es­pe­cially when you move to a world where the Fed­eral Re­serve is go­ing to raise US in­ter­est rates, global rates will rise, and debt ser­vice will rise.”

At a round ta­ble dis­cus­sion at the IIF, a num­ber of of­fi­cials stressed the need for coun­tries to take ad­van­tage of the rel­a­tive quiet to im­ple­ment re­forms that will pro­tect them if there is a sud­den shift in global cap­i­tal mar­kets.

“There is no sil­ver bul­let. It’s about hav­ing a sound fis­cal pol­icy as al­ways,” said Al­berto Tor­res, Deputy Un­der­sec­re­tary for Public Credit in Mexico’s Fi­nance Min­istry.

Lu­dovic Subran, chief econ­o­mist of French in­surer Euler Her­mes, said he does not rule out a sov­er­eign debt cri­sis, “es­pe­cially in the emerg­ing mar­kets where growth is be­ing fi­nanced by public deficits,” he said.

“It is a real is­sue, ac­tu­ally, and could be sys­temic for the world econ­omy,” a se­nior Euro­pean of­fi­cial warned.

To­bias Adrian, Fi­nan­cial Coun­sel­lor and Di­rec­tor of the Mone­tary and Cap­i­tal Mar­kets Depart­ment with the IMF, said debt lev­els are in­creas­ing in G20 coun­tries and the weight of debt ser­vice has also jumped.

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