The World Bank’s Empty Shaft Prospecting

2020 March 26 by

The World Bank’s January Global Economic Prospects issued before the coronavirus surge found “marked deceleration” in global growth last year affecting over half of emerging economies, with the average around 3.5% on weak manufacturing. This year’s projection is only 4%, half a point below previous forecasts, as trade will only expand 2% despite the US-China first phase deal. “Subdued” financial market sentiment will continue and flatten commodity prices, and even with monetary easing about one-third of the developing country universe can expect lower growth. In the medium term low income countries will set the fastest pace at 5.5%, but per-capita income and poverty levels will barely budge. High debt and lagging productivity block anti-shock capacity as traditional policy space is thin. Food and fuel cost controls mask actual inflation, and fiscal deficits limit countercyclical spending as tax bases are unable to support investment and social safety nets. Business climate improvement and technology integration are unfinished agendas, as weather emergencies and energy needs demand “green” solutions, according to the publication. China’s expansion will dip under 6% for the first time in three decades, with total debt over 250% of GDP. Both exports and domestic demand are down, and budget and credit measures cannot reverse the trend. The drag contributes to Asian cross-border goods and services slowdown, with construction and tourism softening for the latter. Protectionist levies affected over $1 trillion in world commerce last year, overshadowing a few new bilateral and multilateral free trade accords most notably a Pan-African one.

Over $10 trillion or one-quarter of global debt has negative yields, spurring emerging market borrowing at narrow spreads although lower-rated sovereigns may not benefit. Most currencies continue to depreciate against the dollar, and FDI slipped in all regions through the first half of 2019 outstripped by remittances. Oil was off 10% to $60/barrel, and agricultural and metals values also fell. Commodity exporters grew just 1.5%, half the figure for importers led in Asia by China and the Philippines. Almost the entire pickup this year will come from a handful of major markets, including Brazil, India, Mexico, Russia and Turkey. Extreme poverty defined as living on less than two dollars a day dropped by a billion people in recent decades, but double that number have no basic sanitation access. The infrastructure elements of the Sustainable Development Goals call for unlikely annual investment over 5% of GDP for poor and middle-income economies, with Africa especially at the bottom as conflict and penury concentrate there, the report warns. On purchasing power parity basis China is now one-fifth of world output and integral in auto and other supply chains at risk from further tariff and geopolitical struggles. Emerging market credit booms have been mostly for consumption, and contagion may center on common foreign investor ownership of local bonds. Social unrest and climate change have economic and financial implications across the asset class yet to be calculated, and China’s excessive leverage can best be tackled over time that may not be available. Almost half of developing markets have insufficient reserves, and macro-prudential policies often stifle banking and securities modernization. Output per worker is less than one-fifth the advance economy result, with a century required to close half the gap as another grim reading.

The EBRD’s New Scaffolding Scrapes

2020 February 21 by

The approaching 30th anniversary of the post-communist European Bank for Reconstruction and Development, with a core democracy and private sector building purpose and geographic spread to the Middle East and Central Asia, has set off a wholesale rethink after a high-level task force recently weighed in on the Luxembourg-based European Investment Bank’s future. That report urged reorientation on climate and sustainability lending in poor countries, with the EBRD as a possible shareholder in a spinoff entity. It came as the EIB’s main infrastructure project portfolio will likely come under pressure with post-Brexit budget cuts, and member countries are able to separately attract private debt and equity finance. Europeans together still hold a majority stake in the London-headquartered Bank, originally championed by a French official on the understanding it would be built elsewhere. North African nations joined after the Arab Spring and stillborn attempts to create a stand-alone Middle East body, and the target central and east Europe block now accounts for only one-third of investment, with the Southeast and MENA roughly split at 20%. Total allocation to date is around $150 billion, with Turkey replacing Russia as the leading single focus after post-Crimea sanctions suspended operations in the latter. Infrastructure and energy currently absorb half of commitments, in contrast with the early manufacturing and services footprint. 80% is loans, 15% equity, and 10% guarantees and other “de-risking’ instruments. Banking and capital markets work came to over $50 billion for 2000 projects through 2018, and an active technical assistance program recruits foreign advisers and consultants. Only a half dozen of the founding area members did not rise in income classification, and the Czech Republic “graduated” from eligibility altogether a decade ago. The US remains a large shareholder with a 10% holding, and it has emphasized geopolitical rivalry in recent years against Russian and Chinese economic and credit expansion in the area. Moscow has natural gas pipelines and drew neighbors into the Eurasian Economic Union aiming for full integration with Belarus, while Beijing’s Belt and related initiatives sprinkle $300 billion across the wider Silk Road.

