On March 8, 2019, the Bretton Woods Committee hosted a virtual conference, Regional Spotlight: Emerging Markets Outlook, which explored the risks and opportunities facing emerging markets in light of global geopolitical tension, trade disputes, and monetary policy normalization. Featured speakers included Gita Gopinath, the Economic Counsellor and Research Department Director at the IMF, and Catherine Mann, the Global Chief Economist at Citigroup. Meg Lundsager, Public Policy Fellow at the Wilson Center and Bretton Woods Committee member, moderated the conversation.
In the most recent IMF World Economic Outlook (WEO) forecast, global growth was revised down due to weakness in the Euro area and protectionist policies in the U.S. and EU. While emerging market turbulence toward the end of 2018 appears to have calmed down in the first few months of 2019, emerging markets remain susceptible to the following risks:
- Monetary Policy in Advanced Economies: Since 2017, the trend of monetary policy normalization in advanced economies has resulted in capital flight from emerging markets and destabilizing exchange rate movements in countries with high levels of foreign-denominated debt, such as Argentina, Chile and Indonesia. However, the panelists noted that central banks in emerging markets are enjoying increased monetary policy space resulting from confidence in domestic currency stability under floating exchange rate regimes. This precludes the need for immediate policy adjustments to insulate emerging markets from the spillover effects of U.S. dollar and euro appreciation. Emerging markets may also be granted a reprieve from the effects of monetary tightening this year as advanced economy central banks adopt accommodative policies in response to projections of slowed growth. The Fed’s recent decision to hold off on further rate hikes until the second half of 2019 is expected to trigger a return of capital flows to emerging markets.
- Implications of U.S. Trade Deals: Panelists emphasized that the outcome of U.S.-China trade negotiations could be a major destabilizing factor to emerging markets but were optimistic that a mutually agreeable deal will be reached. If the deal calls for China to increase its imports from the U.S. reduce the bilateral trade deficit, this will reduce Chinese imports from emerging market partners. Countries whose exports to China have increased during the trade dispute as substitutes for American goods will also experience a destabilizing swing in commodity prices. However, if the deal calls instead for a reduction in tariffs, this would be advantageous to emerging markets, which would benefit from increased openness in the global trade system. Similarly, the successful negotiation of the U.S.-EU free trade agreement is expected to result in positive spillover effects for emerging markets.
- Debt Sustainability and Systemic Risk: Emerging markets that have productively used recent increases in capital inflows to build up foreign reserves have insulated themselves from interest rate movements in the U.S. However, countries such as Argentina and Brazil that have unsustainable levels of public debt are still sensitive to changes in financial conditions and have a constrained set of fiscal policy responses. Despite lax lending standards and corporate, sovereign, and household debt accumulation, the global economy is not facing systemic risk from overexposure to volatile asset classes as it was in the run-up to the global financial crisis. The panelists noted that the banking system is also better capitalized than it was 10 years ago and is not a risk factor for widespread financial contagion.
This event was part of the Bretton Woods@75 series of dialogues to gather forward-looking perspectives on issues impacting the Bretton Woods architecture, institutions, and Committee.
Bretton Woods@75 is a global dialogue to honor 75 years of economic progress and to revitalize the spirit of Bretton Woods now and for the future.