Policymakers in developing nations used the IMF/World Bank meetings on Friday to call on leaders in advanced countries to think about spillover risks when deciding policy as concerns of a US default on debt appeared to recede.
President Barack Obama and House Speaker John Boehner spoke on the phone after House Republicans offered to pass legislation that would end the government shutdown and avert a catastrophic default on US debt.
In a joint statement, the African Governors of the World Bank and the IMF said they were increasingly concerned about the spillover from global economic weakness. We are also worried about uncertainty regarding the unwinding of unconventional monetary policies and the threat of potentially devastating budgetary challenges in the US which if left unaddressed could derail the fragile recovery, they said in the statement.
Therefore, we call on policymakers in advanced economies to be aware of negative spillovers of their policy actions and ensure that stimulus exit strategies are communicated clearly.
But some policymakers in advanced economies insisted developing economies had benefited from stronger growth thanks to the loose monetary policy in the US, UK and elsewhere. UK Chancellor George Osborne said markets were differentiating between developing countries, which should not use the spillover as an excuse not to carry out reforms.
We should recognize that there are spillovers from that monetary policy and we shouldnt pretend they dont exist, Osborne told Emerging Markets. We should help emerging markets deal with those spillovers. That said, those spillovers should not be an excuse for emerging economies to avoid doing what many of them need to do in terms of structural reforms to their economies.
Some officials, especially in Latin America, remained optimistic that the effects of tapering monetary easing by the Federal Reserve, which is now a matter of when rather than if, would not be that bad after all.
What might have happened regarding emerging markets is that we might have had a bit of an excess of optimism and now we see ...the actual situation is rather in between, Luiz Awazu Pereira, International affairs secretary at the Brazilian central bank, said.
The spillover might even bring some benefits. Brazil has an industry and a service sector that are quite diversified. With a more favourable exchange rate, it is going to help to recover a greater export capacity, said Luciano Coutinho, president of the Brazilian Development Bank.
Anoop Singh, director of the IMF Asia and Pacific Department, argued that capital outflows from emerging markets in the wake of the tapering scare had been to some extent beneficial.
They had countered previous overheating in many of the regions economies, which the IMF warned against in its April regional outlook, Singh said. In many countries financial imbalances had built up and financial policies had been too accommodative prior to the tapering scare, he noted.
Ilan Goldfajn, chief economist at Itau Unibanco, admitted there would be some pain, especially at the beginning of the adjustment. But we must not forget [emerging markets] will eventually enjoy gains when the world economy recovers, he said.
The markets expect the Fed to announce it will begin scaling back its QE policy in December. But with Janet Yellen, known for her dovish stance, slated to take over from Ben Bernanke as Fed chair, hopes are high that emerging markets will get more time to get their house in order.
Mauricio Cardenas, Colombia finance minister, said that beyond the personality [of the Fed chair], the most important is a clear path, that we can anticipate, with sound information, in order to avoid market hiccups.
But Paul Sheard, S&Ps chief global economist, warned against holding too high hopes about Yellens ability to control the effects of the taper: I dont think anyone knows, not even top authorities in the Fed, how to manage this tapering, because we are in completely uncharted territory.