Blended Finance’s Poor Country Swirl

2019 September 20 by

Amid the ‘billions to trillions” hype over combining official and private finance to achieve the 2030 Sustainable Development Goals for low-income economies a sobering OECD and UN report working from 2017 data found that only 5% of the blend went there as opposed to emerging market destinations.  South Asia and Africa took almost half the total, with credit and risk guarantees the main bilateral and multilateral contribution. By sector energy, banking and financial services dominate, and domestic investors only account for 15% of transactions. A number of general principles apply but have been followed unevenly, including national ownership, technical assistance and a local presence in deals. Over the period under review, FDI fell almost 20% and official aid remains the top external source. A new cash-flow methodology is used for tracking, with the “missing middle” as small and mid-sized business seeking up to $1 million in funding is bypassed in databases compiled by the UN and blended specialists like Convergence. In 2017 $1.5 billion was mobilized for poor countries, and the leading recipients over time were African commodity exporters (Angola, Senegal, Zambia) and Asian garment hubs Bangladesh and Cambodia. Over 45 nations featured, but conflict and small island states were excluded. The average deal amount was $5 million, compared to $30-$60 million in the middle income category. A weak correlation exists between aid and blended finance totals, but economic growth and policy scores are not broken out for greater performance distinction. Guarantees have been 60% of volume over a 5-year horizon, while simple co-financing was the number one individual project tool. Energy and banking were half the industry focus, followed by mining and telecoms. Oil and natural gas power plants were 40% of the first allocation, while renewables are the majority in more advanced developing markets. By provider, the World Bank’s MIGA with 15% of the total, the US and France are the largest, with new entrants like Canada and Korea moving up the ranks. Local investors have been a small minority and most active in Africa, especially in agriculture and forestry pursuits. Often participation is through national development banks reprising a role after decades out of favor in the aid community over continued losses and bad governance. The current mantra is public-private partnership and these units are encouraged to get credit ratings and continuously report accounts and operations in contrast with previous experience. In industrial economies they are also under consideration to meet large scale physical and cyber infrastructure mandates. The survey suggests further experimentation and research in the nascent field, with different interpretations and versions of the “flexible concept.” A marker may be imminent when the US Development Finance Agency is formally launched in October, with a menu of debt, equity and guarantee offerings under an eventual $60 billion cap. In testimony core executives from OPIC and AID have previewed early organization divided into policy and transaction departments, but instrument and strategy preferences await rollout, although low-income regions are a target. Private sector bankers and fund managers will likely be recruited in a first wave, alongside an expert advisory committee to be named with a talent blend, according to the original legislation,

The World Bank’s Morose Momentum Mooring

2019 July 5 by

The World Bank’s June Global Economic Prospects, the first out under new President Malpass, underscores “weak momentum” into the second half, with emerging market GDP growth slackening to a post-2015 low of 4%. Global trade expansion has slowed to 2.5% exacerbated by the US-China tariff fight, with industrial recession widespread and Asia’s semiconductor supply chain particularly hit. All forms of debt accumulated rapidly the past decade, with the government and corporate to national income ratios at 50% and 100% respectively, and the composition increasingly in commercial and non-Paris Club hands. Almost half of low-income countries are at risk of debt distress, after burdens were eliminated under previous official relief programs. Over the next decade this load will keep average growth below 4.5%, 2% less than the rate preceding 2008. The developing world will not have the $2-trillion plus needed annually for infrastructure and poverty reduction for the 2030 UN Goals and debt-service will constrain fiscal and monetary policy. Bond and stock flows have fluctuated with the Federal Reserve refraining from further rate hikes, but bank export lines are down, and FDI has been mixed on geopolitical and security factors. Commodity prices picked up through June, with oil increasing due to sanctions and conflict supply pressure, while base metals softened with Asian demand and agriculture was largely stable despite weather events. Although poor economy growth will continue at 5.5%, current account gaps are over 9% of GDP and must be offset by declining foreign aid and investment eating into reserve positions. For emerging economies 40% will decelerate this year, with lingering financial drag across regions and in Argentina, Brazil, Nigeria, South Africa and Turkey in particular. East Asia will drop to 6%, and Europe and Latin America 1.5%. The Middle East will be under the latter and Sub-Sahara Africa, 3% and then rise into the next decade with higher domestic demand.

