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The emerging markets cannot “afford” a repetition of the “taper tantrum” market disruption of 2013, when the US Federal Reserve signaled an earlier than expected withdrawal of stimulus measures and triggered a rise in global borrowing costs, warned the IMF’s chief economist.
In an interview with the Financial Times, Gita Gopinath was cautious as the Fed prepares to withdraw its support for the pandemic, highlighting economic pressures on low and middle income countries that have suffered disproportionately from the coronavirus crisis . She also warned of the potential repercussions should US inflation become a more dangerous issue and force a sudden tightening of monetary policy.
“[Emerging markets] are facing much stronger headwinds, ”she said. “You get hit in a lot of different ways, so you just can’t afford a situation where you have some kind of financial market tantrum from the big central banks.”
Gopinath’s comments come after Fed Chairman Jay Powell signaled in a speech at the central bankers’ virtual Jackson Hole Symposium on Friday that the U.S. economy would be strong enough for the Fed to start withdrawing its 120- Billion dollar bond purchase program would begin.
Business has grown significantly in the past five months along with a major Covid-19 vaccination campaign. Consumer prices in the US have also risen sharply, driven by booming demand and bottlenecks in the supply chain that have led to an acute shortage of some goods.
Inflationary pressures have risen higher and faster than most economists expected, although the Fed has long said it will ease over time. However, policymakers are better prepared for the risk it could last longer, especially as the more contagious delta coronavirus variant is fueling an alarming spike in Covid cases worldwide.
“Many of the problems we face, including inflation and supply shortages, have to do with the pandemic raging in different parts of the world,” said Gopinath. If higher inflation persists, “this can flow into inflation expectations and then have a self-fulfilling function”.
“We are concerned about a scenario where inflation would be much higher than expected and that would require monetary policy normalization in the US much faster,” she added.
The IMF calculated in July that a cumulative $ 4.5 trillion could be cut from global gross domestic product by 2025. massive “normalization of monetary policy in the US, although this is not the fund’s base scenario.
The damage would be particularly acute for low- to middle-income countries, according to Maurice Obstfeld, former IMF chief economist and professor at the University of California, Berkeley, given the rise in debt levels since the pandemic began.
Average national debt in major emerging economies rose from 52.2 percent of GDP to 60.5 percent in 2020, according to the Institute of International Finance. That was the largest increase on record and helped countries weather the pandemic.
Many are in better shape today than they were during the 2013 tantrum. Larger foreign exchange reserves and better budget and external balances have helped strengthen their defenses, but one big shock could penetrate that.
“If they are hit by an abrupt tightening in dollar funding conditions and perhaps a reversal in capital flows, that could be pretty devastating amid an ongoing pandemic,” he said.
More than $ 360 billion flowed into EM stocks and bonds in the last nine months of 2020, according to IIF. Although the pace of inflows has slowed since then, many countries are still very vulnerable to rapid changes in investor sentiment.
Higher inflation has already forced several of these countries to raise interest rates – including Brazil, Hungary, Mexico and Russia – but additional tightening may be needed to stave off capital flight and currency devaluation, causing further economic problems.
Gopinath said central bankers need to provide “super clear communication” on a regular basis about their political path forward – something they think Powell has done effectively.
“One of the problems though [then-chair Ben] Bernanke made his statement in 2013 not so much that quantitative easing was about to begin, but that it was also confused with the expectation that rates would rise faster than expected, ”she said. “This time, they made it very clear by saying that they will start tapering first. . . and then they will start raising interest rates. “