The Daily Star (Lebanon)

Emerging economies risk being undermined

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NUSA DUA, Indonesia: After suffering months of capital outflows, policymake­rs from emerging markets attending Internatio­nal Monetary Fund-World Bank meetings in Indonesia had a clear message for leading economies: current monetary and trade policies risk underminin­g us all.

The IMF-World Bank meetings wrapping up Sunday gave central bankers and finance ministers from around the world a chance to meet face-to-face in Indonesia, whose rupiah currency hit a new 20-year low this week.

Poorer and populous emerging markets have been particular­ly vulnerable to the escalating U.S.-Sino tariff war and rate rises by the U.S. central bank. Investors dumped assets seen as riskier, sparking painful currency plunges that have punished countries from India to recession-hit South Africa, as well as triggering crises in Turkey and Argentina.

“We are all aware that the normalizat­ion of the monetary policy in the U.S., combined with their fiscal policy and trade policy … are all creating a systemic impact to the whole economy in the world,” Indonesian Finance Minister Sri Mulyani Indrawati said in an interview during the meetings in Bali.

The Federal Reserve’s nearly three-year-old tightening cycle has in part prompted a global shift in capital away from emerging markets and after three hikes this year, it foresees another December rise, three more next year, and one in 2020.

A senior Fed official in Bali said the rate rises were right for domestic policy and ensuring they were gradual and predictabl­e was “the best solution” for minimizing unintended volatility in emerging markets.

In a bid to support the rupiah, Bank Indonesia has raised rates five times since mid-May and intervened regularly, but still the currency has lost nearly 11 percent this year, leaving it at the weakest levels since the 1998 Asian financial crisis.

Bank Indonesia Governor Perry Warjiyo said that the 150 basis point rate hikes since mid-May aimed to keep Indonesian assets attractive enough for foreigners to stay invested, but calibratin­g this in the current environmen­t was hard.

“The risk premia are very difficult to incorporat­e because risk premia are responding to geopolitic­al, responding to trade tension,” Warjiyo told a panel in Bali.

Finance ministers for developing nations in the Group of 24 economies urged major economies to reform the global trading system, rather than discard it.

The G-24 statement, issued on the sidelines of the Bali meetings, said all emerging markets were “adversely affected” by excessive capital flow volatility. While many countries shared common fears, Indrawati said it was difficult to forge cooperatio­n to counter the risks.

“It’s not really clear how the world is going to coordinate more effectivel­y, especially when each country has their own domestic issues,” she said.

The Philippine peso has shed nearly 8 percent this year and its deputy central bank governor, Diwa Guinigundo, said the IMF and other global institutio­ns should advise advanced economies on the potential negative consequenc­es of their moves.

“It’s the spillovers that we are concerned with … the spillover could have effects from one market to the other, from the financial market to the real market,” Guinigundo said.

He said while it was good for policymake­rs to be ahead of the curve in tightening, they should take account of the growing clout of emerging markets. “It should also be emphasized that ASEAN+3 (China, Japan, Korea), we account for a good bulk of the world’s population and GDP.”

Egyptian Finance Minister Mohamed Maait said policymake­rs in developed countries should understand that if their actions hurt other countries it would have knockon effects. “You need me. I am a market for you, I am an opportunit­y for you,” Maait told Reuters. “I don’t believe there will be a winner and a loser. Either all are winners or all are losers.”

Indeed, market ructions have now cascaded through to developed markets with Wall Street seeing a six session slide until a rebound Friday, amid fears over the trade war between China and the United States.

However, other than having effective monetary policies, developing markets can do little to cope with the impact of rate hikes and trade battles, said Jacob Frenkel, chairman of JPMorgan Chase Internatio­nal. “When elephants fight, the grass suffers.”

 ??  ?? Indrawati speaks during the forum “Empowering Women in the Workplace.”
Indrawati speaks during the forum “Empowering Women in the Workplace.”

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