Trade relations are “fragile” and tariff changes will be “complex and discretionary” to heighten uncertainty, according to the review. In addition to Washington and Beijing at odds, the North American pact’s replacement has not been ratified and Brexit will trigger a shakeup in EU arrangements. Low-grade corporate defaults could spread in tougher financial markets and currency depreciation, which would also trigger foreign investor flight from local government bonds where average ownership is 40%. The US, Euro area and China are over half of world output, and accounted for two-thirds of growth in 2018, and the three face slowdown and confidence risks. Climate change is a general threat affecting small island states and overpopulated farmlands in Africa especially. Structural reforms should be a priority, including power access, logistics and transport, digital technology and corporate governance improvements. Agricultural productivity  gains are even more urgent against extreme weather patterns, and can draw on less pesticide use to protect the environment and workers. On debt the Bank urges prudent management and tracking. as the IIF finalized a proposed transparency code for private sector lending to low-income sovereigns. It would cover a full range of instruments, and report interest rate ranges with a several month time lag. A central repository will collect and safeguard the records, and may take a year to set up when economic prospects could again shift momentum, according to the proposal.

Bretton Woods’ Golden Age Grasping

2019 April 1 by

In the 75 year Bretton Woods institution history, both the Committee and emerging market investment field have also been in existence roughly half that period. As a late 1980s pioneer analyst, I began to appreciate the basic economic, banking and securities information and guidance available through the IMF, World Bank and regional development lenders. They encouraged dialogue with the few private sector financial institutions and fund managers interested in considering a new investment landscape after major debt crisis, and would later help lay the foundation for asset class definition and acceptance through innovative data and launch with the IFC capital markets arm.

 The Fund and Bank more broadly recommended financial sector opening policies and reforms, and extended crisis management facilities and support under the fiscal and balance of payments emergencies that have been standard features since the earliest days. In the three decades since, the proliferation of public and private institutions, bank/non-bank and securities markets, and economic and financial performance elements have far outpaced Bretton Woods creators, as they have struggled to define relevance beyond longstanding building, monitoring and rescue functions. After the initial generational burst, many emerging markets are in turn caught in a stagnation phase as both sides look to recapture previous glory for a next historical cycle. The milestone BW75 rethink can offer a platform for reflection on this signature relationship and detailed action agenda for another boom period ahead.

Average GDP growth is now half the original pace, in the 4%-plus range, as the export-led model has been supplemented by a domestic-demand based one. Productivity has often languished after an initial wave of labor, capital and technology gains, as education and skills training lag. Inflation is low and rarely in double-digits, but credit continues to outpace output expansion and fiscal policy is also loose. On the balance of payments, current account surpluses are flat, and $1 trillion annually sloshes around in cross-border direct and portfolio investment to swing currencies. Government debt is under control, but private local and external borrowing is at a multiple of economic size. In all developing market regions, structural reform is blocked with heavy state ownership in contrast with previous efficiency and privatization pushes.

The IMF-World Bank Financial Sector Assessments are important references for gauging commercial health and Basel Standard regulatory adherence, but complications have arisen. Macro-prudential/ investment flow measures can have equal impact with traditional capital, liquidity and leverage ratios. Shadow banking through unsupervised products, intermediaries and fintech platforms can overlap and approaches the scale of conventional systems. Institutional investor creation was once a priority with private pensions spreading throughout Europe, Asia and Latin America, but they have since been diluted or scrapped entirely. In the Middle East and Africa informal payments and savings networks maintain an outsize presence and pose financial and security risks.

Stock market tracking began with the IFC’s proprietary database, and it also introduced the emerging-frontier distinction between middle-low income and access and sophistication levels. The MSCI Index as the main benchmark remains heavily weighted toward Asia on a regional basis, while by industry consumer goods and technology are now as important as commodities and financials. Global listings on local as well as developed markets have faded from popularity, and small company tiers have yet to gain traction despite their employment contribution. While developing economies now account for over half of global GDP, their equity market share has been stuck at the same 20%.

