The IMF annual meeting in Lima was a surreal affair. Pisco sours, traditional Andean dances, and tours to Machu Picchu might well prove to be enduring legacies from the annual gathering, which was bereft of substantive discussions on the prospects for the global economy.
The relatively remote location of the multilateral gathering ensured fewer bankers and fund managers turned up, giving Euromoney greater opportunity to speak to the slew of emerging market policymakers that did make the journey.
The market backdrop to the meeting was, for a change, quite bullish as risk assets staged a rebound, as the Fed’s more-dovish-than-expected posture in its September meeting, a modest recovery in commodity prices, and the relative calm in China’s stock market after the summer rout calmed some of the more bearish sentiments.
However, external headwinds remain, and the tone of the meeting was decidedly gloomy on global growth. Fears over emerging market corporate debt burdens took centre stage and replaced the European sovereign crisis as the principal global macro fear. Weak corporate balances sheets, currency mismatches, and anaemic funding conditions set the stage for weak corporate and household income growth.
Few officials could see a route to growth, though an outright crisis was considered unlikely. Weaker exchange rates no longer translate into thriving exports, as in the 1990s, leaving domestic demand deflation to bear the brunt of macro adjustment. Strikingly, the disinflationary boost provided by weaker oil prices in Asia has not fed into increased consumption, observers noted.
While fund officials redoubled calls for emerging markets to enact supply-side reforms, given their relative lack of fiscal and monetary space to stimulate growth, they called for demand-side policies to stimulate consumption and imports in the eurozone and the US.
On China, most dismissed prospects for a debt blow-up in the near-term, citing ample fiscal and monetary policy space, yet downgraded their medium-term view on Chinese growth, raising the risk of a fiscal crisis in the commodity producers. Given the opaque nature of large-scale capital outflows from China this year, many emerging market officials suggested further capital-account liberalisation in the near-term would be a recipe for disaster.
Weaker growth from China also threatens to end the state-financed patronage of its commodity- and infrastructure-client states, from Venezuela, Ecuador and southeast Asia, officials feared.
Yet a key plank of the global economic debate was missing: whether or not the Fed should look beyond its narrow domestic employment/inflation mandate to factor in the impact of its monetary stance on emerging markets.
It seems emerging markets have lost all hope on monetary coordination. While emerging markets, in general, should be praised for their embrace of floating exchange rates, distrust over the fickle nature of international capital flows – and, by implication, the virtues of financial protectionism – are growing.
After all, the likes of Brazil, Turkey, and South Africa, are paying a heavy price for having relatively open capital accounts without enacting the institutional reforms in the good times to absorb such flows.