IMF criticizes developing countries’ response to overheating risks
The International Monetary Fund on Monday criticized developing countries for not responding strongly enough to the surge of hot money into their markets, saying the result could be a hard economic landing.
After meeting in Washington D.C. on Friday, the IMF said in a note to G20 major economies that huge inflows of speculative capital had sped up economic growth in emerging markets, but also pushed up inflation and the response by developing country governments had “been insufficient to address these rising pressures, portending risks of a hard landing.”
It said while capital flows to emerging markets have moderated, and in some cases been reversed, they remained high and volatile.
The IMF said emerging market economies have tried to slow the flows through a combination of macroeconomic policies as well as capital control measures, but are delaying further macroeconomic responses such as raising interest rates.
In Brazil, the IMF said there was scope to continue monetary policy tightening, while in China there should be less reliance on quantitative limits and reserve requirements and more focus on raising interest rates.
The IMF warned last week that overheating pressures were growing in fast-growing emerging market economies that was leading to asset bubbles.
Countries such as Brazil have pushed back, blaming near zero interest rates in the United States for sending investors elsewhere in search of returns, and telling the IMF to pay closer attention to the source of the flow. Brazil has resisted efforts to restrict the use of capital controls.
Meanwhile, the IMF said the recovery in advanced economies were moving too slowly. In the United States, improvements in the housing and labor markets have been slow and without an increase in exports, growth will remain subdued.
The Fund said the U.S. dollar was on the strong side of fundamentals, and a further depreciation of the U.S. unit against undervalued currencies would help to cut the U.S. current account gap.
The IMF repeated that the Chinese yuan was “substantially undervalued,” while the values of the euro and Japanese yen are broadly in line with fundamentals.
The IMF said the risk of a near-term spike in oil prices back to 2008 peaks, when prices went close to $150 a barrel, has “increased materially”.
Global oil prices have risen to $127 highs this month on concerns that a prolonged conflict in Libya could affect supplies. The IMF said the Libyan supply setback was comparable to development around the time of the Iraq war in 2003.
Libyan production declines equivalent to 1.5 percent of global supply have been broadly offset by higher production elsewhere.