Bond markets took off with the 1990s Brady restructurings ushering in dollar sovereign instruments, the JP Morgan index, and the Emerging Markets Traders Association to promote awareness and rules. In the following decades external corporate issuance joined as a multi-trillion dollar market, and local currency bonds came to dominate the government segment with the Bretton Woods Institutions, including the Asian Development Bank after the crisis there, working with central banks and finance ministries on building blocks such as yield curves, primary dealers and foreign investor participation. They have also collaborated with private counterparts like the Institute for International Finance on establishing debt restructuring principles and after large preliminary strides on these issues, progress has typically been incremental.

Thirty years ago marked the launch of a new era incorporating emerging economies and financial markets into the global investment mainstream, and that mission has lost momentum even as the subsequent BRICS discovery and institutional creations of their own highlighted common objectives. Recommitment from the broader Bretton Woods partner base on the vast unfinished agenda can produce another peak cycle of policy and performance breakthroughs.  

The World Bank’s Sky Writing Scare

2019 February 24 by

In its January Global Economic Prospects publication the World Bank, in transition to a new President, warns of “darkening skies” on lower growth and trade, financial market and commodity difficulties. Emerging and developing economy GDP expansion will again be an under original forecast 4.2% in 2019 and only rise another half a point over the medium term to fall short of 5%. This sober outlook is subject to further “downside risk” with higher government and private sector debt in most of the group, including low-income countries, and current account deficit financing in the face of costlier and more volatile banking and portfolio inflows. Trade shocks are another blow with the world’s biggest economies China and the US threatening higher tariffs as goods volume shrank in the first half of last year with slight recovery since. Protectionist measures affect parts assembly in particular to upset global value chains, and renegotiation of longstanding pacts as between North American partners has also complicated planning. Services and technology trade continues with liberalization as a partial offset, despite the absence of multilateral talks the WTO previously hosted.  Aside from Argentina and Turkey in outright crisis financial market sentiment was negative and contagion was evident in more liquid locations to an extent not experienced since the Federal Reserve taper tantrum five years ago. Bond issuance evaporated for periods and the 150 basis point yield spike on the external index was the sharpest in two decades. FDI and remittances in contrast stabilized, with outward investment from China “robust” under the Belt and Road initiative, the report comments. Commodities prices were mixed as energy fluctuated agriculture and metals slipped, but values should improve this year, with oil coming in at an estimated $67/barrel.

Domestic demand softened with gross capital formation lagging, and commodity importer growth slowed the most, while Asia maintained the lead through infrastructure projects. Poor country performance is at a 5.5-6% clip, but 40% of their population is still in extreme poverty, and fiscal-current account deficits and debt levels all increased. Commercial borrowing exceeds 30% of the total in Ethiopia, Mozambique, Senegal and Zimbabwe, and weather and health related emergencies are another drag. Africa separately will grow at only half that pace at odds with the former “rising” narrative, while the sprinters include Rwanda and Tanzania mainly due to public investment. Per capita developing market income will climb 3% this year, even as underlying demographic and productivity trends are less positive. Dollar strength could aggravate currency and banking system pressures, and tip companies into default with IMF programs not a natural solution for this squeeze. Trade disputes can transform into geopolitical ones, with security already precarious in the MENA region especially. China has adopted looser fiscal and monetary policies, but the broader universe has limited room in view of exchange rate depreciation and budget deficits. Bank health is a priority and officials should consider macro-prudential steps to deleverage, as the long period of low inflation may end as cross-border integration and central bank independence unravel. Emerging markets should concentrate on upgrading human capital, and tapping small business potential and eliminating informality are two promising rays in the gloom, the World Bank concludes.

