Sponsors: Overseas Development Institute (ODI) & Standard Chartered Bank
Sam Fleming, US, Economics Editor, Financial Times (Chair)
Dr Sarah Alade, Deputy Governor of Economic Policy, The Central Bank of Nigeria
Dong He, Deputy Director, Monetary and Capital Markets Department, IMF
Daniel Hanna, Global Head, Public Sector and Development Organizations, Standard Chartered Bank
Phyllis Papadavid, Team Leader, International Macroeconomics, ODI
Perry Warjiyo, Deputy Governor, Bank Indonesia
(Moderator) Biggest challenges facing Nigeria when considering financial shocks?
- These stem mainly from low commodity prices, as government earns over 80% of its revenue from oil
- This leads to currency challenges, and questions over how to balance growth encouragement, and consider risk from inflation
(Moderator) Q re volatility
- Focus on role of emerging markets in encouraging global financial stability
- How? Getting the macroeconomic stability & adjustment right, we’ve focused on this since the 2013 taper tantrum.
- This means fiscal, monetary policy and structural reform. This is necessary but not sufficient
- This also needs focused central bank policy – but when we are focused on volatile flows we need to practice fiscal policy with a appropriate mix of macroprudential policies. This adds to flexible exchange rate policy.
- This mix of policies allows us to withstand global shock without a greater impact on global economic growth.
- Beyond this, adequate foreign exchange rate reserves are also necessary.
- This approach has worked quite well up to now since 2013, and we are hoping for quite positive growth results
(Moderator) Most important risks or shocks to emerging markets in next 12 months
- Concerns over leverage we do see some positive developments – that leverage in emerging markets has peaked or are currently peaking. This may be related to lowered commodity prices
- Early indications indicate corporate leverage is poised to fall for the first time, though perhaps with exception of China. Though we feel that this leverage remains high.
- Leverage in EMs is not forecast to reach the 2011 level for 5 years, hence along the way vulnerability remains high and if there are shocks then corporates will face difficulties and banking systems would take a hit.
- Markets forecast low or negative interest rates toward the end of the decade.
- For advanced economics 40% of government bonds carry negative yields – this may lead to more borrowing despite our view that it has peaked.
- (moderator – are political risks around elections a concern, and what is the role of the Fed’s interest policy)
We have identified political risks and in particular a fraying consensus over the benefits of cross-border trade and flows
The dollar remains the pre-eminent international reserve, so Fed interest policy will significantly effect emerging markets. But they may indeed benefit from an improved economic outlook that would be underpinning any rise in interest rates from the Fed. So needs to look at that as a net plus for emerging and low income countries
- Focus on Asia, Africa, Middle East – 90% of profits and revenues in those markets.
- We focus on talking to ministries, IFIs, development organisations on these issues
- The issue of shocks – by some measures of volatility these are indicating low volatility. It’s the shocks that are hard to predict causing concern about how to manage it. One example is pandemics, as well as climate as potential and real sources of shocks.
- Emerging markets are seeing broadly improved resilience, in terms of reserves, rainy-day sovereign wealth funds, and shock absorbers through bilateral and multilateral swaps. Further to this is the local currency capital markets
- Secondly preparedness – in terms of controlling inflows and outflows in context of crises, and a more dynamic debt management approach, in addition to use of flexible exchange rates as an effective shock absorber
- The final theme is communication – we’ve seen a big improvement from emerging markets in communicating with key stakeholders, amongst investors, multilateral organisations and ratings agencies to communicate what is a medium term plan that is the objective to achieve through a shock. This is very important and has been a market of Nigeria and Indonesia policy
(Moderator- is IMF approach effective?)
- $13 trillion of debt currently trades at negative interest rates – when there is that amount of debt at that rate represents a financial distortion – these can cause sudden shifts in asset prices. This could be an expected interest rate shifts.
- A number of countries that face problems may lack the institutional and financial capacity to address shocks – perhaps at least from a currency perspective.
- There’s something to be said for use of financial deepening and use of financial instruments – and there is something to be said for use of financial deepening rather than simply stabilizing
- Financial deepening & strengthening capital markets – though this is also important role of W Bank.
- The Fund’s mandate to ensure financial stability needs deep and sophisticated financial markets This means a sound financial framework and structure.
- Specifically the Fund needs to reflect the changing governance of the global economy – and the IMF’s governance structure has been evolving to reflect this.
- Additionally the financing instruments the IMF has developed
- Countries need to look at how to find effective strategies – take Ghana that the World Bank provided a ‘halo’ to other investors to challenge investors’ perception of risk, by providing 40% guarantee to Ghana’s Eurobond – this could be a powerful tool in helping to deal with initial turbulent periods
(moderator – Nigerian policy thinking on flexible currency policy, given use of partial floating rates in Nigeria)
- We moved to floating rates about 3 months ago – it is a managed float and we are beginning to see inflows after the adjustment. We believe it could be better
- To rebuild reserves we need to diversify from oil
- We also need to encourage FDI.
- (moderator – how important is IFIs’ role?)
We are discussing with multilateral institutions for loans for development – we are continuing reforms and we continue to fine tune.
(moderator – could Fed Reserve moves cause volatility, despite being expected?)
- We already practice exchange rate flexibility. The biggest challenge we had was the Taper Tantrum of 2013, which tested our policy
- We managed quite well by getting the fundamentals right