The credit squeeze is spreading to emerging market economies, forcing them to turn to the IMF for emergency balance of payments financing, managing director Dominique Strauss-Kahn confirmed yesterday.
His comments came amid mounting fears that Pakistan, Ukraine, Kazakhstan and Argentina could all now lurch into a downward spiral towards bankruptcy.
Strauss-Kahn spoke about the approaches after the Fund’s International Monetary and Finance Committee (IMFC) warned of possible “spillover effects” on emerging economies from the financial crisis.
Private credit lines and commercial bank lending to certain emerging markets have been cut or restricted, resulting in funding problems for these countries, said Strauss-Kahn. “It is obvious that with the risk of repatriation of [private] capital”, more emerging markets are likely to turn to the IMF for emergency support, he said.
Strauss-Kahn declined to specify the number or size of countries seeking such support but he pledged IMF backing for any country in need.
The IMF has this week activated emergency credit lines and is working on the provision of new “liquidity instruments” to help countries in need, he said, adding that the IMF has ample resources to meet such calls.
The fund has “put onto a fast track” disbursements of its existing Emergency Financing Facility to help deal with calls from economies suffering balance of payments problems, and is also considering the introduction of a new “liquidity facility” an IMF spokesman added.
The implosion of Iceland’s economy last week triggered a wave of capital flight and raised the spectre of contagion for other economies heavily reliant on foreign credit.
In some cases, the reversal of private capital flows to emerging markets is being aggravated by big US corporations raising capital in emerging economies, such as those in Latin America, and repatriating it in order to offset the liquidity squeeze in the US, David Hale, former chief economist at Zurich Financial Services, told Emerging Markets.
This is causing emerging market currencies to sag, while bolstering the dollar, Chicago-based Hale, now of Hale Advisers, said. The situation has been made worse by special tax concessions implemented this week by US authorities, enabling US business corporation to repatriate capital from their oveseas subsidiaries more frequently and in greater volumes.
The IMFC said in its communique that “many emerging market economies which have implemented sound policies in recent years” may experience spillover effects from the financial crisis.
The global financial environment, including elevated food and fuel prices, adds to the challenges for emerging market and developing countries to preserve macroeconomic stability, sustain growth and make progress on poverty reduction.”
The IMFC, which is made up of finance ministers and central bank governors from 24 advanced and emerging market economies, endorsed the plan of action adopted on Friday by G7 finance ministers to deal with the financial crisis.”
The committee recognises the depth and systemic nature of the crisis and calls for exceptional vigilance, coordination and readiness to take bold action, the communique said.
Apart from a drying-up of private capital flows, emerging markets face the challenge of higher commodity prices, “even though food and fuel prices have receded from their recent peaks”. Strauss-Kahn appealed to governments not to reduce financial and other measures aimed at helping the poorest groups to cope with these higher prices.
“While macroeconomic priorities vary considerably across emerging market and developing economies, the risk of a marked slowdown owing to financial market strains and sluggish export markets is becoming the primary concern fro many of them”, the IMFC said. It called on the IMF to “stand ready to assist members to prepare timely, effective and appropriate policy repon to alleviate the negative spillovers from the financial crisis”.