Employment, Growth and Emerging Markets – IMF F&D
Source details
- Canonical URL
- Employment, Growth and Emerging Markets – IMF F&D
Other formats
Bibliographic details
- Authors: MAHMOOD PRADHAN
- Published: June 1, 2021
Resilience of emerging market assets during COVID-19
- Emerging market assets proved "remarkably resilient" over the past year despite pandemic shock.
- Contributing factors:
- Very large liquidity injections from central banks in advanced economies.
- Greater policy space in some emerging market economies, including use of unconventional monetary policies previously thought available only to advanced economies.
- Increased diversification of the asset class: "more than 80 countries to choose from" versus a handful 25 years ago.
- Ownership structure shift: "average ownership of foreigners is about 20 percent, including corporate debt."
- Larger domestic ownership limits contagion and enhances resilience.
- Market behavior in 2020:
- Eurobond issuance by emerging economy borrowers was some $800 billion for the whole of 2020, "more than a 10 percent increase over 2019."
- Recession-induced reductions in current account deficits lowered external financing needs in many emerging economies.
Interest-rate environment and potential risks when yields normalize
- Historical dynamics:
- Collapse of US real interest rates starting in late March 2020 pushed capital toward emerging economies.
- Rises in US interest rates have been a threat to emerging markets’ capital flows "since the 1970s."
- A small recent increase in 10-year US Treasuries "caused some turbulence."
- Persistent negative real yields on the 10-year US Treasury were described as "absurdly low"; as long as that remains the case, "the threat of significant capital outflows should be contained."
- Interactions with global growth:
- If long-term rates move up because of stronger US growth, emerging economies generally lose more through capital outflows than they gain from increased exports under normal circumstances.
- Contemporary global drivers: "the main driver of global investment trade and commodity prices has not been the United States, but China."
- Ideal scenario for emerging markets: "a weaker US, with low interest rates pushing capital toward emerging markets, and a stronger China boosting trade and investment."
- Policy developments in the United States (e.g., infrastructure plans) could help emerging countries, particularly if China refocuses toward consumption.
Use of unconventional policies and policy space
- Unconventional monetary policy in emerging markets:
- Many central banks in emerging markets used unconventional policies; "every central bank has been unconventional" compared with only a few years ago.
- The narrative that emerging countries cannot do quantitative easing "is long past."
- Diversity in approaches: example of India combining expansionary fiscal policy with caps on bond yields; such measures may not be viable in all countries due to potential for "massive capital outflows."
- Effectiveness often depends on market confidence in growth potential and capital account openness.
Debt burdens, default risk, and need for assistance
- Debt trends and concerns:
- Debt burdens of emerging markets and low-income countries are "rising to unprecedented levels."
- Many countries are unlikely to see debt-to-GDP levels return to pre–COVID-19 levels "for many years."
- Accumulation of large debt in foreign currency is identified as "much more dangerous," though current indicators (external debt service ratio; debt to foreign exchange reserves ratio) "don’t look too stretched in historical terms."
- Low US interest rates help keep debt service costs low.
- Comparative historical point: past crises (1980s and 1990s) were linked to lack of dollar assets; in the last 20 years many emerging markets "made strenuous efforts to accumulate foreign currency reserves."
- Domestic debt problems may be more serious in some countries; investors and the IMF have "very little experience" with domestic-debt crises.
- Default and restructuring:
- Recent defaults/restructurings in Argentina, Ecuador, and Lebanon did not produce contagion.
- Some countries facing liquidity or solvency issues will need more assistance from the IMF and "potential private sector participation in restructurings."
- Private sector participation is warranted "when debt is clearly unsustainable."
- The IMF's "lending into arrears policy" (first introduced in the 1980s) and private creditors’ risk assessment responsibilities were highlighted.
ESG (environmental, social, governance) debt issuance opportunities and risks
- Market size and demand:
- ESG-compliant borrowing in emerging markets is estimated at $16 billion, "still only 4 percent of total funds under management in emerging markets."
- Demand from investors is strong; three-quarters of client meetings discussed ESG strategies.
- Roles and challenges for the IMF and public sector:
- The IMF can help smaller countries get involved and support monitoring and reporting, given its commitment to the UN Sustainable Development Goals.
- Suggested IMF roles: help with monitoring and engagement, especially on social and governance aspects; encourage country engagement and better reporting.
- Risks and caveats:
- Money fungibility complicates assurance that proceeds fund stated green/social projects.
- ESG ratings are "highly correlated to per capita GDP," raising concern that entrenched ESG-based capital allocation could produce perverse consequences and risk capital flows to lower-income countries.
- Values-based investing could lead investors to exert pressure that may not always yield clear benefits and could "end up perpetuating a situation."
Market structure and outlook
- Structural improvements reducing systemic crisis risk:
- Pegged exchange rates are largely a thing of the past, reducing likelihood of another "big systemic emerging markets crisis" at the sovereign level.
- Potential for crises remains at the corporate level in some countries.
- Private-sector differentiation and investor behavior:
- Despite large-scale liquidity support, macro and political drivers "ultimately drive asset prices."
- There has been "reasonable differentiation" across countries in sovereign credit and foreign exchange.
- Portfolio managers are expected to perform proper risk assessments rather than rely on multilateral bailouts.
Source: Employment, Growth and Emerging Markets – IMF F&D
Content in this bundle
- الأسواق الصاعدة في حالة تغيير
- 动荡不安的新兴市场 - 金融与发展 - 国际货币基金组织季刊 -2021年6月号·第58卷
- Emerging Markets in Flux – IMF F&D
- Mercados emergentes en cambio constante ● Finanzas y Desarrollo ● Junio de 2021
- Emerging Markets in Flux Pradhan House Lubin Fr
- 「変動期の新興市場国」 マムード・プラダン リチャード・ハウス デビッド・ルービン, ファイナンス＆ディベロップメント 2021年6月号
- СТРАНЫ С ФОРМИРУЮЩИМСЯ РЫНКОМ В ПРОЦЕССЕ ИЗМЕНЕНИЙ