Multilateral Development Banks’ Shifting Agenda Shortcuts

2018 March 2 by

As the G-20 prepares to receive the findings of a high-level appointed group on the multilateral development banks’ future, think tanks worldwide have begun to submit recommendations, with a February paper compiled jointly by Brookings and CGD in the US and ODI in Europe. The authors argue that the system must deliver more to pursue the 2030 Sustainable Development Goals in terms of governance and “operational and policy coherence.” Common data, project design and technical assistance platforms are overdue, and approaches should be adapted in the categories of fragile, high-debt and upper middle-income countries. Global public goods can also be targeted in combination on issues like climate, health, migration and financial crisis. Capital and leverage can be scaled up to mobilize trillions of dollars for infrastructure and other needs, and portfolios can be turned over to the private sector at return and management thresholds. Shareholder oversight should not be limited to individual institutions and incorporate competing and complementary missions through UN bodies. The next two decades will see history’s biggest urban expansion and landmark developing world demographic transition, especially with Africa’s youth bulge. The banks’ “value proposition” is to stay a trusted partner able to offer capacity and reform advice, long-term funding, and global and regional expertise and help when economic instability spreads. Pure financial transfers barely register in middle-income countries where they are less than 1% of private flows, but “development solutions” remain in demand. The World Bank’s net allocation is now lower than regional counterparts, and clients seek input on cross-cutting themes like connectivity, small business formation and inclusion and inequality. Donor harmonization was pledged in the Rome Declaration 15 years ago but application has lagged, with the new Asian Infrastructure Bank trying to avoid uncorrected overlapping and onerous safeguards. Collaboration on public-private partnerships, evaluation and procurement has increased but core agendas are still at odds and often redundant, according to the filing. Shared country and sector strategies, research and impact measurement are viable, and will facilitate the so-called cascade effect for commercial finance as little used instruments like guarantees are more widely deployed. Regular asset sale programs should in turn be scheduled to release original capital and prevent constant shareholder calls.

In fragile states reconstruction should not be delayed over constitutional and electoral formulas and be supported mainly by grants. Administrative procedures should be more flexible and bank staff should handle the load instead in “low capacity” places. Debt sustainability risk is high or moderate in 30 chiefly African countries that got official relief and now tap external bond markets, and management complexity must take into account rollovers, contingent liabilities and other aspects where MDBs can offer global lessons and tracking mechanisms.  Advanced emerging markets still may seek public finance at the sub-national level and policy dialogue and peer convening power where private debt and equity sources do not engage. The Bretton Woods lenders have not been thoroughly reviewed for 75 years and lack a “periodic ambition and mandate inventory.” The report calculates that their $40 billion base can be multiplied the next decade for $2 trillion in resources under far less conservative loan/asset ratios. Individual banks have their own comparative advantages such as the EBRD in energy and AfDB on water and topical rather than geographic focus can define future relationships from high-level summits to daily communications as a tangible near-term goal, it concludes.




The World Bank’s Circuitous Cyclical Bounce

2018 February 10 by

The World Bank’s January Global Economic Prospects report was upbeat over immediate and medium-term developing world growth, with the average put at 4.5% this year, but noted long-range productivity drags which could dent the story without labor, education and business climate breakthroughs. Recovery was clear in 2017 with commodity price upswings and big countries like Brazil and Russia out of recession, and the low-income group will outperform at 5.5% as they are in an earlier phase of capital accumulation with favorable demographic trends. “Disorderly” financial markets remain a risk with steeper borrowing costs hurting corporate balance sheets in particular, alongside geopolitical and trade protection threats. For commodity importers output gaps are near zero, and fiscal and monetary policies generally may be exhausted in extending the cycle placing the onus on structural changes that boost investment quality and living standards. Chinese growth will drop half a point to under 6.5% in 2018, as housing slowdown and bank regulatory crackdown take hold, and ongoing dangers include state corporate debt above 250% of GDP and the aging disproportionately male population. Global trends have been positive with trade volume due to rise 4% annually despite value chain stabilization and spreading tariff and procedural barriers on an estimated three-quarters of G20 member exports. Advanced economy gradual central bank rate and balance sheet normalization has been “accommodative,” with portfolio and banking allocation driving cross-border capital flow rebound with FDI “broadly stable.” However European bank lines are still “subdued” as they regroup on the continent under common supervisory norms, despite 20% oil and metals price jumps in client countries last year while food values fell slightly.

