PAGE 48
Sunday June 26, 2016
Kaieteur News
Addressing the global financial... (From page 45) developing economies stood at about US$20 trillion. She added that it is no surprise that cross-border borrowing, particularly for banks and corporate entities, has become an important source of funding for many emerging economies. Yet, this source of funding can contribute to balance sheet mismatches and possible liquidity
pressures. Lagarde said, “Let us also piece together the major elements of the financial safety net that can be called upon to alleviate such liquidity pressures. These would include four broad elements: individual countries’ foreign exchange reserves, bilateral swap lines, regional financing arrangements, and financing
through multilateral institutions like the Fund.” Together, these resources were “roughly” estimated at about US$16 trillion in 2014, of which the bulk—US$12 trillion—is individual countries’ foreign reserves. Yet, not all countries have equal access to the various elements of the safety net. Lagarde explained that on
one end of the spectrum, there are reserve currency-issuing advanced economies. These are best covered by all the elements of the existing framework. On the opposite end of the spectrum, there are the non-systemic emerging and developing economies, which face the most limited set of options in this safety net. Clearly, we need a bigger – and more inclusive – net that captures all risks, Lagarde expressed. There is another reality that must be addressed and that has to do with capital flow volatility, which the IMF Boss said is becoming a permanent feature of the global landscape. “Consider the exponential growth of cross-border flows over the past few years. These flows reflected both “push” factors, such as appropriately expansionary monetary policies in advanced economies, and “pull” factors, such as rapid growth in emerging economies. Yet today, uncertainty about global economic prospects and a synchronicity in monetary policies of major advanced economies pose a challenge for the emerging world,” explained Lagarde. She said that nations should expect that episodes like the “taper tantrum” of May 2013 could be recurring, rather than one-off. She asserted that the turning of the credit cycle in emerging economies – as capital inflows decelerate or even reverse – is adding a further layer of complexity. Last year, for example, emerging markets saw about $200 billion in net capital outflows, compared with $125 billion in net inflows in 2014. For a sample of 45 emerging market economies, the cumulative slowdown in capital inflows between 2010 and 2015 is estimated at about US$1.1 trillion. Relative to
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economic activity, the aggregate decline in net capital inflows represents about five percent of the sample’s GDP. Lagarde said that these magnitudes can test the resilience of even the most robust macroeconomic frameworks. She said that quick liquidity support during systemic events becomes of paramount importance to stem the risk of broader contagion. Another important aspect that must be taken into consideration, Lagarde opines, is the increased financial globalization, which also means that financial spillovers are the norm, not the exception. Lagarde said that financial integration also strengthens spillovers, or knock-on effects, across countries. Think of the turmoil earlier this year that – for a while – wiped out the equivalent of US$6 trillion – or 8.5 percent of global GDP – in equity market indices. She said that in the current international architecture, the central role of major reserve currencies means that policy and financial developments in reserve issuing currencies can have significant spillover effects on other countries. She said that these knock-on effects can constrain domestic policy choices, especially when countries are at different stages of the business cycle. Even so, the IMF Boss is of the opinion that major advanced economies are no longer the only source of financial spillovers. She said that forthcoming research in the Global Financial Stability Report shows that financial spillovers from emerging economies – to both advanced and to other emerging economies – have become stronger since the crisis. Lagarde said that this is particularly the case for spillovers from equity markets in emerging economies, which increased by 28 percent since the crisis. She
noted that spillovers from some of the largest emerging economies, such as China and Brazil, were even bigger—at about 40 percent. “So these are some of the new realities to which the international monetary system needs to adapt. There are others, of course. Think of the turbo-charged speed of financial transactions; think of digital currency and block chain technology; think of cyber-hacking—from which even central banks are not immune. So, speaking practically, where should the focus of the reforms be? In my view, it is along two key dimensions,” expressed Lagarde. She said that the first dimension is to ensure that the global financial safety net is large enough, coherent, and works for all. Clearly, strong policies and effective Fund surveillance remains the cornerstone of crisis prevention. Still, a large enough and more coherent global safety net, with a wellresourced Fund, remains critical. Lagarde opines that options should explore measures that would strengthen the reliability and reduce the stigma associated with accessing the safety net. At the Fund, Lagarde promised that efforts will be geared towards looking into ways to make resources and instruments more predictable for crisis prevention and resolution. She said that this includes further improving coordination among the various layers of the safety net. For its part, the IMF boss said that the Fund will be taking stock of progress in the liberalization and management of capital flows, with a focus on capital flow measures and foreign exchange intervention. She asserted that the role of macro- and micro-prudential policies in limiting vulnerabilities in the nonbank sector will also be explored, along with options to promote greater equity finance.