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CEMLA, October, 2013
U.S. Monetary Policy and Emerging Markets’ Challenges
Jose Viñals
Financial Counselor and Director, IMF
Recovery of the global economy continues …
0.0
1.0
2.0
3.0
4.0
5.0
6.0
World Advanced Economies Emerging Market and Developing Economies
2013 2014
GDP Growth Projections (In percent)
Source: World Economic Outlook (WEO, October 2013)
2!
… with regional differences
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0
United States European Union
Japan Developing and Emerging
Asia
Latin America and the
Caribbean
Central and Eastern Europe
Advanced Economies Emerging Market and Developing Economies
2013 2014
GDP Growth Projections (In percent)
Source: World Economic Outlook (WEO, October 2013)
3!
Key challenges for emerging markets: internal and external
-
1.0
2.0
3.0
4.0
5.0
6.0
2013 2014
WEO Apr 2013
WEO Oct 2013
Emerging Markets - GDP Growth Projections (In percent)
4!
1.5
2.0
2.5
3.0
Apr
-13
May
-13
Jun-
13
Jul-1
3
Aug
-13
Sep
-13
Oct
-13
10 Year U.S. Government Bond Yield
-40
-20
0
20
40
60
80
100
120
Japan Europe EM US
-24
-20
-16
-12
-8
-4
0
4
8
Recent market turbulence: temporary or more to come?
(basis point) Equity Currency
(percent) (percent)
Bond Yield Volatility
Change since May 21, 2013 to current Change since May 21, 2013 to peak
Appreciation
Depreciation
0
20
40
60
80
100
120
140
160
5!
How will the U.S. monetary exit be? Bumpy
• Timing of recovery
uncertain
• Tapering has not even started, let alone tightening
• Unchartered territory
• Fed doesn’t control long-term rates
• Potentially
destabilizing market dynamics
Smooth • Gradual recovery
expected
• Tapering smooth and tightening gradual
• Much already “priced in”
• Volatile adjustment largely behind us
US 10-year Treasury Yield (percent)
1
2
3
4
5
6
7
Jan-13 Jan-14 Jan-15 Jan-16
May 21 Sep 17
90th percentile
50th percentile
10th percentile
6!
Potential impact on emerging markets
-460
-320
-140
-500
-400
-300
-200
-100
0 Yield External Factors
Domestic Factors
Local currency yield tightening (Dec 08-Dec 12)
(basis point)
• External conditions
• Quality of domestic fundamentals
7!
• Massive shift to fixed income (U.S., EM)
• Increased duration (U.S., EM)
• Structurally lower market liquidity (U.S., EM)
• Foreign investors have crowded in local markets (EM) • Higher role of cross –over investors (EM)
Volatility amplifiers in the U.S. monetary exit process
8!
Rising corporate leverage in emerging markets
New issuance of corporate debt (billions of US dollar)
0
50
100
150
200
250
300
2008 2009 2010 2011 2012 2013
Nonfinancial Corporate Balance Sheet Metrics
40
45
50
55
60
65
2004 2006 2008 2010 2012
Ratio of Net Debt to Equity (percent)
Asia
Latin America
CEEMEA
Sources: Bloomberg L.P.; and IMF staff calculations. Note: Computed as the median of all available firm data. CEEMEA - central and eastern Europe, the Middle East, and Africa. Firms with negative net debt were excluded.
9!
Recent “mini-stress” tests: currencies and bonds hit the most
BRA IND
IDN
TUR ZAF
CHN
MEX
HUN POL
RUS
KOR
MYS PHL THA
CHL COL PER
BGR LTU
ROM UKR
-20
-15
-10
-5
0
5
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0
Increase in 10-yr Govt Bond Yields (percentage points)
Cha
nge
in N
omin
al E
xcha
nge
Rat
e
(LC
/US
D, i
n pe
rcen
t, - d
epre
ciat
ion)
Exchange Rate vs. Bond Yields Change (May 22 /Aug 30, 2013)
10!
Recent “mini-stress” tests: fundamentals matter
BRA
IND
IDN
TUR ZAF
CHN MEX
HUN
POL
RUS KOR PHL
THA
CHL COL
PER
BGR
KAZ
LTU
ROM
-8
-6
-4
-2
0
2
4
6
-20 -15 -10 -5 0 5
Cur
rent
Acc
ount
Bal
ance
, 201
2 (i
n pe
rcen
t of G
DP
)
Change in Nominal Exchange Rate, Aug 30 to May 22, 2013 (LC/USD, in percent, - depreciation)
Exchange Rates vs. Current Account Balance
BRA
IND
IDN
TUR
ZAF
CHN
MEX
HUN POL
RUS
KOR MYS
PHL
THA CHL COL PER BGR
KAZ
LTU
ROM
UKR
-2
0
2
4
6
8
10
12
-20 -15 -10 -5 0 5
Infla
tion
rate
(a
vera
ge J
an-A
ug 2
013,
per
cent
)
Change in Nominal Exchange Rate, Aug 30 to May 22, 2013 (LC/USD, in percent, - depreciation)
Exchange Rates vs. Inflation Rate
11!
It takes two to tango
• Manage tapering and tightening (execute + communicate) • Prudential policies key for stability
US
Emerging Markets
• Strengthen macro-financial policy frameworks and buffers • Facilitate orderly market adjustment
12!
• In preparation è strengthen fundamentals/keep them in check
• If serious tensions arise:
Ø Allow exchange rates to adjust in line with fundamentals
Ø Provide liquidity
Ø Adjust macroeconomic policies
Ø Prudential policies
Ø Swap lines, IMF facilities
Specifically for emerging markets
17!