Industrial production as measured by PMIs is at multi-year peaks, and lower inflation has supported private consumption. Gulf and African energy exporters have struggled with price fluctuations and delayed budget and exchange rate adjustments, with security and social tensions a byproduct. In India investment has been “soft”, while EU structural funds aided Hungary and Poland. Mexico faces NAFTA renegotiation, but smaller Asian economies benefited from China’s Belt and Road infrastructure scheme. Poorer countries reduced poverty, but in one-third per capita income shrank with political upheaval worsening in places like the Democratic Republic of Congo. In this category fiscal and current account deficits fell, but government debt went the opposite for an average 55% of GDP. More trade-dependent emerging markets will reap gains from stronger industrial world investment, but “stretched” asset valuations raise doubts, and impaired credit quality, combined with higher leverage and historic low risk compensation, could spur corporate bond reversal. China could be especially susceptible after a prolonged debt boom and financial stress there would have wide-ranging “adverse” effects. Bank profitability is solid but capital buffer erosion is pronounced in India, Russia, South Africa and elsewhere. The UK-EU Brexit standoff, Korea and Middle East conflict, bilateral and regional trade pact modification, and international migration waves are other obstacles. Oil prices could slip again as green energy alternatives become less expensive and easily connected, and expansionary Chinese fiscal policy may spike public debt as sustainability is a core issue in the larger universe, especially if sovereign contingent liabilities are counted. Better skills and training are vital to future economic health, but the prescription could also worsen inequality in coming cyclical turns, the Bank concludes.


The IMF’s Foregone America First Feud

2017 December 18 by

A year into the Trump administration IMF watchers, as in a recent paper by the Canada-based Center for International Governance Innovation, remark on the lack of “vitriol” toward it as compared with free trade pacts like the TPP and the other Bretton Woods arms, the development banks which originally faced proposed 20 percent budget cuts. The “America first” focus on bilateral commercial deficits and alleged currency manipulation are issues at the center of Fund advice and monitoring, but its technical and understated political nature have not attracted the same multilateral invective as the UN and WTO. The Treasury Department appointees directly responsible are not yet in place and White House relationships outside are thin, although top officials at both places reportedly have cordial relations with Managing Director Lagarde. In April China was not named a currency violator, despite repeated campaign promises, following a Fund assessment that the renimbi was fairly valued. The retreat may have been reinforced by the urgency of getting Chinese help for North Korea anti-nuclear measures, as Treasury Secretary Mnuchin urged stronger exchange rate surveillance. On country bailouts which aid private creditors, senior line appointees Malpass and Lerrick have expressed skepticism in past writings awaiting a new test case. On Greece conservative Republicans introduced legislation in Congress to oppose further assistance and another quota increase until all debts were repaid, but the administration did not support the move or rise objections as a fourth loan arrangement the past decade was finalized over the summer. Secretary Mnuchin also praised current programs in Egypt and Ukraine and technical assistance on money laundering and terror financing. The Article IV report on the US in turn approved “broad objectives” such as tax reform, infrastructure spending, financial regulation and NAFTA overhaul. However its GDP growth estimates were lower than in the submitted budget and it called for open markets alongside better structural policies on education and training as the income inequality recipe rather than blaming trade partners. The fresh team may confront its first large rescue quandary in Venezuela, where it has imposed bilateral sanctions including on future debt exchange and purchase while the sovereign seeks restructuring with reserve exhaustion. The latest quota reform round, after the prolonged delay while President Obama was in office with Republican opposition, may not be concluded until 2019. Early betting is that additional incremental realignment of voting shares toward big emerging economies may be smooth but that more appropriations will be difficult, in view of critics’ push to tap global capital markets instead.

Africa has been an active recent Fund rescue region and assistance was a main topic at a forum between Secretary of State Tillerson and dozens of foreign ministers. Ghana extended its accord until the first quarter of 2019 with $350 million remaining to disburse, under a fiscal deficit goal of 5 percent of GDP next year to be covered by another $1 billion in Eurobonds. Zambia remains in negotiations as copper prices rebounded on Chinese demand and drought ended. Inflation is on track for the medium-term 6-8 percent target range, likely to enable central bank easing and Treasury bill yield decline as off-index investors creep in to shine returns.