A December CSIS think tank report points out that graduation policy is undefined and that “fault lines” have opened as borrowers may be tempted to turn to cheaper sources with “malign interests.” It argues that assigning a green mandate within the context of a new organization would confuse its mission and undermine a versatile commercial culture, and that expanding into Africa and other low-income regions will stretch capabilities and create additional rivalries. However on the issue of migration the EIB and EBRD could better collaborate on fresh solutions, building on the latter’s Syrian refugee support in Jordan and Turkey which also acts as a “force multiplier” for US humanitarian assistance. Rediscovery more than reinvention should be the future strategy especially with frontier capital market deepening lacking basic knowledge transfer. More countries should graduate under a clear process, and equity and guarantee volume can better balance loans. These changes should be embraced under the next President as longtime leader Chakrabarti exits the scene, and the US should not consider reducing or selling off its estimated $150 million share, which can backfire in both deal and diplomatic terms, CSIS warns.

The World Bank’s Conflict Strategy Rifts

2020 February 7 by

After extensive consultations over months with interested parties, the World Bank circulated a draft of its 5-year fragility, conflict and violence (FCV) blueprint intended to guide the new leadership and prepare for a scenario where half the world’s poor could be under the classification. It notes that displacement and war in low and middle-income economies have reached peaks, alongside climate, technology, capital flight and terrorism stress. Chronic bad governance is typically a feature due to affect the population and deepens poverty for another generation, and these combined challenges go beyond reconstruction to span a range of institutional capacity and human development issues. The latest IDA replenishment targets $15 billon for such purposes, with special pools like the $2 billion refugee window also available. Within the broader group IFC and MIGA are scaling up private sector activity, with the former committed to a 40% fragile-country portfolio. The template must be adapted to political, economic and security conditions and will require more staff taking greater project risks, the paper suggests. Environmental degradation, rule of law absence and weak business environments are structural obstacles where outside humanitarian and commercial partnerships should be mobilized as a priority. In the past decade major military confrontations have tripled and thirty countries are in constant crisis. They have drug, gang, gender and cross-border dimensions spurring over 30 million each in externally and internally dislocated waves, three quarters women and children. By 2050 Africa, Asia and Latin America could have 150 million climate migrants alone according to expert projections. Natural resource management is at the heart of two-thirds of fighting, and in cases like the Democratic Republic of Congo has perpetuated it locally and among neighbors. It also drives “elite capture and corruption” and tends to overwhelm cost-effective prevention efforts where one dollar invested can save fifteen dollars of damage.

Future engagement should focus on the most vulnerable in society and follow “do no harm” principles. The Bank has tried this approach in Yemen since 2015 with billions of dollars in food, fuel, health and power support. Standard monetary and exchange rate policies must also be monitored during these emergencies, as remittances are often vital while central bank operations cease. Subnational areas can be spared in the worst conflicts, and IFC has expanded agribusiness deals in parts of Afghanistan and Iraq. On refugees the UN’s Global compact in force this year has guided employment and education programs encouraging integration and self-reliance. Pandemics such as Ebola can be tracked more systematically for early warnings and treatment, and social safety nets and cash transfers should be in place if viable. The Bank Board will update its FCV policy as line staff streamlines small loan approval processes. New quantitative and qualitative indicators will aid evaluation and learning, and real time data collection from satellites and other sources can bolster planning. The Crisis Partnership with the UN can be extended to other official and private actors, as multilateral lenders also further build their dedicated economic migration platform. Faith-based and civil society counterparts are already part of natural outreach but banking and corporate executives should be added without disturbing the volatile mix, the document concludes.

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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