U.S. Monetary Policy and Emerging Markets’ ChallengesU.S. Monetary Policy and Emerging Markets’...

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!