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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.


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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.




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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.


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Doing Business’ Plodding Placement Proliferation

2016 November 2 by

The World Bank’s 2017 Doing Business reference again added new components to its dozen ground level regulatory, credit and infrastructure themes, with a focus on post-tax filing and gender treatment as it also compiled original public procurement data. Women’s startup, enforcement and registration difficulties resulted in reduced private sector employment, and better country performance particularly on insolvency translates into lower income inequality. The 185 economies covered have enacted 3000 changes the past dozen years since publication launch, and Europe-Central Asia has been the top regional reformers, with Georgia, Latvia, Lithuania and Yugoslav Republic of Macedonia in the 30 ranking leaders overall dominated by wealthy OECD members. The past year had 275 improvements, mainly in launch processes, and Brunei, Kenya, Belarus, Kazakhstan and Indonesia showed the most progress. Major cities within countries have started to compete for superiority, as with Mumbai and Delhi in India, where the Modi government’s “fast pace” was lauded. The capital’s utility has streamlined power connection and automated tax payment, and new bankruptcy and court procedures were introduced. African officials often form dedicated units to raise marks, and Rwanda has stood out with a wide-ranging menu to help achieve low-middle-income status by end-decade. Efforts have gone cross-regional as with APEC’s medium-term action plan for Asian and Latin American signatories. In Mexico and Colombia subnational benchmarking is routine for dozens of provinces and states. Georgia was again a major gainer with customs breakthroughs, and Bahrain and the UAE have advanced on credit information and construction permits even as the Gulf has traditionally lagged on these issues. Secured transaction laws and collateral registries are increasingly common and credit reporting has extended beyond banks to wider commercial use within privacy limits. Twenty countries strengthened minority shareholder rights, and Morocco and Vietnam expanded transparency criteria while Sri Lanka barred conflict of interest and insider dealing. In Africa 17 French-speaking states adopted the OHADA liquidation framework, and Thailand adapted its reorganization code to meet small and midsize company needs.

Frontier markets with banking cleanup challenges, such as Tunisia which renewed its IMF program with a 4-year $3 billion facility. The financial-heavy stock exchange was flat on the MSCI Index through October despite recapitalization of two large public banks and new legislation. Private credit has sputtered with the NPL ratio above 15 percent, forcing borrowers to rely on direct central bank lines. Capital adequacy is reported at 12 percent, but tourism which accounts for one-quarter of problem portfolios, remains subdued on meager 1-2 percent GDP growth. Small companies have scant access despite the recent removal of interest rate caps and consolidation of hundreds of microfinance providers into several dozen. Security and social spending to address overlapping terror, refugee and unemployment threats have undercut efforts to restrain debt/GDP at 50 percent, but fiscal strategy contemplates civil service and fuel subsidy cutbacks. The current account deficit at 8 percent must also be reined in under the Fund arrangement, with reserve coverage now four months’ imports with bilateral and multilateral infusions. The central bank has refrained from intervention as capital account restrictions are gradually relaxed in preparation for a big end-November investment conference previously postponed with political shakeups and headline violence. Municipal elections approach in early 2017, after another Jasmine revolution anniversary with financial sector flowering signs still remote.




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Development Finance Institutions’ Muddled Model

2016 October 20 by

As OPIC in the US and other long-established bilateral development finance specialists look to revamp their missions in the face of new global competitors and issue-business challenges, a comprehensive study by Washington and London think tanks traces the broad history and recommends future activity and policy concentration. Their combined commitments were $70 billion as of 2014, half of total overseas direct aid, and they focus on investment support in low and middle-income economies rather than broad anti-poverty and sustainability goals. Tools encompass a range of loan guarantees, equity and insurance and outside fund manager engagement. Blended instruments with pure private sector funding are increasingly popular, and may be well-suited for big regional, energy and environmental projects, according to the authors. However executives in charge tend to focus on technical deal-making instead of larger issues and themes often inviting disconnect with traditional assistance agencies. The 2015 Financing for Development conference in Addis Ababa emphasized the importance of FDI risk reduction mechanisms, especially for marginalized fragile states. Local capital markets where they exist are often shallow and spurn small and midsize firm needs. In 2015 European DFIs had a total portfolio of $35 billion, and both OPIC and the World Bank’s IFC arm each mobilized $20 billion. China’s policy banks had outstanding credit of $685 billion, and Brazil’s state development lender’s was $275 billion. The new BRICS bank will extend and consolidate these efforts, along with the infrastructure focused AIIB based in Beijing with extra-regional shareholders. Europe’s providers have quantified their impact by citing creation of 4 million jobs and $10 billion in local tax revenue and participation must always meet the “additionality” test, namely that transactions would not occur otherwise. Financial services, power and transport are among priority sectors, and Sub-Sahara Africa is a chief target region. The institutions are often called upon to spur innovations such as in women-run enterprises and to carry out urgent crisis relief such as in battling the Ebola virus or funding post-Arab Spring economic transition. Evidence suggests that this investment can be counter-cyclical, but poverty and environmental results are rarely measured explicitly even as these operations are responsible for achieving the 2030 Sustainable Development Goals.

The paper concludes that “core competencies” should continue, but advises a shift from micro to macro themes and greater transparency in approval and evaluation processes. Risk tolerance should rise along with endowed capital as many DFIs remain small, and failure lessons must be more widely shared for academic and practical purposes. Africa attention will expand in the near-term with commodity exporter strain as debt-GDP ratios in many countries exceed 40 percent. Nigeria, where oil contributes three-quarters of fiscal revenue, has reached out to these sources after naira devaluation for commercial backing without resort to a companion IMF adjustment program,, while Zambia post-election will tap both after tightening fiscal and monetary stances. Its new budget will present figures on an accrual basis as GDP growth should come in this year at 3 percent, and banks grapple with higher bad loan loads which could be mitigated by outside forms of copper-bottomed protection.


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