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The IMF’s Regional Reinforcement Rehash

2017 August 16 by

Ahead of the next annual meetings the IMF’s Policy Review Department has published background papers on potential elements of an expanded global financial safety net leveraging Fund resources, a priority identified under the Managing Director’s work program and endorsed by major county shareholders. They have agreed in principle on an increased backstop beyond the existing prequalified contingency credit and new coordination approaches, with existing regional mechanisms profiled in a case studies document of a half-dozen recent crisis flare-ups. It looks at emerging economy constructs in Asia, Europe, the Middle East and Latin America and through the BRICS, with a particular focus on information sharing, surveillance capacity, and loan instruments to examine likely Fund facility fits. The analysis separately sketches out a quantitative contagion model that could serve as a future collaboration basis and sequence emergency partnerships according to the formula. The Arab Monetary Fund, founded 40 years ago, has $5 billion in capital and twenty members and was designed to correct balance of payments problems, including sudden oil import difficulties. It offers trade reform, broader structural adjustment and short-term liquidity assistance, and recent operations involved Egypt, Jordan, Mauritania and Sudan. The BRICS’ $100 billion contingent reserve was launched in 2014 with China’s contribution highest at $40 billion. It has not been tapped yet, but rules call for one-third access to currency lines with member agreement, and the remaining available with a formal IMF arrangement. The Chiang Mai Initiative among the Asean+3, a bilateral and multilateral swap regime, has been in place since 2000 with $250 billion on hand. It too offers 30 percent immediately and the rest tied to a Fund program, and has conducted “test runs” while never formally tapped. Members did help Indonesia with backup support during the 2008 crash in de facto application, although the episode passed in short order.

The Eurasian Fund was set up a decade ago by Russia and five CIS neighbors with the biggest Kazakhstan. It can provide $8.5 billion including grants for social purposes, and extended balance of payments aid to Belarus and Tajikistan and infrastructure credit to Armenia and the Kyrgyz Republic. Non-euro EU states have an EUR 50 billion kitty from 2002 predating the 2015 Stabilization Mechanism for the sovereign debt crisis, which was drawn on by Hungary, Latvia and Romania. The ESM’s current size is around EUR 700 billion and has been deployed on multiple occasions in Ireland, Portugal, Cyprus and Greece. Its writ goes beyond traditional external reserves protection in view of the single currency to encompass secondary bond buying and bank recapitalization with central bank consultation. Latin America has its own four decade-old Reserve pool among seven economies with maximum capacity below $5 billion. Ecuador and Venezuela received $500 million range loans and central banks in Colombia and Peru got technical help. Europe the past decade provided all the case evaluations, and they show differences over conditionality, responsibility, burden-sharing and timeliness. Joint reviews were often uncoordinated to undermine confidence and momentum, and out of six experiences listed only Hungary was a clear success in terms of effective collaboration which required the parties to defer to respective “comparative advantages” in know-how and judgment as important as money at stake in future anti-crisis recipes, the authors imply.


The World Bank’s Economic Prospect Pratfalls

2017 June 10 by

The World Bank’s June Global Economic Prospects analysis predicted 4 percent emerging market growth this year after 2016’s 3.5 percent “stagnation,” on broad commodity export and domestic demand rebound, but warned of longer-term structural productivity and trade drags for an overall “soft” recovery. Fiscal sustainability is often an issue, while currencies have strengthened with inflation in retreat. Household balance sheets are stretched in big natural resource countries like Brazil, Russia and Kazakhstan, and energy lags metal and farm sales performance. Sub-Sahara Africa has floundered with 2.5 percent growth forecast on additional political, security and weather challenges. In Francophone West Africa infrastructure has been the main driver, and Senegal re-tapped the Eurobond market in May. Current account deficits remain high in Rwanda and Uganda as they also struggle with refugee inflows. Exchange rates have collapsed in the Democratic Republic of Congo as President Kabila clings to power despite promised elections, and in Mozambique with external debt default following an inflation spike above 20 percent in the first quarter. While China and India slow other major developing economies including Mexico and Turkey will pick up the slack, but “headwinds” linger against further momentum ranging from lack of value chain integration to governance and institutional weakness. By region Europe-Central Asia and MENA will grow 2 percent, and Latin America/Caribbean just 1 percent this year, with the latter dampened by US policy fallout from the new administration’s pledged import and immigration curbs. Budget stimulus in industrial nations should be a net benefit, but “downside” protectionist and geopolitical risks will outweigh it, according to the Bank. The Middle East is at the perennial center of conflict worries, but North Korea is now in the mix and food and water scarcity cut across wide swathes of Africa. Tighter and more volatile global finance could loom with monetary policy changes not just in the North America, Europe and Japan but in China as well with the current deleveraging push with shadow banking’s squeeze. Dollar appreciation could aggravate corporate foreign currency borrowing as domestic credit backstops are not as readily available, according to the IIF’s latest lending condition survey with the still below 50 index. Oil prices could again slide with shale gas competition and non-observance of OPEC pacts. The earlier output boom from capital accumulation has not been followed by innovation and technology strides, and demographic pressures have also started to limit potential, the review cautions.

China is singled out for reform urgency with progress in state enterprise, tax, local government debt, and securities market consolidation amid lingering corporate and financial vulnerabilities. Private sector discipline and hard borrowing constraints could go further, and land and urban migration shifts can boost efficiency and employment. Emerging economies generally need increased banking system capital and liquidity, and public debt maturities should be extended and sovereign stabilization funds replenished. Labor and education overhaul and higher fixed capital formation with better property rights should be priorities and bilateral and regional commercial deepening in the absence of global agreements, such as the EU’s recent partnerships with CIS and Central American counterparts may be the future model. These accords can slash poverty but require supporting competition and capital market rules for more favorable prospects, the Bank insists.




The IMF’s Emergency Line Backup

2017 April 3 by

The Center for Global Development in Washington in a working paper called for expansion of the IMF’s two contingency facilities created in the 2008 crisis aftermath with current “volatile” emerging market conditions, as the US Treasury starts to fill its senior ranks amid a budget blueprint slashing multilateral development institution contributions, including all the Department’s own technical assistance to foreign counterparts. The separate Flexible (FCL) and Precautionary Liquidity (PLL) pools were designed for pre-qualification and lighter monitoring than traditional programs. Only a handful of countries—Colombia, Mexico, Poland, Macedonia and Morocco– have applied, with most renewing, as the instruments are bypassed in favor of reserve self-insurance, and regional and bilateral currency swap alternatives. The analysis points out widespread eligibility at reasonable cost, but acknowledges possible residual stigma following immediate creditworthiness gain. Mexico’s $90 billion is the largest, with the others combined less than $25 billion. Its term runs for two years with “strong” polices under the more stringent FCL, with the PLL demanding “sound” economic fundamentals.  Exclusionary factors include inability to access global capital markets, high public debt and bank insolvency, and poor data quality and transparency. Based on a series of institutional and macro-performance indicators thirty more countries could be added to the list, according to the Center. Fund resources could easily manage this demand under an assumed quota with $250 billion to be extended, out of $850 billion in total credit capacity. Other crisis buffers available through the ASEAN+3, BRICS, Latin American Reserve Fund, and European Stability Mechanism have more onerous guidelines and similar expense, with the first two requiring a formal IMF agreement in advance. Central bank swap commitments such as the Federal Reserve’s $30 billion to Brazil, Mexico, Korea and Singapore in 2008 soon expired, and they were the only approved recipients. Indonesia tapped the World Bank’s Deferred Drawdown Option instead under tougher terms, and private liquidity provision as organized in Latin America in the late 1990s has not been repeated since and lacks durability. Reserve accumulation continues to entail costs equal to 1 percent of GDP, and a better overall deal cannot be found than the FCL or PLL, the document argues.

A 2013 fifty-member IMF survey cited perceived negative image as the main obstacle, but it may be associated with the organization’s austerity reputation generally rather than the specific products. The financial market implications would seem to neutralize this concern, with Colombia seeing a 10 basis point sovereign bond yield reduction upon its move, while Morocco’s CDS fell by similar magnitude. With global reserves tapering with commodity export slowdown and capital outflows, the timing is right for wider participation which can contribute to global monetary safety, the paper concludes. Mexico has been in the cross-hairs in particular for stress response as the US formally signaled NAFTA renegotiation and preliminary immigration border wall construction in the coming months. Foreign investors have cut short-term Treasury ownership to 30 percent, and the central bank unveiled a new discretionary $20 billion foreign exchange hedging backstop to defend the peso. However growth will be less than 2 percent this year as inflation heads toward 5 percent on currency depreciation which may revive the relative value of IMF spurned innovations.